36.Here are two useIul rules oI thumb.

The 'Rule oI 72 says that with discrete compounding

the time it takes Ior an investment to double in value is roughly 72/interest rate (in percent).
The 'Rule oI 69 says that with continuous compounding the time that it takes to double is
0,.969.3/interest rate (in percent).
a. I the annually compounded interest rate is 12 percent, use the Rule oI 72 to calculate
roughly how long it takes beIore your money doubles. Now work it out exactly.

6 years
Assume that
FV RM10
PV RM5
r 12

FV PV ( + r)
t

10 5 ( + .)
t

10/5 ( + .)
t

log 10/5 log ( + .)
t

log 2 t log (1.12)
t log 2/log 1.12
6.12 - 6 years

b. Can you prove the Rule oI 69?

2P P(1r)
2 (1r)
ln 2 t*ln(1r)
t ln(2)/ln(1r) - 69/r 0.35


Plug in r12
6.11 - 69/12 0.35
6.11 - 6.1

37.Use a spreadsheet program to construct your own set oI annuity tables showing the annuity
table Ior a selection oI interest rates and years.
ReIer to the Appendix A

38.You own an oil pipeline that will generate a $2 million cash return over the coming years.
The pipeline operating costs are negligible, and it is expected to last Ior a very long time.
UnIortunately, the volume oI oil shipped is declining and cash Ilows are expected to decline
by 4 per year. The discount rate is 10.
a. What is the PV oI the pipeline`s cash Ilows iI its cash Ilows are assumed to last
Iorever?
Growing perpetuity Iormula with a negative growth rate (g 0.04):
PV
C
-g



,,
.-(-.)


$14,285,714.29


b. What is the PV oI the cash Ilows iI the pipeline is scrapped aIter 20 years
PV Ior growing annuity
PV

-
1+g
1+r

-g


,,_
-_
-.
+.
]

.-(-.)
_
$13,347,130.78