Business Mathematics

Business Mathematics Copyright © by . All Rights Reserved.

Contents

Introduction 1
Calculator Instructions 1

Chapter 1: Business Applications of Basic Mathematics

Ratios 5
Proportion 9
Ratios With More Than Two Quantities 11
Retail Calculations 15
Rates and Currency Conversions 19
Trade Discounts 23
Chained Discounts 25
Payment Terms 27
Partial Payments 31
Chap 1 Learning Activities Answer Key 33
Chapter 1 Review Questions 37

Chapter 2: Functions and Applications

Linear Functions 57
Linear Equations From Data 63
Cost Functions 65
Equations and Functions 67
Systems of Equations 69
Profit Volume Analysis 75
Cost, Profit Volume Analysis Using the BA II Plus 81
Chapter 2 Learning Activities Answer Key 83
Chapter 2 Review Questions 85

Chapter 3: Simple Interest

Exact Time 97
Calculating the Amount of Interest 103
Calculating Principal, Rate and Time 105
Calculating the Future Value 107
Time Diagram 109
Calculating Present Value 111
Time Value of Money 115
Equations of Value 121
Solutions to Chapter 3 Learning Activities 127
Chapter 3 Review Questions 135

Chapter 4: Compound Interest

Nominal and Periodic Rates 147

Compound Interest Formula 149
Present Value 151
Formula for Present Value 152
Multiple Cash Flows 153
Equivalent Values 155
Compound Interest with the BAII Plus 159
Equivalent and Effective Rates 169
Fractional Periods 177
Average Rates 181
Chap 4 Learning Activities Answer Key 183
Review Questions for Chapter 4 185

Chapter 5: Annuities

Chapter 5 Review Problems 201

Chapter 5 Supplementary Problems 213

Chapter 6: Investment Decisions

Rate of Return 235

Net Present Value 237
Cash Flow on the BAII Plus 243
Internal Rate of Return 245
Chapter 6 Review Problems 247
Chap 6 Supplementary problems 251
Chapter 7: Extra Problems

Chapter 1 and 2 Review 259

Chapter 3 and 4 Review 267
Chapter 5 Review 271
Entire Course Review 277

Appendix 289
Glossary 291
This is where you can write your introduction.

Calculator Instructions

-> How to set up your calculator.

Here’s a handy video, courtesy of Chris Kellman:

Setting up your BAII Plus

Then it would be really neat to have hyperlinks to the calculator parts in the rest of the text.

1
Chapter 1: Business Applications of Basic
Mathematics

The purpose of a business is to make a profit. To find the profit a company makes in a particular period,
say in a given month, you must start with all the money that comes into the company as a result of its
operations. Then from that money, which is called the revenue, subtract all the expenses paid to earn it.

Thus you have

The profit is found on the famous “bottom line.” In accounting it is usually called the net income.

Example

Suppose that a company’s revenue is earned entirely from sales and that it had expenses of $24,000 in a
period during which it had sales of $32,000.
Then,

Revenue $32,000

– Expenses $24,000
= Profit $8,000

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REVENUE: $32,000
Expenses Profit

$24,000 $8,000

When you study accounting, you will find that it takes considerable effort to find the correct values for
the expenses that apply to the revenues for a period.
Ratios

This chapter uses ratios to analyze basic business concepts such as profits, expenses and revenues.

Key Takeaways

If only two quantities are involved, they are referred to as amount and base.

A ratio expresses the relative sizes of quantities. If only two quantities are involved, they are referred to
as amount and base.

A frequently used ratio is the ratio of profit to sales. In this case the base is sales and the amount is profit.

Thus you have

This ratio is also written as

Key Takeaways

It is common to express a pure ratio in percent.

Since both the amount and base are in dollars, this is a pure ratio or fraction, and it is common in business
to express it in percent.

Percent is a ratio in which the base is 100. Thus, for the above example,

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where the symbol % signifies that the amount 25 is to be divided by 100.

A ratio of 30% is thus:

Percent is used so much in business analysis that you must become completely familiar with its meaning
and be able to change back and forth between percent and decimals.

The profit-to-sales ratio expressed this way is called the percent net margin. It is used to compare the
profitability of different companies or branches of companies.

Example

Consider a company that has three branches, A, B and C, operating in small, medium-sized and large towns.
Suppose the branches have the following performances during a month:

A B C Total

Sales $12,500 $46,500 $63,200 $122,200

Expenses $9,550 $38,750 $48,850 $97,150

Profit $2,950 $7,750 $414,350 $25,050

From these raw figures it is not easy to assess the performance of the branches. It is clear that C’s profit is
greater than B’s, and that B’s is greater than A’s, but you would expect that to occur because of the size of
their markets and the volume of their sales. If you take the percent net margin, however, you get the
following:
For A: %
For all branches and the company total:

A B C TOTAL
Percent Net Margin 23.6% 16.7% 22.7% 20.5%

From those percentages, you can see that, in a sense, branch A has the best performance (for its size),
and that branch Bis farthest out of place. Although there may be good reasons for this, the ratios provide
a reasonable place to start looking for improvements.
 Business Mathematics 7

Examining profits on graphs illustrates the situation. First look at the graph of the dollar values of the
profits (Figure 1).

Figure 1: Dollar Value of Profits

Then look at the graph of profits as a percent of sales (Figure 2 below).

Figure 2: Profits as a Percent of Sales

On the last graph you can see that branch B is noticeably lower.

Ratios are frequently used in business analysis. Two examples:

• Turnover ratio -This is the value (at cost) of goods sold, divided by the average value of the
goods held for sale (inventory). This gives the number of times the inventory is “turned over”
(completely sold and replaced).
8

Key Takeaways

Turnover ratio: The value of goods sold divided by the average value of goods in stock.

• Acid test ratio – This is the ratio of the cash resources (e.g., cash and customer accounts
owed to the company) to the short-term debts of the company. It is a measure of the ability of
a firm to pay its short-term debts.

Key Takeaways

Acid-test ratio: Ratio of cash resources to the company’s short-term debts.

Learning Activity #1

1. Central Clothing Store had sales of $80,000 last month.

1. a) If the total expenses were $71,000, what was the profit?

2. b) What must expenses have been if the profit had been $14,000?
2. Two consumer electronics stores, Sounders and Electronicks, are to be evaluated. Their sales for
last year were as follows:

Sounders Electronicks

Value of goods sold (at cost) $936,400 $1,245,900

On average, Sounders stock on hand cost them $184,000. Electronicks stock on hand cost them $209,400.
Compare their turnover ratios. Which had the better (higher) ratio?
Proportion

Another way to analyze the performance of branches A, B, and C described above is to take the view
that all of the percent margins should be equal – or, equivalently, that the ratio of profit to sales should
be the same for each branch.

When the ratio of quantities should be the same in all circumstances, the quantities are said to be
proportional to one another.

Example

Assume that the profit should be proportional to sales, and that this proportion should be that of the company
totals (20.5%). Then you could calculate the appropriate profits for branches A, B and C individually.
For branch A:

Thus profit =
Similarly for branches B and C, the proportional profits would be $9,532.50 and $12,956 respectively. The
analysis would proceed as follows:
Profits

A B C

Actual $2,950.00 $7,750.00 $14,350.00

Proportional 2,562.50 9,532.50 12,956 .00

Difference +387.50 -1,782.50 +1,394.00

Again you can see the branch B’s performance was the least effective.

Ratios are generally used as in the above exercises – sometimes to eliminate the effect of size, and
sometimes “in reverse” to make sure the quantities are appropriate.

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Learning Activity #2

1. Will’s Coffee Shops expect to earn a percent net margin of 14% of sales.
2. Find the expected profit and expenses of a shop that will have sales of $29,000 a month.
3. If a shop hopes to earn a net profit of $5,000 a month, what should be its sales target?
4. As a guide to restaurant pricing, it is often assumed that the price of a meal should be proportional
to the cost of the food in the meal. Suppose that a restaurant decided to make that ratio 2.8.
That is:

Use this guide to estimate the price of meals for which the food cost is (a) $3.50; (b) $8.00; (c) $14.00.
Ratios With More Than Two Quantities

In some business situations, it is desirable to examine the relative sizes of a number of quantities. In such
cases, ratios of the quantities are used.

Consider, for example, the expenses of a merchandising company. These expenses can be usefully
broken down into two major components:

• the cost of the goods sold (COGS)

• all other expenses, called operating expenses.

When analyzing merchandising companies, it is customary to first deduct the cost of goods sold from
sales revenue, and to call the result the gross profit.

Operating expenses are then deducted from the gross profit to get net profit.

SALES
– COGS
GROSS PROFIT
– OPERATING EXPENSES
NET PROFIT

All of these quantities are commonly compared with the sales revenue as the base.

Example

Suppose that in our opening example, in which the company had sales of $32,000 in a period, the cost of
these goods was $20,000 and operating expenses were $4,000. You would arrange the analysis as follows:

% Sales
Sales $32,000 100.00
– COGS 20,000 62.5

Gross Profit 12,000 37.5

– Operating Expenses 4,000 12.5

Net Profit 8,000 25.0

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This has the format of a (very) simple Income Statement.

When gross profit is compared with sales it is called percent gross margin. Net profit compared with
sales is called percent net margin.

Key Takeaways

Gross profit compared with sales is called percent gross margin; Net profit compared with sales is called
percent net margin.

Suppose now that a similar company was expected to perform with the same ratios but to have sales of
$50,000 in a period. Then each of the other entries could be calculated by using the above ratios. For
example:

So

Notice that while the ratio was stated as a percent, it was necessary to replace it with the decimal
equivalent in order to do the calculations. You should check that the other quantities come out, as in the
following table:

% Sales
Sales $50,000 100.0

COGS 31,250 62.5

Gross Profit 18,750 37.5

Operating Expenses 6,250 12.5

Net Profit 12,500 25.0

Another use of ratios is to allocate resources according to some measure of need or performance in an
organization. For example, bonuses may be given as a percent of sales; budgeted expenses may be a
percent of the previous year’s expenses.

Learning Activity #3
 Business Mathematics 13

A merchandising company finds that its COGS is 65% of sales and its monthly operating expenses are
$14,000.
What would be the COGS and the gross and net profits on sales of $90,000 in a month?
What would be its percent gross margin and percent net margin?
Retail Calculations

Many retail calculations parallel the foregoing ratio calculations for profits and expenses.

When goods are bought for resale, a decision has to be made about the selling price of the individual
articles. The goods are said to be marked up, the amount added to the cost of the goods being the markup.

Thus

Selling Price = Cost + Markup

or

if is used for selling price, for cost and for markup.

Key Takeaways

In setting markup, it is common to apply the same fraction of the cost for marking up all goods in the same
category.

This is similar to the calculation of gross profit for a company:

COMPANY ARTICLE
SALES SELLING PRICE

– COGS – COST
GROSS PROFIT GROSS PROFIT (MARKUP)

To simplify the process of finding markup for each product, it is common to apply the same fraction of
the cost as that used for marking up all goods in the same category – for example, sports shoes.

