Question

re trying to compare two six year investment ideas; both ideas require a $12,500 investment today (TO ment A will grow to $50,000 at the end of year 6 (T 6), whille Investment 8 will grow to $25,000 at the year 6 (T-6).Estimate the annuolized return for each investment using the Rule of 72. Next, find the ound Annual Growth Rate fie. geometric average) for each investment, which we learned is more precise the Rule of 72. You con use the timeline below to help answer problems 1-2 TEAR 50,000 S 25,000 1. The Rule of 72 estimates the retum on Investment A will be closest to 12.0% per year b. 12.2% per year c. 24.0% per year d. 26.0% per year e. 50.0% per year 2. Compare the Rule of 72 to the CAGRs for each investment. Bosed on your observotions, which of the following statements is most occurate The Rule of 72 does a better job of estimating The Rule of 72 underestimates the octual return on te onroolized return of Investment Lhon nrenmenta a. Investment & by 2.0% b. The Rule of 72 does a better job of estimating the annualized return of c. The Rule of 72 does a better job of estimating the annuolized return of Investment &than lavestment A d. The Rule of 72 does a better job of estimating the annualized refurn of Investment Athan Investment& e. The Rule of 72 does a better job of estimating the onnualized return of Investment & than Investment A The Rule of 72 overestimates the actual return on Investment A by 2.0% The Rule of 72 gxerestimates the actual return on Inxestment&by Q.2% The Rule of 72 overestimates the actual return on Invetment A by 9.2% The Rule of 72 underestimates the actual revrn on InvestmentA by 2.0 3. Assume a discount rote of 1 00% per year. Using the concept of discount foton I $20 today(T-o) to receiving S 20 20 years from now tT:20. w hich of the following ietements is me most accurate: compare receting a. b. c. d. e. The $20 received 20 years from now is worth only 5% of the volve today The $20 received 20 years from now is worth only 10% of the vole today The $20 received 20 years from now is worth only 15% of the vole today The $20 received 20 years from now is worth only $4 today The $20 received 20 years from now is worth only $6 today 4. In the 5-Stoge DuPont ROE formulo, which of the following stoges is considered to be a relative meosurement of how much long term debt there is on the balance sheet (i.e. a solvency ratio) a. NI /SE, or the return on equity b. NI/Sales, or the profit margin c EBIT /Soles, or the operating margirn d. EBIT

Answer 1

Case study - Question 1 and 2

Question 1: The rule of 72 says how may years it takes for the money to double itself

Investment A of 12,500 increased four times to 50,000 in 6 years. So, it doubled in 3 years. So, the rate of return on investment A as per rule 72 is 72/3 = 24% (Option C)

Question 2:

The actual return of Investment A = (50000/12500)^(1/6) -1 = 26%. So rule of 72 underestimates the actual return on investment A by 2% whereas it accurately estimates investment B

Answer : The rule of 72 does a better job of estimating the annualized return of Investment B than Investment A; The rule of 72 underestimates the actual return of investment A by 2% (Option E)

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