Final answer:
The rule of 72 is used to estimate the time required to double an investment. For an investment earning 7% annually, it will take about 10 years to double. Option 1 is correct.
Step-by-step explanation:
The Rule of 72 serves as a convenient method for approximating the time needed to double an investment based on a fixed annual rate of return. This rule operates on a straightforward principle: by dividing the number 72 by the annual interest rate, you can estimate the number of years it would take for an investment to double in value. For instance, consider an investment of $5,000 generating a 7% annual return. Applying the Rule of 72 involves dividing 72 by the interest rate of 7, yielding approximately 10.29. This signifies that it would take around 10.29 years for the initial investment to double under the given conditions.
In the context of the $5,000 investment at a 7% annual return, the application of the Rule of 72 clarifies that the doubling of the investment will occur in approximately 10.29 years. This straightforward formula offers a quick and useful tool for investors to gauge the potential growth of their investments over time, providing a rough but insightful estimate of the doubling period based on the chosen rate of return.