This ratio is usually written as a percent and called percent markup.

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For a markup ratio of 25% and goods that cost $20.00 per unit.

Key Takeaways

Gross profit: Markup ratio times cost of goods.

So

And the selling price would be

The $5.00 is also called the gross profit on the sale.

Note that, in general, markup ratios are based on cost prices and that margin ratios are based on sales or
selling price. For the above example, if you wanted a margin ratio for the product, you would compare
the $5.00 to the selling price of $25.00 and get

Since the percent markup is based on cost, which is known at the time goods are purchased, the normal
way to calculate the increase is to use the percent markup method.

Careful!

Even though this book stays with the definitions of margin and markup as above, you should be aware that
some texts and industries may use different terms (for example, “markon” instead of “markup”, or “markup
on sales” for margin) and different meanings for the terms. But the ones used here are frequently used, and
you will find them on most business calculators.

Learning Activity #4

1. Complete the following table.

 Business Mathematics 17

COST %MARKUP MARKUP PRICE

a. $10.00 35% ? ?

b. $20.00 ? $9.00 ?

c. $16.00 ? ? $20.00
Rates and Currency Conversions

Key Takeaways

Rate: The result when you take the ratio of two different units of measurement.

When you take the ratio of two quantities that have different units of measurement (for example, money
and time), you refer to the resulting ratio as a rate. As before, using the terms amount and the base:

A sales rate would have the amount in dollars .and the base, perhaps, in days. So if sales were $18,000
in a 10-day period, you would have:

Similarly a pay rate might be in dollars per hour and an exchange rate in dollars per British pound.

One use of such rates is to find a new amount for a different base (assuming the rate is constant). You
would have to do this if you wanted to find the cost of a given amount of foreign money. In this case,
you would check the exchange rates, which are determined by money markets and reported regularly in
the financial pages of newspapers.

Examples

Suppose the exchange rate is $2.10 per British pound and you need £300. Then:

So

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And

Notice that if, given the same rate, you wanted to find the number of pounds you could buy with, say $500,
you could reverse the ratio:

Key Takeaways

Keep track of the units. You can use them as a guide for calculations.

When dealing with rates, it is critical to keep track of the units; they can guide your calculations if you
use them for arithmetic operations.

If, for example, you want Canadian dollars (CAD) for US dollars (USD), and if you know that the
exchange rate is 0.68 USD for each CAD, then your rates are:

And

Check this by using a simple example – say, $1,000 (Canadian). Then, by the first rate, you would have:

By the second rate, you would find:

So the rates are equivalent.

 Business Mathematics 21

The following exchange rates were taken from a local newspaper.

Currency Rate

Euros € 1.532

Hong Kong (HKD) 0.1678

Japan (¥) 0.011648

Each rate gives the number of Canadian dollars required to purchase one unit of the other currency.

Example

To purchase Euros you would use the rate 1.532 CAD per Euro. So, if you wanted 300 Euros at this rate, you
would need:

To get the number of marks for, say $100.00 Canadian, you would calculate:

Learning Activity #5

1. Find the Canadian dollars you require to purchase 200 units of each currency listed above.
2. Find the amount of each currency you can buy for $500 Canadian
Trade Discounts

Most of the goods you purchase as a consumer are not bought directly from the manufacturer. The
goods are distributed through a marketing channel – that is, a sequence of middlemen which move the
goods to the consumer. In this section, you will examine the price calculations for a typical
[Link] an industry (such as clothing) which distributes goods through wholesalers and
retailers as shown in Figure 3 on page 1-13. Note that the manufacturer may sell to different levels of
the channel, perhaps to retailers near the production facilities and to wholesalers everywhere else.

Channel from Manufacturer to Consumer

Manufacturers (and wholesalers) often produce a single price list of their products for their customers.
This usually lists the prices (the list price) at the level a final consumer would pay. Clearly wholesalers
and retailers cannot pay this price because they have to mark up the price they pay before they sell the
product.

The price to be paid by these organizations is found by reducing the list price by a trade discount. The
trade discount is given by a percent of list. Suppose, for example, that a manufacturer of men’s suits
lists a suit at $300 (this is roughly what a consumer might pay). Then a retailer buying directly from the
manufacturer might get a 25% trade discount and pay:

The retailer can then mark up the suit by $75 for sale to the public.

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Chained Discounts

If retailers are expected to pay $225 for a suit, a wholesaler has to pay less for it, because the
wholesaler’s customers are retailers. Hence the wholesaler must get an additional discount to stay in
business. This is usually given as a chained discount; which is a percentage of the price after the first
(retailer’s) discount is taken.

In the example above, this extra discount is 20%. So the wholesaler would pay the manufacturer:

As a single equation you would have . This discount would be described

to the wholesaler as list less 20%, 25%.

To get the final price (the net price), after all discounts, you can set up the following formula:

where:

• = net price to be paid

• = list price
• = discount rate 1;
• = discount rate 2

Note that and are the fractions of the price to be paid after the discounts are taken.
Thus, in the example above:

• For , there remains to be paid.

• And for , there is of the remainder to be paid.

Sometimes there are additional discounts – special sale discounts, seasonal discounts, quantity discounts
– that are treated the same way.

Learning Activity #6

1. A wholesaler is purchasing refrigerators from a manufacturer and is offered discounts of “list less
30%, 25%” on refrigerators with a list price of $700.00. What price would the wholesaler pay?

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2. A retailer purchased a television set from a wholesaler and paid $244.30 after getting a single
discount on a set listed at $349. What single discount did the retailer get?
Payment Terms

In the previous section you learned to calculate the prices businesses paid for goods. This section
examines the terms of payment allowed by sellers.

After goods are sold, the vendor sends a request for payment to the purchaser. This request is usually on
an invoice, a document which lists all the pertinent facts about the transaction, including the following:

• the items sold, with list prices

• the trade discounts
• conditions of delivery
• other charges (e.g., freight)
• the PAYMENT TERMS.

Usually payment is not required immediately and a payment period (for example, 60 days) is given. This
payment period normally begins on the date of the invoice (that is, the next day is day 1) and payment is
expected by the last day of the period. The payment period allows for goods to be partly or wholly resold
by the purchasing company before payment is due, and is thus an inducement to buy from the seller.

Key Takeaways

A cash discount encourages early payment.

Sellers have to finance the sale during the payment period and consequently some sellers encourage
payment before the end of the period by allowing a discount, called a cash discount, for early payment.
The discount also helps to ensure preferential payment to the seller by companies that may be
experiencing difficulties meeting all payment commitments.

The following are examples of terms:

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2% discount allowed if paid within 10 days, otherwise net (full) payment due within 30 days
2/10, n/30
(of the invoice date).

1% discount if paid within 15 days of the RECEIPT OF GOODS, otherwise net payment due
1/15, n/60 ROG
60 days from receipt of goods.

2% discount if paid within 5 days of the END OF THE INVOICE MONTH, otherwise full
2/5, n/30, EOM
payment due 30 days from the end of the current month.

Key Takeaways

The payment period normally begins on the date of the invoice.

For example, consider the following invoice:

 Business Mathematics 29

Ajax Wholesale Ltd.

Invoice No: 16274

Date: August 15, 2020
Ship via: Hermes Delivery

Special Instructions:
Sold to: Electronicks
Ltd. None

110 B Avenue Surrey, BC

Ship to: Same PST Exemption #XXXXXXX

Terms: 2/5, n/30 FOB

List Price per Amount

Quantity Description
Unit

15 #1472 AM-FM Radio; less 30% $17.50 $183.75

10 #1821 Telephone; less 30% 12.25 85.75

#2171 Answering machine; less

10 36.00 226.80
30%, 10%

Subtotal 496.30
30

Delivery charge 35.00

TOTAL PAYABLE $531.30

Note that the amounts calculated have the trade discounts deducted, but do not have the cash discounts
deducted since it is not known whether or not the purchaser will pay early.

The delivery charge is listed separately and cash discounts are not usually allowed on it. This is because
the delivery in this case is not the seller’s business; it is being paid on behalf of the purchaser.

If the invoice was paid in full by August 20, 2019, the payment would be:

Otherwise the full amount would be due on September 14, 2019.

Learning Activity #7

An invoice dated September 3, 2020, for six television sets with a list price of $749.00 has trade discounts of
30% and 5%. If the payment terms are 3/10, n/30, what is the payment required if the cash discount is taken?
Partial Payments

Sometimes it is not possible to pay an entire invoice at once. In this case, we can apply the discount to
only part of an amount owing. This is called a partial payment.

Examples

S&C sports receives an invoice for $4,500 for a shipment of curling shoes. The invoice is dated April 1 and
has terms 3/10, 2/15, n/30.

a. On April 6, S&C sent in a payment of $1000. The Curling Equipment company gives discounts
for partial payments. How much does S&C owe on the invoice?
b. S&C plans to send in a second and final payment on April 11. How much should this payment
be?

For part (a), we need to see how much credit should be given for the $1,000 payment, given that it is
eligible for a 3% discount. The discount applies to the credit given (the part of the invoice that is paid
off) and not to the amount paid.

• To calculate how much to pay multiply by

• If given the amount paid divide by to get the credit

To see this, we can solve the equation:

Dividing both sides by , we have:

So, by paying the $1,000 early, S&C now owes only:

To solve (b), we multiply the amount owing by to see that the final payment is:

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Key Takeaways

• Not all suppliers allow retailers to receive a cash discount when only part of the invoice is paid early
(partial payments).
• In this text, we always assume retailers will receive a discount on the portion of the invoice that was
paid early.
• You will notice that we did some intermediate rounding in the problem above. Often companies will
do this type of intermediate rounding when storing amounts, but it is always important to check with
the supplier, to see how they record the numbers.

Learning Activity #8

In the middle of a kitchen remodel, you decide to splurge on a new refrigerator and range. The range was on
back order, but you received the following invoice for the fridge:

• Invoice 1 (fridge): $2,500 dated April 4 (5/20, n/30)

On April 6, you sent in a payment of $760. Two weeks later, you receive the invoice for the range. It has the
same terms as the first invoice:

• Invoice 2 (range): $3,250 dated April 19 (5/20, n/30)

a. If you pay off both debts at the same time, what is the last day you can pay?
b. How much will you pay?
Chap 1 Learning Activities Answer Key

Learning Activity #1

1. a. $9,000 b. $66,000
2. Sounders:

, Elecktronicks:

(Elecktronicks is better)

Learning Activity #2

1. a. Net Profit = 14% of $29,000 .

b. , so

2 a. $9.80 b. $22.40 c. $39.20

Learning Activity #3

1.a.

Sales $90,000

COGS 58,500
Gross Profit 31,500

Operating Expenses 14,000

Net Profit 17,500

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2.

