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jamesk486 · Jul 27, 2010, 06:07 AM

A company made $100,000 profit this year. If they anticipate that profits will increase by 6% a year going forward, how long will it take for the profits to double?
A. Between 9 and 10 years
B. Between 10 and 11 years
C. Between 11 and 12 years
D. Between 12 and 13 years
E. None of the above

I was able to solve the question using excel

just wondering if there was some kind of equation in the case excel couldn't be used

ebaines · Jul 27, 2010, 06:48 AM

The equation to use to find the number of periods to double your investment is:

$<br /> (1+i)^n = 2<br />$

Which you can rearrange and solve for n by taking the logarithm of both sides of the equation:

$<br /> n = \frac {log 2} {log(1+i)}<br />$

There's an easier way however, if an estimate is good enough. A handy rule-of-thumb that you can use is called "the rule of 72." Divide 72 by the interest rate and you get a pretty good estimate of how long it takes an investment to double. So here you'd have 72/6 = 12 years. It's not exact, but it works pretty well for "reasonable" values of i.