Question

f the interest rate is 7.8% per year, approximately how long will it take for your money to quadruple in value? (Use the Rule of 72.) b. If the inflation rate is 4.9% per year, what will be the change in the purchasing power of your money over this period? (Use the Rule of 72 to compute the number of years. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Answer:

The rule of 72 establishes that, to determine the time in which an investment will double its initial capital through the generation of compound interest, 72 must be divided by the interest rate number of said financial investment.

In the present question, the interest rate is 7.8%, with which the investment would double in 9.23 years (72 / 7.8 = 9.23).

Now, at the same time there will be an annual inflation of 4.9%, that is, an accumulated inflation of 45.22% (4.9 x 9.23 = 45.22). In other words, the real growth of investment will not be 100%, but the accumulated inflation will have to be discounted from said number, with which the real growth of investment will be 54.88% over those 9.23 years.