Learning Activity #4

COST % MARKUP MARKUP PRICE

a. $10.00 35% $3.50 $13.50

b. $20.00 45% $9.00 $29.00

C. $16.00 25% $4.00 $20.00

Learning Activity #5

1. a.

b.
 Business Mathematics 35

Learning Activity #6

1.
2. Discount ,

Learning Activity #7

Before Discount:

After Discount:

Learning Activity #8

a. The last day you can pay off both debts is the day the fridge invoice is due: May 4. On this
day, the fridge will not get a discount, but the range will be eligible for a 5% discount
b. The first payment of $760 is worth a credit of:

so the we owe on the fridge, and on

the range, so our final payment will be:
Chapter 1 Review Questions

Unless otherwise stated, round the final answer to 2 decimal places.

1
. A jewelry store’s sales and expenses are given below for the months of October, November and
December:

October November December

Sales $40,000 $59,000 $109,000

Expenses (all) $38,000 $50,000 $84,000

a. Find the profits for each

b. Find the percent net margin for each

2
. FST Computer Stores has decided to give a total bonus of $10,000 to its outlets. The bonus will be
proportional to the monthly sales (given below) for each outlet. Find the bonus for each outlet.

Outlet Burnaby Downtown Richmond Surrey

Sales $162,000 $119,000 $172,000 $215,000

3
. A-Plus Appliances two branches reported the following results for a one week period:

East West

Sales $20,000 $25,000

COGS 12,000 16,000

Other Expenses 3,000 4,000

a. Find the gross and net profits for each branch.

b. Find the percent gross margin and percent net margin for each

4
. Joan’s Co. knows that, nationwide, companies in its industry earn, on average, a percent gross
margin of 38% and a percent net margin of 11%. Joan’s Co. forecasts sales of $730,000 next year. If it
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aims at the same profit ratio as the nationwide average, estimate Joan’s cost of goods, gross profit and
net profit.

5
. Jim’s Co. sees that its competitor sells an article for $42.00. It knows that the competitor pays
$30.00 for the article.

a. What is the competitor’s markup (dollar amount)?

b. What is the competitor’s percent markup?
c. What is the competitor’s percent gross margin?

6
. At one time the exchange rate for the Canadian dollar was:

For the Danish krone the rate was: 1 krone= 0.155 (USD)

a. Find the value of $1 USD in terms of Canadian dollars (4 decimal places).

b. Find the value of one Danish krone in terms of Canadian dollars (6 decimal places).
c. How much would it cost (in Canadian dollars) to purchase 10,000 krones (2 decimal places)?
d. How many krones can be purchased for $500 Canadian (2 decimal places)?

7
. JB Appliances received an invoice which contained the following information:

• Date, June 17, 2018 Items:

• 10 Refrigerators; list $710 each, less 25%, 20%
• 5 Dryers; list $420 each, less 25%, 20%, 5% (special sale)
• Freight charge $208
• Payment terms 3/10 net 60

Find:

a. The last day for

b. The amount due if the invoice was paid on the last day.
c. The last day at which the cash discount
d. The amount of discount allowed on the day in (c).

a. The amount to pay off the invoice on the day in (c)

 Business Mathematics 39
8
. Mac’s Wholesale buys from a distributor which allows discounts of 25%, 20% and 5%.

a. What single discount (called the single equivalent discount) would be equivalent to the above
discounts?
b. Compare the above discounts to discounts of 30%, 20%.

9
. A branch of Jack’s Hardware has been told by its head office to sell goods at a percent gross margin
of 40%. What percent markup should the branch use?

10
. CHMCO sells a product with discounts of 25%, 15% to its distributors. It plans to allow a seasonal
discount to make the overall discount equal to 45%. What additional (chained) discount should CHMCO
allow?

11
. Wilson Co. has received an invoice dated October 17 for 5 items with list price $900 each, and for
freight of $170. The terms were:

• Trade terms: list less 20%,15%.

• Payment terms: 3/10, n/30.

Find:

a. The last day for payment

b. The amount due if payment is made on the last day
c. The last day for taking a cash discount
d. The amount needed to pay the invoice on the day in (c).
e. If the seller agrees to give a cash discount on a partial payment, how much credit would be
applied to the account if $1,500 were paid immediately?

12
. Three companies, Alpha, Beta and Gamma, are the only suppliers to a specialized market. Last
year Alpha’s sales were $700,000, Beta’s $1,200,000 and Gamma’s $1,600,000.

a. What was the market share (percent of market) of each company? Note: retain all decimal
places calculated in (a) to solve (b) and (c).
b. If next year’s total market is expected to be $5,000,000 and each company’s share remains
the same, what would be the sales of each company?
c. Alpha has an aim of making its sales 75% of Beta’s. With total sales as in (b) and Gamma’s
as in (b) what would have to be the sales of Alpha and Beta if Alpha were to make its aim?
40

13
. Janet’s Co. has sales of $90,000, COGS of 80% of sales and operating expenses of $5,000.

a. Find the gross and net profits.

b. Find the rate of markup (based on cost).
c. Find the percent net margin.

14
. Jim’s Co. has set a requirement on stock items of a turnover ratio of 2.6 per year. It is examining
three stocked items, A, B and C, which have to be bought in large amounts. As a result of the purchasing
requirements, the maximum stock for A is $1,000, for B $1,200 and for C $2,500. If the average stock
is assumed to be one-half the maximum stock, what would be the required annual sales of each of these
items?

15
Majjor Oil Co. allocates its maintenance budget to three of its branch offices on the basis (i.e.,
proportional to) of total floor space. Branch I has 9,000 sq. ft., Branch Il has 20,000 sq. ft. and Branch
III has 15,000 sq. ft. If $880,000 is to be allocated, how much should each branch receive?

16
A paint is advertised for sale with a price of $11.00 USD per gallon. Find the price in CAD/liter if
1 CAD = 0.73 USD

Given:

• 1 liter = 1.0567 quarts

• 1 gallon = 4 quarts

17
The wellhead price of a certain grade of oil is $69.00 USD per barrel. What is the price in CAD
per liter?

• 1 CAD = 0.73 USD

• 1 Barrel = 31.5 US Gallons
• 1 liter = 1.0567 quarts
• 1 US Gallon = 4 quarts

18
An invoice arrives from the Home Shopping Network. The invoice is dated May 28th, and the
 Business Mathematics 41

invoice amount is $600. Calculate the net payment of the invoice if the te1ms are 2/10, n/30 and the
invoice is paid on June 6.

19
An invoice dated Aug. 12th for $745 containing the terms “3/15, n/60” was paid on Aug. 25th
How much should the cheque be to pay this invoice?

20
An invoice dated May 4th for $1,200 has terms 3/10, 2/30, n/60. How much should be paid on
May 31st to fully pay off the invoice?

21
An invoice dated May 1st for $4,000 has terms 3/10, 2/20, n/45. It was partially paid by a $1,000
payment on May 10th and a second payment of $1,500 on May 20th. What is the outstanding balance
after the May 20th payment?

22
. A dealer purchased 10 DVD players at $300 each less discounts of 25% and 5%, and 5 TV’s at
$450 each less 30%, 10% and 2%. The invoice for these items was dated June 5th and had terms 2/10,
n/30.

a. If the dealer wishes to take advantage of the cash discount, what would be the last day for
payment?
b. What amount must be paid on the day found in part a) to fully pay it off?
c. If the dealer only sent in $2,500 on June 15th what would be the outstanding balance?

23
. An invoice for $12,000 has payment terms 3/10, 2/20, n/45. Discounts are allowed for partial
payments. The company made of payment of $4,000 9 days after the date of invoice, and a second
payment 18 days after the date of the invoice that reduced the balance owing to $2,000. What is size of
the second payment?

24
. An invoice for $2,500 has terms 2/10, n/30. The invoice is dated April 27th and half of the invoice
amount is paid on May 1st and the rest is paid on May 20th. If the seller grants discounts for partial
payments, by how much is the balance reduced by the 1st payment? What is the total amount paid?

25
. A seller grants discounts for partial payments. An invoice for $1,200, dated May 1st, has terms 2/
10, 1/15, n/60 and $400 is paid on May 5th, $400 on May 14th and the rest is paid on June 5th• How
much is the balance reduced by the two early payments? How much is paid on June 5th?
42

26
. Chan Enterprises sent CK Air an invoice dated Sept. 14th for $5,400 with terms 3/10, 1.5/20, n/45.
CK Air made a payment of $2,000 on Sept 24th and a second payment on Oct 3 that reduced the balance
owing to $1,000. What was the size of the second payment?

27
. You receive an invoice from AG Electronics dated Feb. 10th for:

• 20 TV sets at $500 per set less 20% and 15%.

• 30 DVD players at $200 each less 25% and 10%.

AG Electronics has payment terms 2/10, 1/20, n/45. Cash discounts are allowed for partial payments.
They make of payment of $4,900 on Feb 18th and a second payment on Feb 26th that reduced the
balance owing to $1,500. What is the size of the second payment?
28
. The Harrison Lake Corporation likes to maintain a capital structure of [Link] (dollar value of debt
to common shares to preferred shares). The company is considering a new project and will need to raise
$3,300,000. If the company wishes to maintain its existing capital structure, how much debt, common
stock and preferred stock should they issue?

29
. The Ministry of Education allocates its budget in proportion to student enrollments. The
Ministry has $1,500,000 to allocate and the student enrollments are as follows:

High Knowledge Institute, The 12,000

Institute of Technology 15,000

School of Hard Knox 13,000

a. Allocate the budget in proportion to

b. The following year total enrollment is expected to reach 65,000. High Knowledge Institute is
expected to have 3,000 more students and the ratio of students at The Institute of Technology
to Students at Hard Knocks will remain the same at 15:13. Give the new estimate for
enrollment at each

30
. An engineering firm is owned by three partners (Alan, Barbara, and Chuck) with 4,000, 3,000
and 1,000 shares respectively. The company’s net income for the year is $4,500,000 and 10% of that
income has been set aside as a performance bonus. The bonus will be allocated in the following way:

• $70,000 to be distributed amongst all staff excluding the partners.

• Each partner will get $80,000.
 Business Mathematics 43

• The remainder is to be divided among the partners in proportion to the number of shares held.

What was the total amount of bonus received by each partner?

31
The $300,000 yearly rent of a four-story building is to be expensed to the four departments using it
according to the number of floors occupied. Sales occupies two floors, Finance one floor, Administration
and Research and Development (R & D) share one floor equally. How much of the rent expense is
allocated to each department?

32
Last year, Reliable Securities established a sales achievement bonus fund of $10,000 to be
distributed at the year’s end among its four-person mutual fund sales force. The distribution is to be
made in the same proportion as the amounts by which each person’s sales exceed the basic quota of
$500,000. How much bonus will each salesperson receive from the fund if the sales figures for the year
were $910,000 for Alicia; $760,000 for Bob; $460,000 for Charles; $630,000 for Diana?

33
For the past seven years the sales of Departments A, B, and C have maintained a relatively stable
ratio of [Link]. Department A is predicting that their sales will be $500,000 next year. Based on their past
sales ratio, what sales would be predicted for Department B?

