Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

Which one of the following formulas correctly defines the Rule of 72 for estimating the number of years required to double an investment at a given annual interest rate?

Years to double = \( \frac{72}{\text{Interest Rate (\%)} } \)

Years to double = \( \frac{\text{Interest Rate (\%)}}{72} \)

Years to double = \( 72 \times \text{Interest Rate (\%)} \)

Years to double = \( \frac{100}{\text{Interest Rate (\%)} } \)

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Verified step by step guidance

Step 1: Understand the Rule of 72. It is a simple formula used to estimate the number of years required to double an investment at a given annual interest rate. The formula is based on the principle of compounding interest.

Step 2: Identify the correct formula from the options provided. The Rule of 72 states that the number of years to double an investment is calculated as: Years to double = \( \frac{72}{\text{Interest Rate (\%)} } \).

Step 3: Analyze why the other formulas are incorrect. For example, \( \frac{\text{Interest Rate (\%)}}{72} \) does not align with the Rule of 72, as it reverses the relationship between the interest rate and the years to double. Similarly, \( 72 \times \text{Interest Rate (\%)} \) and \( \frac{100}{\text{Interest Rate (\%)}} \) do not follow the established formula for estimating doubling time.

Step 4: Apply the correct formula to a hypothetical scenario. For instance, if the annual interest rate is 6%, the formula \( \frac{72}{\text{Interest Rate (\%)}} \) would be used to calculate the approximate number of years to double the investment.

Step 5: Remember that the Rule of 72 is an approximation and works best for interest rates between 6% and 10%. For very high or very low interest rates, the accuracy of the formula may decrease.