Rule of 72

 Rule of 72

 “Rule of 72” is a simple  rule of thumb to determine the number of years it takes for an investment at a certain rate of interest ( interest at annual rests) to double. As is the case with most thumb rules, it works well within a certain “normal” data range.One can use the same to determine the implicit interest rate given the amount invested and the maturity amount.

To illustrate the use of it, let us assume that an investment is made at 8% per annum and at yearly rests, it would take 72/8=9 years for it to double. The underlying assumption is that the annual return is reinvested at the same rate of interest .This rule works well within an interest range of 5% to 12% with best being at 8% 

(Not able to attach an excel table. Not quite sure how to do the same)

Just as when one is given a rate of interest, one can find the no of years it takes for the investment to double by dividing 72 by the rate of interest, given the fact that an initial investment doubles in a certain no of years, one can find the underlying rate of return .

If someone says that an investment doubles in 9 years, then the underlying annual return rate is 72/9= 8%.