34
If the chain discount on an item listed at $2,200 is 40%, 15%, 5%, what is the net price? What
single rate of discount is equivalent to this series of discounts?

35
The Ray department store is selling all summer clothes at 50% off the regular retail price
during the month of September. On Saturdays only, they are offering an additional 20% off the already
discounted price. What is the single equivalent discount rate on Saturdays?

36
A publisher sells its romance novels with chained discounts of 20% and 10%. The publisher
would like to add a third discount to bring the overall discounts to 31.6%. Find the third discount rate.

37
If the net price of a typewriter was $425.59 after chain discounts of 25%, 10% and 3%, what was
the list price? What is the equivalent single discount rate?
44
38
A patio set is listed at $350. What is the size of the discount (in dollars) if the buyer is eligible for
discounts of 30%, 15% and 5%? Convert the chain discount into a single equivalent discount rate.

39
. Which offers the larger discount? Manufacturer A offering chain discounts of 30%, 20%, 5%, 2%
or Manufacturer B giving 45%, 13%?

40
Island Remanufactured Wood Products Inc. sells its products at trade discounts of 30%, 10%.
A competitor has been offering products at the same list prices but with trade discounts of 25%, 20%.
Island Reman wishes to beat the competitor’s prices by offering a third trade discount. At least how big
must the additional discount rate be to meet this objective?

41
Toys-R-Costly sells Barbie Computers for $840 less 20% and 15%. A competitor sells a similar
computer for $800 less 25%. What further discount (second discount) must the competitor allow so that
its net price is the same as Toys-R-Costly’s?

42
In order to stimulate sales of file cabinets, a manufacturer had to offer a temporary additional
discount to its present rate of 25%. The list price is $300. What additional temporary discount would
have to be given in order to achieve a net price of $150?

43
. Wadi Air Conditioners Ltd. sells one model at a list price of $500. Retailers are offered discounts
of 15% and 10%.

a. Find the net price of an air conditioner.

b. Find the single equivalent discount rate
c. Wadi would like to add a third chained discount to bring the total discount to 27%. Calculate
the rate of the third discount.

44
. A company manufactures Bluetooth Speakers. The Speakers retails for $400 and are offered to
the wholesaler with chained discounts of 10% and 15%.

a. Find the net price after discount.

b. What is the single equivalent discount rate?
c. The manufacturer would like to add a third discount to bring the total discount to 30%.
Calculate the rate of the third discount.
d. A competitor offers a single discount of 25%. This amounts to a discount of $87.50 off the
 Business Mathematics 45

list price. What is the list price?

45
. After graduation you decide to start up a business selling spices imported from Colombia. The
main product you import, saffron, sells for 95,149.87 Pesos for a 4-ounce jar. In Canada, you sell
the product in 125 gram bags. Find the selling price in Canadian dollars per 125 gram bag. Use the
following:

• 1 pound = 454 grams

• 1 USD = 1.5644 CAD
• 125 grams = 1 bag
• 16 ounces = 1 pound
• 0.000427 USD = 1 COP (Columbian Peso)

46
. You are taking a holiday in Britain. You are taking $750 USD with you. How many British pounds
can you buy with this money?

Rates:

• $1 USD= $1.5644 CAD

• 1 British pound (£) = $2.1356 CAD

47
. You are thinking of expanding your bottled water company to the US. Your company bottles
pure Fraser River water collected near the Oak Street Bridge. Your water currently sells for $0.85 per
600 ml bottle. The water shipped to the US would be sold in quart bottles. What price, in US dollars,
should you charge for a quart of your water? (Convert the Canadian price per 600 ml to a US price per
quart).

Rates:

• $1 USD= $1.5644 CAD

• 1 Gallon = 3.7853 Litres
• 4 Quarts = 1 Gallon
• 1,000 ml = 1 Litre

48
. You missed the Back Yard Boys concert at GM Place, and have decided to drive to Seattle to see
them. After driving through customs, you stop at the Thrifty market in Blaine. You see a quart size bottle
46

of Duff Cola selling for $1.89 USD. You would like to compare this price to the price of a Canadian can
of Cola. Convert the price to Canadian dollars per can.

Rates:

• $1 USD = $1.5644 CAD

• 1.0567 Quarts = 1 Litre
• 1 Litre = 1,000 ml
• 1 can = 355 ml

49
. In California gasoline sells for $1.99 USD per gallon. In British Columbia gasoline is currently
selling for $0.729 CAD per liter. Convert the Canadian price per liter to US dollars per gallon. Is the
price of gasoline cheaper in California or in BC?

Rates:

• $1 USD= $1.5644 CAD

• 1 Litre = 1.0567 Quarts
• 4 Quarts = 1 Gallon

50
. You purchase gasoline for your gas stations from local refineries. A number of labour disruptions
and increasing costs have motivated you to consider importing gasoline from the Emirate of Abu Dhabi.
Refined gasoline sells for 91.30 Dirhams per barrel. Calculate the equivalent Canadian price in liters
given:

Rates:

• 3 Dirhams = 1 USD
• 0.638 USD = 1 CAD
• 1 Barrel = 42 Gallons
• 1 Gallon = 4 Quarts
• 1 Quart = 0.9464 Liters

51
Fill in the Following Table:
 Business Mathematics 47

Cost Sales Price Markup in dollars % Markup % Margin

$125 $175

$75 $95

52
A computer dealer buys NADIR brand VR headsets for $3,500 less 10%, 5% and sells them for
$3,299.

a. What is the Cost?

b. What is the rate of markup?
c. What is the percent margin?

53
. An outboard motor costs the retailer $500 less chain discounts of 30%, 25% and 5%: The
company maintained a margin of 40% on all items. The motor was sold after it had been marked down
25%.

a. What was the regular selling price?

b. What was the actual selling price (sale price)?
c. What rate of markup did they use? (based on part b)
54
. A souvenir stand bought 300 hockey sweaters for $15 each. They sold 170 at the regular selling
price of $30 each but had to sell another 70 sweaters at a 35% discount (markdown) near the end of
the hockey season and the remaining sweaters were cleared by selling them at a breakeven price which
exactly covered the cost of the sweaters plus overhead. Overhead (operating expenses) are roughly 25%
of cost.

a. What was the selling price per sweater for the 70 sweaters sold near the end of the season?
b. What was the selling price per sweater for those sweaters sold at the breakeven price?
c. What was the gross profit (loss) and net profit earned from the sale of the 300 sweaters?

55
. Wilma Inc. prices its products to provide a 25% margin. What rate of markup do they use?

56
. You know that a TV retailer makes $50 on the sale of a certain model of television set and the
retailer has a markup policy of 20% of cost.

a. How much did this TV set cost the retailer?

b. What is the selling price of the TV set?
48

c. Find the percent margin.

57
. A diamond ring sells for $4,500. If the rate of markup is 110%, what did the ring cost the retailer?
What is the percent margin?

58
. An item that cost the dealer $350 less 35% and 12.5% carries a price tag at a markup of 150% of
cost. For quick sale, the item was reduced 30%. What was the sale price?

59
. The selling price of an automobile is $9,500. If the markup is 15% of cost and the operating
expenses are 2% of the selling price, how much is the gross profit (markup in $)? What is the net profit?

60
. ABC Co. prices its products to provide a 43.5% margin. What rate of markup do they use?

61
A bookstore has a policy of maintaining a margin of 20%.

a. If an item costs $90, how much should it sell for?

b. If another book sells for $120, how much did it cost?

62
. The regular selling price of merchandise sold in a store includes a margin of 40%. During a sale,
an item that costs the store $180 was marked down 20%. For how much was the item sold for?

63
. An item sells for $500. If the company uses a 100% rate of markup, what is the cost of the item?

64
. Scoopy-Doo Pet Foods prices its pet food to maintain a 45% margin. A 7-kg bag of Woof-Woof
dog food costs $27.50. Calculate the selling price.

65
. CK Winery sells its merlot red wine for $21.00. If the rate of markup is 200%, what did the wine
cost the retailer? What is the percent margin?

66
. If you knew that an appliance dealer makes $100 on the sale of a certain model of washing
 Business Mathematics 49

machine and the dealer has a markup policy of 20% of cost, how much did this washer cost the dealer?
What is the selling price of the washer? Find the percent margin.

67
. Find the cost of an item sold for $1,904 to realize a rate of markup of 40%.

68
. A retailer bought an article for $78 and his rate of markup is 32%. He sold this article in a sale
after having marked it down by 30%. What is the sale price?

Notes

OctoberNovemberDecember
1.
a. $2,000$9,000 $25,000

b. 5.00%15.25% 22.94%

BurnabyDowntownRichmondSurrey
2.
$2,425.15 $1,781.44 $2,574.85 $3,218.56

East West
3.
a. Gross Profit $8,000$9,000

Net Profit $5,000$5,000

b. Gross Margin40% 36%

Net Margin 25% 20%

Sales $730,000
4.
COGS 452,000

Gross Profit 277,400

Operating Expenses 197,100

Net Profit 80,300

5. a. $12,000,
b. 40%
c. 28.57%

6. a) 3158 CAD = 1.00 USD b) 0.203947 CAD = 1 Krone c) 10,000 Krones =2,039.47 CAD d) 500 CAD =
2,451.61 Krones
7. a. August 16, 2018
50

b. $5,665.00
c. June 27, 2018
d. $163.71
e. $5501.29
8. a. 43%
b. 44%

9. 66.67%
10. 13.7255%
11. a. November 16
b. $3,230.00
c. October 27
d. $3,138.20
e. $1,546.39

Alpha α Beta β Gamma γ

12.
a. 20.00% 34.2857142%45.7142857%
b. $1,000,000 $1,714,285.71$2,285,714.29

c. $1,163,265.31$1,551,020.41$2,285,714.29

13. a. Gross Profit= $18,000, Net Profit= $13,000

b. 25%
c. 14,44%

14. A: $1,300 B: $1,560 C: $3,250

15. Branch I = $180,000; Branch II = $400,000; Branch ID= $300,000
16. $3.98 CAD/liter
17. $0.79 CAD/liter
18. $588
19. $722.65
20. $1,176.00
21. $1,438.46
22. a. June 15th
b. N = $3,456.12
c. $3,526.65 - $2,551.02 = $975.63

23. $5,758.76
24. $1,275.51 is credited and a total of $2,474.49 is paid
25. $408.16 + $404.04 = $812.20 is the credit and $387.80 is still owing.
26. $2,303.07
27. $4,306.50
28. Debt: $1,500,000 C/S: $1,200,000 P/S: $600,000
29. a. $450,000; L: $562,500; S: $487,500
 Business Mathematics 51

b. N: 15,000 students L: 26,786 students S:23,214 students

30. Alan: $150,000; Barbara: $132,500 Chuck: $97,500

31. Sales: $150,000; Fin: $75,000; Admin: $37,500 (same for R & D)
32. Alicia: $5,125; Bob: $3,250; Charles: 0; Diana: $1,625
33. $375,000
34. N = $1,065.90 D = 51.6%
35. 60%
36. 5%
37.
38. $152.16, 43.5%
39. Mfg A: Total discount= 47.864%; Mfg B: Total discount= 52.15% (B is larger)
40. more than 4.76%
41. 4.8%
42. 33.33%
43. a. N = $382.50
b. 23.5%
c. 4.575%

44. a.
a. $306
b. 23.5%

c.
d. $350

45. $70/bag
46. £549.40
47. 0.856959 USD/quart, so $0.86 USD/quart
48. 1.11 CAD/can
49. 1.76 USD/gallon, so cheaper in Canada
50. 0.30 CAD/Liter
51. a.

