CMA Intermediate · Financial Management and Business Data Analytics · Time Value of Money
A sum doubles in 9 years under annual compounding at an unknown rate. Using the Rule of 72 as a quick approximation, which rate is closest, and what will ₹25,000 become after 18 years at that rate?
The rate is about 8% p.a. and the sum becomes about ₹1,00,000. The Rule of 72 gives 72 divided by 9 years, which is 8%. Eighteen years contains two doubling periods, so ₹25,000 doubles twice to reach about ₹1,00,000.
- A8% p.a.; about ₹1,00,000Correct
- B9% p.a.; about ₹50,000
- C8% p.a.; about ₹50,000
- D6% p.a.; about ₹75,000
Explanation
Rule of 72: rate = 72/9 = 8% p.a. Eighteen years is two doubling periods, so ₹25,000 becomes 25,000 x 2 x 2 = ₹1,00,000. Option ₹50,000 counts only one doubling, which is wrong because 18 years equals two doublings.
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