Financial Modeling Tutorials
- Financial Modeling Basics
- What is Financial Modeling?
- Financial Modeling in Excel
- Types of Financial Models
- Financial Modeling Interview Questions
- Alibaba IPO Financial and Valuation Model
- Box IPO Modeling Details
- Box IPO Valuation Model
- Download Alibaba IPO Financial Model
- Financial Modeling Books
- Financial Modeling Templates
- Financial Modeling Course
- Excel Modeling
- Financial Functions in Excel
- Sensitivity Analysis in Excel
- Time Value of Money
- Future Value Formula
- Present Value Factor
- Perpetuity Formula
- Annuity vs Perpetuity
- Annuity vs Lump Sum
- Internal Rate of Return (IRR)
- NPV vs XNPV
- NPV vs IRR
- NPV Formula
- PV vs NPV
- IRR vs ROI
- Break Even Point
- Payback Period & Discounted Payback Period
- Payback period Formula
- Discounted Payback Period Formula
- Profitability Index
- Cash Burn Rate
- Simple Interest
- Simple Interest vs Compound Interest
- Simple Interest Formula
- Effective Interest Rate
- Loan Amortization Schedule
- Rule of 72
- Geometric Mean Return
- Real Rate of Return Formula
- Continuous compounding Formula
- Weighted average Formula
- Holding Period Return Formula
- Cost Benefit Analysis
- Cost Volume Profit Analysis
- Opportunity Cost Formula
- Mortgage APR vs Interest Rate
Rule of 72 Formula
In simple terms, Rule of 72 is a formula that helps us understand when we can double our investment.
Here’s how it works.
As an investor, you need to know the rate of return. And then all you need to do is to take the number 72 and divide it by the rate of return. And you will get the duration of time that will double your investment.
Here’s the formula –
Here, r = the rate of return
Alternatively, there can be another 72 rule formula.
In that formula, you would be able to know the rate of return at which you would be able to double your investment.
Here’s the alternative formula –
Here. t = duration of time
Example of Rule of 72 Formulas
Let’s take a simple example to illustrate 72 rule formulas.
Deeds Inc. has been offering 9% return on the investment of $200,000. Find out when the money will get double. Also if the investors want to double their money in 6 years, what would be the available rate?
By using the first formula of 72 rule, we get –
- = 72 / r = 72 / 9 = 8 years.
- It will take 8 years to double the money.
Coming to the next question, we can use the second formula of Rule of 72.
- = 72 / t = 72 / 6 = 12%.
- At 12% rate, the investors can double the money within 6 years.
Explanation of Rule of 72 Formulas
Let’s understand the above two formulas in detail.
The first formula is all about “when”.
And the next formula is all about “what rate”.
- In the first formula, the investor isn’t sure about the time duration of the investment. She needs to use the formula to come to a conclusion.
- In the second formula, the investor isn’t sure about the rate of return on the investment. In other words, in the second formula, the investor isn’t sure at what rate she would be able to double her investment.
As an investor, you should use both.
- Let’s say that you’re investing a sum of $100,000 into an investment. They are offering you a 10% return.
- Using the first formula of 72 rule, we can easily find out when you will double your investment.
- = 72 / r = 72 / 10 = 7.2 years.
- Now, let’s say that the investor wants the money to double within 6 years.
What should she do in that case?
- She needs to use the second formula of 72 rule to reach the conclusion.
- = 72 / t = 72 / 6 = 12%.
- To double the money the investor puts into the investment within 6 years, she needs to get a rate of return of 12%.
Use of Rule of 72 Formulas
- If an investor needs to know the basics about the investments, she should have formulas that are useful and at the same time can deliver quick results. 72 rule formulas are very useful and can help investors quickly.
- Even if the investors don’t know anything about investment, they can quickly use these formulas to know the basics of the investments. However, 72 rule formulas can’t act as substitutes of financial ratios.
- You can use 72 rule formulas quickly to find out the rate or the time period when your investment will get doubled. But, keep in mind, this formula alone aren’t enough. You need to look at all the financial statements and also investigate all the financial ratios of the company before investing.
Rule of 72 Formulas Calculator
You can use the following Rule of 72 formula Calculator.
|Rule of 72 Formula =||
Rule of 72 Formulas in Excel (with excel template)
Let us now do the same example above in Excel.
This is very simple. You can easily calculate the ratio in the template provided.
You can download this Rule of 72 template here –Rule of 72 formula Excel Template
This has been a guide to Rule of 72 Formula, practical examples, and 72 rule calculator along with excel templates. You may also have a look at these articles below to learn more about Corporate Finance –