CostSales PriceMarkup in dollars% Markup% Margin

$125$175 $50 40% 28.57%

$75 $95 $20 26.67% 21.05%

52. a. Cost = $2,992.50

b. 10.24%
c. 9.29%
53. a. $415.63
b. $311.72
c. 25%
52

54. a.
a. $19.50
b. $18.75
c. $3,090 gross profit, $1,965 net profit

55. 33.33%
56. a. C = $250
b. S = $300
c. % margin = 16.67%

57. C = $2,142.86, percent margin= 52.4%

58. $348.36
59. Markup = $1,239.13 NP= $1,049.13
60. 76.99%
61. a. $112.50
b. $96.00

62. $240.00
63. $250
64. $50
65. C = $7.00, % margin= 14/21 = 66.67%
66. C = $500, S = $600, % margin = 16.67%
67. $1,360.00
68. $72.07
Chapter 2: Functions and Applications

Key Takeaways

The purpose of a function is to enable you to find the value of a quantity (variable) you want from a quantity
(variable) you know or can choose.

Most quantities in business (for example, profits, costs, sales) can take on a wide range of values (profits
can even be negative!). These quantities are referred to as variables, and there are relationships between
many of these variables that help you to plan and improve the operation of a business. The relationships
examined in this chapter are called functions.

The purpose of a function is to enable you to find the value of a quantity (variable) you want from a
quantity (variable) you know or can choose. The value of the quantity you want thus depends on the
value of the quantity you know. The quantity you start with (the known one) is called the independent
variable; the quantity you want is the dependent variable.

An independent variable can take on any value consistent with the situation being investigated. A
dependent variable must take on the value that is a consequence of the known value of the independent
variable.

These variables are often denoted by for the independent variable and by y for the dependent variable.
The letters are just a convenient shorthand, which makes it easy to do algebraic manipulation. In
applications you will generally find it preferable to use letters that remind you of what is being
represented (for example, for cost).

Example 1

A shirt manufacturer may decide to produce a certain number of shirts of a particular size and style. The first
task is to find out the amount of material needed.
Then,

53
54

A function must be described in such a way that you can find the value of the dependent variable from
the value of the independent variable. Three standard ways of doing this are used in this course.

They are,

• an equation, which allows you to calculate the value of the dependent variable for each value
of the independent variable.
• a table, which lists the value of the dependent variable for each value of the independent
variable.
• a graph, which displays the value of the dependent variable for each value of the independent
variable.

Example 2

Suppose a series of items are to be marked up by 40% of cost. The selling price (the value wanted) can be
described in terms of the cost (the value known) in the following ways:

All of these approaches give the selling price, (dependent variable), as a function of the cost,
(independent variable). A function like this, where one variable is a multiple of another, is called direct
variation.
 Business Mathematics 55

Note that such functions follow the algebra convention which states that when single letters are used to
stand for variables, multiplication is to be used when no other operation is given, so that

Key Takeaways

Equations provide short descriptions of functions and enable you to find precise values of the dependent
variable.

Also, you will follow the graphing convention which requires that the independent variable be drawn on
the horizontal axis and equal the dependent variable on the vertical axis.

Each way of describing functions has its own advantages. Equations have the advantage of providing
short descriptions of functions and enabling you to find precise values of the dependent variable when
you need them. However, it may be difficult to do the calculation, or to understand the overall behavior
of the function.

Key Takeaways

Tables give values immediately, without calculation … Graphs communicate an overall understanding of the
way a function behaves.
Linear Functions

Tables give the values immediately, without calculation, but they may have to be very large to be useful.
(Clearly the small table used in example 1 is not large enough to be of real use in a business.) Tables are
still commonly used in some areas of business – for example, to find the payments required for loans
such as mortgages. They are useful because the calculations are fairly complicated and a precise answer
is required. Later chapters deal with such payments. Normally we use spreadsheet programs such as
Microsoft Excel for this type of problem.

Graphs communicate an overall understanding of the way a function behaves. Complex functions are
often referred to by graphs. The function values and equations may not be known in detail, and the
general behavior of the function may be all that is required. In economics, for example, the major issue
may be the direction (up or down) that changes in one variable (such as price) have on another variable
(such as revenue).

The rest of this chapter examines a type of function often used in industry and finance: linear functions.

A function is linear if the graph of the function forms a straight line. You will get a straight-line graph if
the only operations on the independent variable are as follows:

1. The independent variable is multiplied by a constant. For example, ; Or

2. The independent variable is added to or subtracted from a constant. For example,
; Or
3. A combination of 1 and 2 is used. For example,

All of the above would qualify as linear functions. Note that direct variation is a special case of linear
function.

The following equations would result in non-linear functions:

Example 3

57
58

Take the cost of producing advertising posters as an example of applying a linear function. Suppose that the
management of the print shop finds that producing the posters for local companies costs $80.00 for artwork
and set-up, and an additional $0.11 for materials and labor for each poster printed.

The cost of production could be described by the (linear) equation

where

• is the cost of production and

• is the number of posters produced/

Number Of

Posters Cost
100 $ 91.00 This table would be satisfactory

200 102.00 for costing orders to the printer

300 113.00 as long as orders were limited

400 124.00 to these sizes.

500 135.00
600 146.00

700 157.00

800 168.00

900 179.00

1,000 190 .00

To make a graph showing this function you should take as a horizontal axis the independent variable
(number of posters), and as a vertical axis the dependent variable (cost). Both axes must be scaled so
as to allow for the largest value of each variable (2,000 for , $300 for ). Plotting the points from the
table above, you get, by joining them, the graph illustrated below.
 Business Mathematics 59

Graph of Cost (C) of Posters (x)

The values corresponding to a few points have been marked on the graph and dotted lines given to show
how these points relate to the axes. Note that the graph is a straight line.

All linear functions are quite simple: only two points are necessary to establish the appearance of the
function. An extra point serves as a check to see that the graph is correct.

Key Takeaways

Key fact about linear functions is the uniform rate of change, or slope of the line.

Also note that as the independent variable (number of posters) increases, the dependent variable (cost)
increases at a steady rate ($0.11 per poster).

The key fact about linear functions is this uniform rate of change, which is called the slope of the line.
If you revert to the generally used and for independent and dependent variables.

Then,

The slope will always have the value of the coefficient (multiplier) of if is written as a function of .

Thus,

Where,
60

• and are constants.

• is the -intercept ( -value at = 0).
• is the slope of the line.

Note:

Note

When changes by 1, will change by an amount , which increases if the slope is positive and decreases
if it is negative.

Example 4

As an example, suppose you have the following linear function:

Then the slope will have the value +2. Make a table of a few values and graph the function. Just substitute
selected values of to get values of .
For example, if :

-2 -1
-1 1

0 3
4 11

NOTE:

1. When changes by 1, changes by 2.

2. When changes by 4, changes by 2 × 4 = 8.
3. Also is the value of when .
 Business Mathematics 61

The graph would then appear as shown in Figure 2:

Graph of

Learning Activity #1

1. For each of the following linear equations find the intercept and the slope.

a. ______________ ______________

b. ______________ ______________

c. ______________ ______________

2. A machine that wraps boxes of candy requires 90 minutes to set up, then one-half minute per box to do the
wrapping. Use

• = total time required (in minutes)

• = number of boxes to be wrapped
a. Complete the equation for . Note the units used.
Total time = set up time + wrapping time.

without units:

b. Complete the table for the given -values:

62

80
150

c. Plot the points from your table on the graph and join them to form a line.

d. Estimate the time to wrap 100 bags and check by calculating it with the function.
Linear Equations From Data

You will not always be given the equation for a linear function. Instead you will have available some
information about it and, from that data, you will have to work out the equation.

The most common case is to have two data points, and which satisfy the equation.
Then, since you are working with the slope-intercept form of linear equation, you should first work out
the slope, , as follows:

Next, substitute one data point, say into the equation to find the intercept, , as follows:

which can then be solved for the intercept as it is the only unknown.

Example 5

Suppose that in the poster printing example above you were only given the facts that, to make 1,000 posters,
it would cost $190 and, to make 1,500 posters, it would cost $245. The information could be organized by
thinking of the points as being in a table or on a graph as follows:

Then to find the slope:

To find the -intercept:

63
64

and write the whole equation as follows:

Learning Activity #2

There are two temperature scales in North America: Fahrenheit and Celsius. They are related by a linear
equation. The temperature of boiling water is 212° Fahrenheit and 100° Celsius. The temperature of freezing
water is 32° Fahrenheit and 0° Celsius.
Let,
= temperature on the Fahrenheit scale (the ).
= temperature on the Celsius scale (the ).
Then find the equation for in terms of (i.e., ) by using the following steps:

1. Choose one point as another as in the formula,

2. Since you now know , substitute and one of the known points in

and solve for .

3. Write the final equation and find the Fahrenheit temperature equivalent to 20 degrees Celsius
(approximately room temperature).
Cost Functions

Key Takeaways

Cost functions give the cost of an activity.

The function used as an example in this chapter, which gives cost in terms of a number of posters, has
some elements typical of cost functions. Cost functions give the cost of an activity, usually in terms of
some measurement of a level of activity.

The fixed cost is the cost that must be paid no matter how low the measured level of activity (the cost
at zero). For the posters the fixed cost was the $80.00 for artwork and set-up, since these things would
have to be done even if only one poster was produced.

The variable cost is the part of the cost that changes with the level of activity. For linear cost functions,
the variable part of the cost changes directly with the level of the activity. In the poster example, the
variable cost is $0.11x. The $0.11 per poster is called the variable cost per unit. The fact that the variable
cost per unit is the same for all units makes the function linear.

Key Takeaways

Variable cost: that part of the cost that changes with the level of the activity

? The fixed cost is usually denoted by or .

? The variable cost per unit is usually denoted by or .

If you take to be the number of units produced, then you have the following as a general formula:

Thus, for the poster example:

•
• per poster
• number of posters

65
66

Hence,
Equations and Functions

Key Takeaways

In linear equations it is always possible to solve for any variable shown in the equation

An equation always shows a relationship between variables, but the relationship is not necessarily
to be viewed as a function with independent and dependent variables. For example, in the equation
, there is no requirement that one variable be independent and the other dependent.

In linear equations it is always possible to solve for any variable shown in the equation -that is, to rewrite
the equation with that variable by itself on one side of the equation. If this is done, it is a convention to
write the variable on the left-hand side of the equation and treat it as the dependent variable. Thus, in the
example above, you could solve for as follows:

and treat as a function of . Similarly you could solve for as follows:

and treat as a function of .

