GMAT Focus EditionQuantitative ReasoningEasy
A financial advisor is evaluating an investment that grows at an annual rate of 9% compounded annually. Using the Rule of 72, approximately how many years will it take for the investment to double in value?
- A9 years
- B7 years
- C6 years
- D8 years
Show answer & explanationAnswer & explanation
Correct answer: D. 8 years
The Rule of 72 is a simplified way to estimate the number of years required to double an investment, given a fixed annual rate of compound interest. The formula is: Years to Double ≈ 72 / Annual Interest Rate (as a percentage). Given an annual interest rate of 9%: Years to Double ≈ 72 / 9 = 8 years. This is an approximation, but it's the expected method for this type of question.
Why the other options are wrong
- A. Incorrect. This would imply a lower interest rate (72/9 = 8%).
- B. Incorrect. This would imply a slightly higher interest rate (72/7 ≈ 10.2%).
- C. Incorrect. This would imply a higher interest rate (72/6 = 12%).
Rule of 72 (Approximation)
The Rule of 72 is a quick mental math shortcut to estimate the number of years it takes for an investment to double in value, given a fixed annual rate of compound interest. It's an approximation, not an exact calculation.
- Formula: Years to Double ≈ 72 / Annual Interest Rate (as a percentage).
- Works best for interest rates between 6% and 10%.
- Assumes annual compounding.
- Useful for rapid financial estimations.
Memory trick: Seventy-two divided by rate, tells you when your money will inflate!