Question

California Investors recently advertised the following claim: Invest your money with us at 10%, compounded annually, and we guarantee to double your money sooner than you imagine. Ignoring taxes, how long would it take to double your money at a nominal rate of 10%, compounded annually?

1. 5

2. 9

3. 6

4. 7

Answer 1

The future value of a cash flow is given as under

Future value = Present value*(1+interest rate)^number of periods

Let amount invested today be X. So, future value would be 2X

2X = X * (1+0.10)^(number of years)

2 = (1.1)^number of years

Ln(2)/[ln(1.1)] = number of years

Number of years = 7.2725

Thus, approximately 7 years are required to double the money.