Hello All,
I am struggling with compounding questions. Can someone please provide a easier way of solving this?
Question: What will the $21 Billion Market Size of Widget X currently (in 2022) be in 2030 if it grew at 10% per year?
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Compounding
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Hi there,
This is tricky!
The answer is around “double”, so it should be around $42B.
How did I get here? Well, I quickly noticed that we're in the realm of the “Rule of 72” (I know that numbers double every 10 years if the rate of growth is 7%, so with 10% growth it should take a couple of years less).
The rule of 72 is basically divide 72 by your growth rate to see how many years it will take to double. 72 divided by 10 is 7.2. Given we have an 8 year period, then we've about doubled by then.
Now, you are never going to get a case that forces you to compound more than 2-3 years out, so don't worry about getting an exact number here!
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Hi there,
As mentioned by Ian, you have to use the rule of 72 to solve this.
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With the Rule of 72 you can calculate the time to double for a variable. The formula is:
Time to double = 72/r
Where r=discount rate*100 (so if the discount rate is say 15%, r=15).
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In this case,
- Time needed to double: 7.2 years (72/10)
- Time to calculate: 8 years
This implies that the market should be around $42B in 2029.
Once you know this, you can calculate another 10%, and get that it will be around $46B (the exact answer is $45B – the approximation will be fine if you mention that should be around that).
Hope this helps,
Francesco
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Hello!
The magic rule of 72, is a key one! Francesco and Ian explained it wonderfully.
For those of you who are wondering: how many of this hidden rules are there that I don´t know about?: Don´t worry, this is the classic one, and you will recognize that you need it since in the problems, there will be the concept of “doubling in…”
Cheers,
Clara
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