ASSIGNMENT # 2
Chapter # 3
ADVANCE FINANCIAL MANAGEMENT
Mr. Zia-ul-Haq Zuberi
Azeem Fraz khan
MBA-13 (BBA Stream)
Dated: 20th April 09
Army Public College of Management Sciences
“Rule of 72” is a quick way to handle compound interest problems involving double your money. This rule states that if the number of years, n, that investment will be held is divided into the value 72, we will get the approximate interest rate, i, required for the investment to double value.
Same as if we get interest rate, i, we can also get number of years, n, at particular interest rate, i, by dividing it to the value 72.
It can be best illustrated with the help of example:
Suppose an investor invest Rs. 10 million in land and sold it after 5 years at price Rs. 20 million. At what rate, i, investor double his investment after 5 years?
72/5 = 14.4%
14.4% is a rate at which investor double his investment.
To see how accurate the result of “Rule of 72”, we use formula of future vale compounding interest rate that is:
FV = PV (1+i) n
20,000,000 = 10,000,000 (1+i) 5
2 = (1+i) 5
(2) 1/5 = 1+i
1.148 = 1+i
i = 1.148 – 1
i = .148 = 14.8%
This 14.8% is accurate interest rate at which investor’s amount double to Rs. 20 million, which shows that by applying “Rule of 72” we only get nearest or approximate result but not accurate one.
Approximate result is found in case of finding n, number of year to double investor’s investment at specific interest rate, i.
Q 10: Answer
Yes present value decreases at a decreasing rate with the discount rate. Because greater the interest rate or discount rate, the lower the present value.
In above Fig: 1, PV of Rs.100 received from 1 to 10 years in the future is graphed for discount rates of 5, 10, and 15 percent. Which shows that PV decreases at a decreasing...