67
Systems of Equations

If a number of equations involve the same variables, they are called a system of equations.

Example 6

An agent is to purchase two products, G and H, and send them to the company’s warehouse. He has a budget
of $70,000 and truck space of 9,000 cubic meters. The product costs and sizes are as follows:

Cost per Case Volume per Case

G $10 3 m3

H $20 2 m3

The question to be answered here is: how much of each product should be purchased if both the budget and
space are to be used up?

Key Takeaways

Limitations are called constraints … each constraint gives an equation.

Limitations such as those for budget and space are called constraints. Each constraint gives an equation.
To find the equation from the data given, you should consider the totals for each constraint separately
and find the contribution of each variable. In this case; the variables are the amounts of each product to
be bought. Let,

• = the amount (number of cases) of G

• = the amount (number of cases) of H

Then the budget constraint equation can be obtained by considering:

69
70

Similarly,

So,

Thus you have the system of equations

for which the graphs are given below.

Graph of G and H, Example 6

Notice that the data for the problem was chiefly in terms of rates, the costs per case and the volume per
case. These were used to get equations for totals, using the idea of,
 Business Mathematics 71

for each equation. Notice, also, the use of the units of measurement to help keep track of the parts of the
equations.

The values required by the problem are those of the point at which both equations are satisfied – the
point on the graph at which the lines cross. This point is called the solution of the equations. It can be
estimated from the graph and also calculated from the equations.

Method of Elimination

To solve the equations, using the method of elimination write each one in the form for which is given
as a function of .

For the budget:

For the space:

Next, note that at the solution, the values of must be the same, so:

By adding to each side, you get:

Subtracting from each side gives:

Substituting the result in one of the original equations (space):

Whence

Thus, both the budget and space allowances will be used up if 1,000 cases of G and 3,000 cases of H are
bought.

Method of Substitution

The method of substitution gives you another way of solving such equations. It consists of the following:

Once the first equation has been solved for , the result is
72

This result would be substituted in the second equation, which would produce an equation containing
only the variable .

Thus,

and

Substituting in the other equation:

Learning Activity #3

One of the production facilities of Jones Furniture Company produces chairs from kits, each of which
contains all the parts for the chair. The facility makes two types of chairs: a regular chair for normal inside
use and a special chair for outside use. Each chair is assembled and then painted.
There is only a limited amount of labor time for each operation: 120 hours per week for assembly, 80 hours
per week for painting. Each regular chair requires 0.5 hours for assembly and 0.3 hours for painting. Each
special chair requires 0.4 hours for assembly and 0.4 hours for painting.
Find the number of regular and special chairs that would have to be produced each week in order to use up
both the assembly and painting time available for that week.
Let,
= number of regular chairs produced per week
= number of special chairs produced per week
 Business Mathematics 73

1. Find the equation that shows the constraint for the available assembly time: _______ (total hours)
= _______ _(hours/chair) × r (chairs) + _______ (hours/chair) × s (chairs)
2. Find the equation that shows the constraint for the available painting time.

3. Solve the equation in Question 1 for and substitute the result in the second equation, in
Question 2, to get the value for .
4. Substitute the result from Question 3 in one of the equations to get the value of .
5. Check your results by placing them in the other equation (but not the one in Question 4) and see
that they give the correct value.
6. Graph the two equations to make a visual check of your answer.
Profit Volume Analysis

A system of equations is also used in the analysis of profits for different volumes of business. As an
example, consider cost and revenue for the poster example discussed previously. Suppose the printing
business decided that it should charge $0.17 per poster. Then it would have a revenue function:

Together with the cost function, this forms a system of equations:

You have already seen a table for the cost function. Now prepare a short table for revenue, then graph
both functions on the same axes, as follows:

Graph of C and R

To analyze this system for business purposes, you should use the relationship (from Chapter 1):

You can see from the graph that the printing business would lose money at those values of (the low
values) for which the cost function is above the revenue function. And it would make a profit at those
values of (the high values) where revenue exceeds the cost.

As in most systems of equations, the point at which all the equations are satisfied – the solution of the
equations – is of particular interest. In the example above, it is the place at which,

That is, the point at which the profit is zero – the break-even point.

75
76

The break-even point can be estimated from the graph, but it can also be calculated from the equations
in the system.

To find this point, set:

So, by subtracting from both sides, you get:

And:

So

But we cannot make a fraction of a poster! So we always round up.

= 1,334 posters (rounded up)

This analysis shows the printing company that small orders lose money at $0.17 per poster. In real life
such companies cannot accept orders on which they lose money; they will either set a minimum order
size (say, 1,500) or charge proportionately more for small orders (for example, $100 for the first 100
posters).

Key Takeaways

• As long as the revenue and cost functions are known, you can evaluate what the profits will be at any
level of activity.
• To analyze the relationship between profits and volume for an entire business or product line, do the
analysis for a time period …

As long as the revenue and cost functions are known, you can evaluate what the profits will be at any
level of activity. Using the revenue function above ,

so that for, say, 2,000 posters:

 Business Mathematics 77

The above example was for a job in a business. To analyze the relationship between profits and volume
for an entire business or product line, do the analysis for a time period, such as a month or a year. As
before, the fixed costs are those that do not depend on the level of activity. They include:

• rent
• property taxes
• salaries of employees who will be employed regardless of the level of activity (for instance,
managers, sales clerks)
• utilities such as heat and light

The variable costs include:

• the costs of materials

• labor costs which are the result of the level of production (called direct labor costs)
• commissions on sales

Example 7

Suppose a manufacturer of sports bags examined its accounts and found the following costs.
78

Fixed Costs (Per Month)

Salaries (Office, Sales Management) $50,000.00

Depreciation of Equipment 8,000.00

Rent 6,000.00

Interest on Loans 4,000.00

Other Fixed Expenses 2,000.00

Total Fixed Cost $70,000.00

Variable Cost Per Unit Produced

Materials $4.00

Labour 3.00

Total Variable Cost $7.00 per bag

Thus the cost equation would be

where
= cost
= number of bags produced in a month
This manufacturer sells the bags for $12 per bag. Hence the revenue equation is
R= $12x
if we assume all bags produced are sold in the same month as they are produced.
The monthly profit would then be

To break even would require:

 Business Mathematics 79

So
bags (produced and sold)
Below 14,000 bags the company would show a loss; above 14,000 bags it would show a profit. You can find
the level required for any given profit by solving for x with that profit. For example, to earn a $10,000 profit:

thus

Learning Activity #4

Suppose, in the above example, new equipment were to be bought, increasing the depreciation cost to
$12,000 and the interest on loans to $5,000, but reducing the labor cost to $2.50 per unit. Find the following:

1. The resulting cost function.

2. The volume (number of bags) required to break even.
3. The volume required to make a profit of $10,000.
Cost, Profit Volume Analysis Using the BA II Plus

After graduation you have moved to Australia and discovered a need for bottle openers to take the tops
off “stubbies” of pop. You start a company called Pieces of Roo that will make novelty bottle openers
shaped like Kangaroo forpaws.

You estimate fixed costs of $2,500 per month and variable costs of $3.50 per bottle opener. The
maximum capacity of your factory will be 1,000 units per month. You expect to sell the openers for
$12.00 each.

This makes your cost equation:

And your revenue equation

Use the pre-programmed functions of the BA II plus to answer the following questions:

1. Calculate the breakeven in units.

◦ Enter the breakeven worksheet by keying 2nd BRKEVN

◦ Enter fixed costs 2500 ENTER
◦ Scroll down using the down arrow +
◦ Enter variable costs 3.50 ENTER
◦ Scroll down using the down arrow +
◦ Enter price 12.00 Enter
◦ Scroll down until Q appear then press CPT
◦ The answer is 294.11 which you would round up to 295

2. Calculate the Profit at 1,000 units

◦ Change quantity to 1,000 units 1000 ENTER

◦ Scroll down using the down arrow+ until PFT is reached
◦ Key CPT
◦ The answer is $6,000

3. You would like to make a profit of $5000 – how many units should you produce?

81
82

◦ Change PFT to 5000, 5000 ENTER

◦ Scroll down until Q appear then press CPT
◦ 882.35 which you would round up to 883 units

4. At maximum capacity of 1,000 units, you would like to make a profit of $7,500. What price
should you charge?

◦ Change Q to 1,000
◦ Change PFT to 7500
◦ CPT P
◦ Answer is $13.50 per unit
Chapter 2 Learning Activities Answer Key

Learning Activity #1

1. Intercept Slope

a. 6 3

b. 4 2

c. 2 -1 (note that )

2. a.

X T

0 90

80 130
150 165

d. 140 minutes

Learning Activity #2

1. Slope:

2. Using the point ( ): , so

3. . So putting in , we have

Learning Activity #3

1.
2.

83
84

3.
4.

Learning Activity #4

1.
2. 13,637 bags
3. 15,455 bags
Chapter 2 Review Questions

1
. Ocean Marina rents moorage space for boats. Its charge for boats between 20 and 40 feet long is
$180 plus $12 a foot.

Let = boat length in feet = cost of moorage

a. Complete the following table relating length and cost.

20 24 28 32 36 40

a. State the equation describing cost as a function of length.

b. Graph cost as a function of length for 20 to 40 feet.

2
. An agent has available truck shipping capacity for 62.5 tons of materials A and B. Each unit of A
weighs 2.4 tons and each unit of B weighs 1.7 tons. Find an equation that relates the amounts of A and
B that can be shipped.

3
. A company finds that when the temperature is 12°C it uses 100 litres of heating oil per day. When
the temperature is 5°C, it uses 170 litres of heating oil per day.

a. Mark the above data points on a graph (allow for negative temperatures).

b. Find the equation (assumed to be linear) for oil usage in terms of temperature.

c. Find the amount of oil that would be used at -5°C. Check your result on a graph.

4
. A company has a choice between two copiers, A and B. A costs $120 a month plus $0.05 per page;
B costs $250 a month plus $0.03 per page.

a. Find the cost equations for each copier.

b. Which copier would be best for 5,000 pages a month? For 10,000 copies?
c. Graph the equations on the same axes and show clearly where each copier is cheapest.
d. Find the volumes at which the costs are equal and mark the point on your graph.

85
86

5
. Jones Stereo Company sells stereo sets for $150 each. The parts for each stereo cost $39.50 and the
labor costs $53 per set. Fixed costs are $16,000 a month.

a. Find Jones’ cost and revenue functions.

b. How many must Jones produce and sell every month in order to (i) break even? (ii) make a
$6,000 profit?
6
. Find the equations of the following lines.

a. Passing through (3, 10) and (I, 6).

b. With slope 1.5 and passing through (2, 5).
c. Passing through (1, 7) and falling 2 units in for each increase of 1 in .

