The rule of 72 follows compound interest curve. For example, if an investment grows to twice of initial investment at the end of 2 years , it will grow to 4 times of initial investment at the end of 4 years (i.e, 2*2) and similarly 8 times initial investment at the end of 6 years ( i.e., 2*3).
For investment A, the principal investment of $12,500 grows to $50,000 at the end of 6 years. Thus, the initial investment grows to 4 times the initial investment at the end of 6 years. Thus, as per compound interest curve, investment would grow to twice of initial investment at the end of 3 years. The 72 rule says: time (T) to double investment = 72 / R (rate of interest).
Here, T = 3 years.
As per CAGR rule: Final amount=A; Initial investment =P; Time=T; Rate of interest =R
|Investment A||Investment B|
|72 Rule|| |
Thus, Answer is option E.
The rule of 72 does a better job of estimating the rate of return of investment B than A. &2 rule, underestimates the rate o return on Investment A by 2%.
As per CAGR (Compound Annual Growth Rate):
Here, T=20; A=20$, R=10%
P= $1.05 which is 5% of $20.
Thus answer is option A.
Answer is option e. As leverage ratio gives an indication of how the company's assets and business operations are financed (debt or equity). Common leverage ratios are Debt/Equity ratio, Debt//Capital Ratio and Debt/Total Asset ratio.