Mathematical Derivation of Rule of 72 in Finance
Rule of 72 or Rule of 70 or doubling rule is a well known rule in finance. In this post, we first see how this rule works and from where it is derived. Rule of 72 or Rule of 70 : If a capital is invested and compounded at the rate of r %/year , it will be doubled (2P) approximately in (70/r) years or (72/r) years. For example, if a capital 100 is invested and compounded at the rate of 10%/year, it would be doubled approximately in (70/10)years or (72/10) years i.e. 7 years or 7.2 years. i.e. if a capital 100 is invested and compounded at the rate of 10%/year, it will be doubled i.e . 200 approximately in 7 years or 7.2 years. NOTE : The time derived from Rule of 70 or Rule of 72 is a approximation. Of course, a good approximation i.e. it is very closer to the real value. Mathematical Formula of Compound Interest : If, P= Principal A= Amount (Principal + Compound interest) r= Rate of interest n= Number of year, capital remain invested it is given by Now, we ta...