7
. Jimms Company believes that the time required to produce its widgets is a linear function of the
number of widgets to be produced in a run. It finds that to produce a run of 600 widgets requires 7,050
minutes, and that to produce a run of 350 widgets requires 4,300 minutes.

a. Find the equation giving time required as a function of the number of widgets.
b. How long will it take to produce 500 widgets?
c. How many widgets can one expect to produce with a run that is assigned 81 hours?

8
. Deluxe Tire Company finds that to produce each additional tire it costs $21.50. The fixed costs of
the plant operation amount to \126,000 per month. The tires are sold for $58 each.

a. Find the revenue and cost functions for the operation.

b. How many tires must be produced and sold in order for Deluxe to break even in a month?
c. How many tires must be produced and sold in order for Deluxe to earn a profit of $40,000 in
a month?

9
. A company can rent a car using either of two methods of payment. Method A requires $20 per day
and $0.20 per kilometer. Method B requires $35 per day and $0.12 per kilometer.

a. Which method is cheaper for 300 kilometres of use in one day?

b. At what level of use per day are the costing methods equally expensive?
 Business Mathematics 87
10
. A competitor to the company in problem 9 charged $37 for a day’s use during which 80 km were
driven, and $43 for a day during which 120 km were driven. Assume the cost function to be linear and
find the cost, , as a function of distance traveled, .

11
. Solve the following system of equations for and :

12
. Solve the following system of equations for and :

13
. A publishing company finds that, when it prices its computer books at $20 per book, it can sell
7,000 books per month. When it prices them at $25 per book, it can sell 5,500 books per month. The
company assumes the relationship is linear.

a. Find the equation which gives the number of books that can be sold per month in terms of the
price.
b. How many books should it be able to sell at $22?

14
. FG Company produces housings for a major electrical manufacturer. In a four-week period, during
which it produced 2,550 housings, its total costs were $120,000, and in a four-week period, during which
it produced 1,750 housings, its total costs were $98,000.

Assume that the costs are linear functions of the number of housings produced each four-week period.

a. Find the equation relating total costs to the number of housings produced in a four-week
period.
b. According to your equation in (a), what are the following?
i. the fixed costs per four-week period
ii. the variable cost per housing
c. If the housings are sold for $55 each, how many must be produced and sold each four-week
period in order to break even?
d. Graph your results for costs and revenues. Identify all major areas on the graph.
88
15
. A furniture company finds that to make a run of 6,200 cabinets costs $205,000 and run of 8,300
costs $267,000. Assume the relationship between cost and number of cabinets produced is linear.

a. Find the equation which gives cost as a function of number of cabinets produced.
b. If cabinets are sold for $38 each, what is the minimum number of cabinets in a run such that
the sales revenue would pay for the cost of the run?

16
. For a certain good there is a demand for 8,000 units when the price is $8/unit and a demand for
6,200 when the price is $12/unit. Assuming demand, , is a linear function of price, , find the slope of
the line and the equation.

17
. HJ Outdoor Company found that it cost $6,100 to make a run of 105 jackets, and $7,900 to make
a run of 150 jackets. Assume the cost is a linear function of the number of jackets made.

a. Find the cost as a function of the number of jackets made in a run, and graph it from 80 to
200 jackets.
b. Estimate the cost of a run of 180 jackets.
c. If HJ sells the jackets for $55 each, how many must be in a run in order to barely recover the
cost of making the jackets?
18

Find the equation of the line:

a. with slope 3 that contains the point (4, 1).

b. with slope -5 that contains the point (-2, 3).
c. containing the points (2, 3) and (-6, 1).
d. containing the points (12, 16) and (1, 5).
e. containing the points (-4, 5) and (-2, -3).
f. that contains the point (-4, 2) and falls 2 units in for every one unit increase in .

19
You use your calling card to make a telephone call to your friend who lives in Oyster River. You
receive your monthly telephone bill and two of the items are as follows:

Time of call Area Amount

5 min Oyster River $2.50

11 min Oyster River $4.60

 Business Mathematics 89

a. Define the two variables and create an equation to calculate the total cost of a call.
b. How much would a 60-minute call cost?

20
. You have been asked to predict the cost of flying a Dash 7 aircraft from Vancouver to Seattle.
You are provided with the following information:

Number of Passengers Cost

12 $7,680

15 $7,725

a. Define the two variables and create an equation to calculate the total cost of a flight.
b. How much would it cost to fly the plane empty (with no passengers)?
c. Interpret the y intercept using the words of the problem.
d. How much extra does it cost to have one more passenger?
e. Interpret the slope using the words of the problem.
f. How much would it cost to fly 14 passengers?

21
. B. Furniture Co. believes that the cost to produce its chairs is a linear function (straight line
relationship) of the number of chairs to be produced in a run. It finds that to produce a run of 130 chairs
requires $8,200, and that a run of 250 chairs requires $13,000.

a. Find the equation giving cost, , based on the number of chairs produced, , in a run.
b. What is the cost if no chairs are produced?
c. Interpret the intercept using the words of the problem.
d. What is the extra cost to make one more chair?
e. Interpret the slope using the words of the problem.
f. How much would it cost to produce 400 chairs?
g. How many chairs can be expected to be produced with a run that is assigned $8,600?

22
. Mr. Smith wants to rent a truck for one day to make a number of deliveries. He can rent the type
of truck he needs from either of two companies. Company A charges $100 plus $0.40 per kilometre.
Company B charges $40 plus $0.80 per kilometre.
90

a. Write equations for the cost, , of each truck in terms of , the number of kilometres
traveled.
b. Suppose you rent a truck from Company A,
i. How much would it cost to rent the truck but not actually drive it (0 km)?
ii. How much would it cost to drive 300 kilometres?
c. Suppose you rent a truck from Company B,
i. How much would it cost to rent the truck but not actually drive it (0 km)?
ii. How much would it cost to drive 300 kilometres?
d. Graph the equations on the same axes and show on the graph where each company’s deal is
best. Graph from 0- 300 km. Use a large scale, graph paper and straight edge, and apply
proper conventions.
e. Using your graph, determine the point where the costs are equal. Mark the point on the graph
you made in (d).

23
. Best Buy Furniture Store manufactures and sells bedroom suites. Each suite costs $800 and sells
for $1,500. Fixed costs total \150,000.

a. Write down the cost equation and the revenue equation.

b. Find the breakeven point in units (number of suites).

24
. A company has determined that a minimum of 25,000 units of their product can be sold at a
selling price of $10 per unit. However, if the selling price was reduced to $8.00 per unit, a minimum of
35,000 units can be sold. Relevant cost data for this product is as follows:

Fixed Costs Variable Costs

$75,000.00 Labour cost per unit $4.50

Material cost per unit $1.50

a. Determine the breakeven points in units.

b. Determine the profit earned by selling the minimum quantity for each price alternative (i.e.,
at both $10 and $8).

25
. CK Air has begun a new discount air service to Port Alberni. It costs $2,070 to fly an empty
aircraft with crew to Port Alberni. Each passenger costs an extra $12 in food and extra fuel costs. Tickets
sell for $150 for a one-way flight.
 Business Mathematics 91

a. Write down the cost equation and the revenue equation.

b. How many passengers must the plane hold for the company to break even?
c. Calculate the profit if 17 passengers fly to Port Alberni.
d. If the company wants to make a profit of $690 per trip, how many seats must they sell?
e. What is the contribution margin?

26
. Finicky-Cat Gourmet Pet Food makes organic cat food and sells them in 2 kg bags. The
company has annual fixed costs of $150,000 and variable costs of $4 per bag. Finicky-Cat sells each bag
for $10. Production capacity is 50,000 bags per year.

a. Find the revenue and cost equations.

b. How many bags of cat food does the company have to sell to break even?
i. What are total sales at the breakeven point?
ii. What is the percent capacity at the breakeven point?
c. The company anticipates that it will be able to make and sell 40,000 bags of cat food this
year. What will it cost to produce these 40,000 bags?
d. Graph the cost equation and the revenue equation on graph paper. Graph from 0-50,000 bags.
Make sure to label the axes.
i. Clearly identify the breakeven point on the graph.
ii. Identify the area on the graph where the company makes a profit and where it has a
loss.
e. Finicky-Cat wants to increase its selling price from the current $10 so that it could make a
profit of $150,000 from selling 40,000 bags of cat food. What price must they charge?

27
. It costs Brawn Products $8 to make a particular model of shaver. The fixed costs are $12,000 per
month. The shavers are sold to retailers for $25 less trade discounts of 33.5%, 10%.

a. Write down the revenue and cost equations.

b. Compute the breakeven point (in units and in sales dollars).
c. Find the profit if 2,200 shavers are sold in a month.
d. Find the profit if monthly sales (in dollars) are $37,500.
e. Brawn wants to make a profit of $5,000/month. How many shavers must be sold?
f. If the fixed cost increased to $18,000/month, how many shavers must they sell to break even?
g. If the fixed costs remain the same (at $12,000/month) but the selling price is reduced to $10,
what would the new breakeven point be?
h. Brawn Products wants to add a third discount to reduce their selling price to $10 (as in part
92

g). Find the rate of the third discount.

i. The cost to make a shaver has increased by 25% from the current $8 and fixed costs have
fallen by 25% from the current $12,000/month. If Brawn wants to make a profit of $20,000/
month from the sale of 5,000 shavers, what should the new selling price be?

28
. Your company needs to lease a photocopier. It has a choice between three photocopiers A, B, and
C. Copier A charges a flat fee of $3,000 per month. Copier B charges $2,000 per month plus $0.05 per
copy; and copier C charges $1,000 per month plus $0.15 per copy.

a. Find the cost equation for each copier.

b. If the requirement is 15,000 copies per month which copier is cheapest?
c. Calculate the points of indifference based on cost (i.e., determine the number of photocopies
which will make the costs equal).
i. between copier A and B
ii. between copier A and C.
iii. between copier B and C.
d. On the same graph, graph the three cost equations over the range 0-30,000 copies.
e. Over what range of values of (the no. of copies) is it most cost-effective (cheapest) to rent
from A, B, or C?

Notes

1. a.

20 24 28 32 36 40
420468516564612660

b.
2.
3. b. , where is the temperature and is oil usage; c. 270 litres
4. a. Copier A: ( = number of pages; C = total cost); Copier B:
b. 5,000/month: Total cost for A= $370 Total cost for B = $400 Copier A is
cheaper 10,000/ month: Total cost for A= $620 Total cost for B = $550 Copier B is cheaper d. Costs are equal
when
5. a. ( = total costs; = total revenue; = number of stereos sold);
b. Breakeven = 279 stereos (rounded up from 278.26) For a $6,000 profit number of stereos=
383
6. a. b. c.
7. a. ( = time in minutes; = number of widgets) b. 5,950 minutes or 99.17 hours c. 401
widgets
 Business Mathematics 93

8. a. ; ; = number of tires b. 3452.05 round up to 3453 tires c.

