Rule of 72

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Description of Rule of 72. Explanation.


Definition Rule of 72. Description.

The Rule of 72 is a formula that is used in investing to approximate the number of years it will take to double money at a given (compound) interest rate. The calculation works by dividing 72 by the interest percentage you will receive, giving the number of years.

Example: an investment gives an interest of 9%. The estimated time in years (t) it will take to double your investment is 72 / 9 = 8 years.

The number of 69.3 or 70 is actually better, but the number 72 has as advantage it is easily divisible by many numbers: 2, 3, 4, 6, 8, 9, and 12 and works OK for most purposes.

The exact number can be derived from the Formula Future Value = Present Value x ( 1 + Interest Rate )t

Suppose the money has doubled, this means that the Future Value then equals 2 Present Value. We can now substititute this in the formula and then cancel the factor Present Value.

This results in 2 = (1 + Interest Rate)t    or:    t ≈ 0,693147 / Interest Rate

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Compare with: Time Value of Money  |  Net Present Value  |  Discounted Cash Flow  |  Internal Rate of Return  |  WACC

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