Rule of 72
Question:
If I make 8 times my money in 6 years, what's my IRR? You have to use the rule of 72 to figure this out.
I know rule of 72 works when I want to know how long itll take to double my money, but how would you use this rule to find out 8 times my money in 6 years, and what rate that would be?
72/6 is 12. However, you don't just double your money, you double your money three times - so 1,12^3 = 1,405 = 40,5%. Doesn't give the exact number (it gives 7,69 years), but it's the best you can do by applying that rule.
41.42%. I have no idea what the rule of 72 is though.
howd you get this?
I threw ((1+x)^6)-1=y into excel. Then just use solver to see what x has to be for y to equal 7 (7=700%=8x investment). You get .4142
An 8x return in 6 years means you double your money 3 times (2^3=8), or, assuming a constant rate of growth, once every 2 years - so the rate of return is roughly equal to 72/2=36%
36%
8 times your money in 6 years means you're doubling every 2 years (8=2^3, 6/3). Now simply use rule of 72: 72/2 For an IRR ~36
Rule of 72 gives you a kinda shitty estimate here, but it's alright for order of magnitude, I guess.
Not using rule of 72 but this would be a good interview question..
8 = (1+R)^6 (2^3)^(1/6) = (1+R) 2^(3/6) = (1+R) 2^(1/2) = 1.414 = (1+R)
R = 41.4%
It's just 8^(1/6)-1 = 41.4%; you use this all the time in PE
You guys are way over complicating this and in doing so defeating the purpose of the quick mental math. 8 times your money equals doubling 3 times.
3x72 = 216 216/6 years = 36%
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