4547.9 round up to 4548 tires
9. a. Method B is cheaper by $9.00 b. 187 .5 kilometres
10.
11. (0.1389, 2.7222)
12. (-1, 2)
13. a. ; ( = price; = number of books) b. 6,400 books
14. a. ; ( = total costs; = number of housings) b. fixed costs= $49,875;
variable costs= $27.50 per housing c. 1,814 housings
15. a. ;( = total cost; = number of cabinets produced) b. 2,589 cabinets
16.
17. a. ;( = total cost; = number of jackets made) b. $9,100 c. 127 jackets
18. a.
b.
c.
d.
e.
f.

19. a. where = length of time of the call (in minutes); = total cost of the call.
b. $21.75

20. a. where = number of passengers; = total cost to fly the plane

b. $7,500
c. It would cost $7,500 to fly the plane empty (i.e., with no passengers).
d. $15
e. It costs an extra $15 for each additional passenger.
f. $7,710

21. a. b. $3,000 c. The cost incurred even when no chairs are produced i.e., the overhead
or expenses, (e.g., rent, property taxes). d. $40 e. Each additional chair made will cost $40 (the cost of labour
and materials). f. $19,000 g. 140 chairs
22. a. , b. and c.

# Km ( )Total Cost Total Cost

0 $100 $40

300 $220 $280

d. Below 150 km it is cheaper to use B; above 150 km it is cheaper to use A. e. The costs are equal at 150 km
(both cost $160)
23. a. ; ; = the number of bedroom suites produced and sold b.
215 suites (rounded up from 214.3 units)
24. a. 18,750 units/ 37,500 units b. $25,000 profit/ $5,000 loss
25. a.
94

a. ; ; = the number of passengers on the plane

b. 15 passengers
c. $276 profit
d. 20 passengers
e. $138/passenger

26. a. ; ; = the number of bags produced and sold b. 25,000 bags of cat
food, revenue= $250,000; 50% capacity c. $310,000 d.

Number of BagsRevenueCost

0 0 $150,000

50,000 $500,000$350,000

25,000 $250,000$250,000

e. $11.50/bag
27. a.
a. , , = the number of shavers produced and sold
b. 1,715 shavers (rounded up from 1714.28). Sales: $25,725
c. $3,400
d. $5,500
e. 2,429 shavers
f. 2,572 shavers (after rounding up)
g. 6,000 shavers
h. 33.33%
i. $15.80/shaver

28. a. ; ; ; where = the number

of copies b. A: $3000; B: $2,750; C: $3,250 so B is cheapest for 15,000 copies c. at 20,000
copies; at 13,333 copies; at 10,000 copies d. Plot these points below. Your lines
must cross at the indifference points you found in (c). If not, your graph is wrong.

Number of copies ( )Cost ACost BCost C

0 $3,000$2,000$1,000

30,000 $3,000$3,500$5,500

e. A is cheapest for more than 20,000 copies Bis cheapest between 10,000-20,000 copies C is cheapest below
10,000 copies
Chapter 3: Simple Interest

Key Takeaways

Interest is based on the amount of money borrowed, the time allotted for paying it off, and the rate of interest.

If you were to borrow money from an individual or a financial institution such as a Bank or Credit Union,
you would expect to be charged a number of dollars for the use of this money. This

amount of compensation is called interest, and is based on the amount of money borrowed (called the
principal), the amount of time allotted for paying it off and the rate of interest.

By the same token, if you are to deposit some money in a financial institution, you would expect to get
paid interest for allowing the financial institution to use your money. In reality, you are loaning money
to the financial institution and they in tum earn an income on this money by either loaning it out or
investing it.

The amount of simple interest is calculated by using the following relationship:

Where:

• is the amount of interest earned;

• is the amount of money (principal) borrowed or deposited;
• is the annual rate of simple interest; and
• is the time period in years

Usually, (rate) is quoted as a percent per year (percent per annum or percent pa) and the time ( ) in
years. The units of rate and time must match.

Example

Example

95
96

If the time is 48 days, then

If the time is 16 months, then

Note: When the time is given in months, you will treat one month as being equal to 1/12 year.
If the time is 2 years, then:

Key Takeaways

Note: Be very careful with rounding; be sure to input the exact fraction when using your calculator.
Exact Time

If the two dates that determine the interest period are known, it is important to calculate the exact
number of days between those two dates. To do this, you count the beginning day but not the ending day
of the period. You always use a 365 day year.

Example

If the interest period ranges from May 12 to May 27,

Be sure to satisfy yourself that this simple subtraction of dates actually includes the first date but not the
last.

You should also know that April, June, September and November have 30 days, February has 28 days
(29 days during a leap year) and the remaining months have 31 days. Leap years occur everyfour years
and are determined by getting an integer (a whole number) answer when dividing the last two digits of
the year by four.

Examples

Example
How many days between April 16 and August 12?
Start Date: April 16 (counted)
End Date: August 12 (not counted)
Number of days:

97
98

April = (30 – 15) = 15

May = = 31
June = = 30

July = = 31
August = (12-1) = 11
TOTAL = = 118 days

Therefore,

Some calculators and computer software will calculate the days for the user. In this text we present two
methods of date counting: using your calculator, and using a table. We also highly encourage students to
take the time to learn how to use the date functionality in Microsoft Excel, as it is well worth the effort.

Using the BA II Plus to Find Exact Dates

We will use Question 16 from the Practice Problems to illustrate the exact date feature of the BA II plus
calculator.

Examples

AW borrowed $9,000 on January 30, 2002 and agreed to pay 14% simple interest on the balance outstanding
at any time. He paid $5,000 on March 9, 2002 and $2,500 on May 25, 2002. How much did he have to pay on
June 30, 2002 in order to pay off the debt?

• First, find the number of days between the debt and the focal date.

1.3002
2nd Date DTl = Enter the date of the loan ([Link] year)
Enter

6.3002
DT2= Enter the focal date
Enter
DBD= CPT 151 from debt to focal date
 Business Mathematics 99

• Next, find the number of days from the $5,000 payment to the focal date.

3.0902
2nd Date DTl = Enter the date of the first payment
Enter

6.3002
DT2= This is the focal date – you do not need to re-enter
Enter

DBD= CPT 113 days from the payment to the focal date

• Find the number of days from the second payment to the focal date.

5.2502
2nd Date DTl = Enter the date of the second payment
Enter
6.3002
DT2= This is the focal date – you do not need to re-enter
Enter

DBD= CPT 36 days from the payment to the focal date

We will finish solving this problem later on.

Dates using a Table

If you prefer to use tables, you can use the following:

100

Day of
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month

1 1 32 60 91 121 152 182 213 244 274 305 335

2 2 33 61 92 122 153 183 214 245 275 306 336

3 3 34 62 93 123 154 184 215 246 276 307 337

4 4 35 63 94 124 155 185 216 247 277 308 338

5 5 36 64 95 125 156 186 217 248 278 309 339

6 6 37 65 96 126 157 187 218 249 279 310 340

7 7 38 66 97 127 158 188 219 250 280 311 341

8 8 39 67 98 128 159 189 220 251 281 312 342

9 9 40 68 99 129 160 190 221 252 282 313 343

10 10 41 69 100 130 161 191 222 253 283 314 344

11 11 42 70 101 131 162 192 223 254 284 315 345

12 12 43 71 102 132 163 193 224 255 285 316 346

13 13 44 72 103 133 164 194 225 256 286 317 347

14 14 45 73 104 134 165 195 226 257 287 318 348

15 15 46 74 105 135 166 196 227 258 288 319 349

16 16 47 75 106 136 167 197 228 259 289 320 350

17 17 48 76 107 137 168 198 229 260 290 321 351

18 18 49 77 108 138 169 199 230 261 291 322 352

19 19 50 78 109 139 170 200 231 262 292 323 353

20 20 51 79 110 140 171 201 232 263 293 324 354

21 21 52 80 111 141 172 202 233 264 294 325 355

22 22 53 81 112 142 173 203 234 265 295 326 356

23 23 54 82 113 143 174 204 235 266 296 327 357

 Business Mathematics 101

24 24 55 83 114 144 175 205 236 267 297 328 358

25 25 56 84 115 145 176 206 237 268 298 329 359

26 26 57 85 116 146 177 207 238 269 299 330 360

27 27 58 86 117 147 178 208 239 270 300 331 361

28 28 59 87 118 148 179 209 240 271 301 332 362

29 29 88 119 149 180 210 241 272 302 333 363

30 30 89 120 150 181 211 242 273 303 334 364

31 31 90 151 212 243 304 365

Table 3-1: Days of the Year

Note carefully: For leap years (those years where the last two digits are divisible by four with an integer
result), February 29 must be included and becomes day #60. One day must then be added to all dates
following. (Examples of leap years: 2016, 2020, 2024, 2028, 2032 )

There are two occasions when extra care must be taken when using Table 3-1:

Leap Year

In a leap year, if the time period includes the end of February, every date after February 28 increases its
count by one.

Be careful when your calculations include a leap year or a period that covers the end of a year.

Write the day count on a diagram.

Example

How many days between January 15 and May 28, 2024? (2024 is a leap year.)
January 15 is the 15th day of the year from Table 3-1.
May 28 is the 148th day of the year from Table 3-1. However, since the time period includes February 29,
you must add one day to the value shown in the table.
102

Therefore, the exact number of days = (148 + 1) – 15 = 134.

When the Time Period Includes the End of the Year

Example

Examples

How many days between October 15, 2021 and February 13, 2022? The technique is to subtract the first day
value from 365 (to get to the end of the year) and then to add the second day value to that difference (which
moves you into a second year).
October 15 is the 288th day of the year from Table 3-1. Therefore, the number of days to the end of the year
is (365 – 288) or 77.
February 13 is the 44th day of the year from Table 3-1. Therefore, the exact number of days is 77 + 44 = 121.
You can draw a time line with the exact dates shown. To assist in calculating the exact time, get into the habit
of also writing the day count on the diagram.

This will automatically lead you to an exact count of the number of days between any two dates. To illustrate
this, note:
178 – 44 = 134 days between the first two dates,
288 – 178 = 110 days between the second two dates, and
288 – 44 = 244 days between the first and last dates.
Calculating the Amount of Interest

You will apply the formula:

Examples:

Examples

1. How much interest must be paid on a $5,000 loan at 7.5% (per annum or pa) simple for 32
months?
Note: It is recommended that you always state the data before solving the problem.

Therefore:

2. How much interest must be paid on a $6,500 loan at 8.5% (per annum or pa) simple if the loan
was taken out on February 12, 2023 and repaid on August 15, 2023?
Using Table 3-1:

Or using the BAII PLUS:

DT1 = 2.1223 [ENTER]

↓DT2 = 8.1523 [ENTER]
↓[CPT] DBD = 184

Therefore,

103
104
Calculating Principal, Rate and Time

If any three of the four variables in the relationship ( ) are given, you should be able to calculate
the value of the unknown variable. Starting with the basic interest equation:

You can solve for or or as follows:

Since is the rate in percent per year, the answer for will be in years (or part thereof):

Since is the time in years, the answer for will be the annual rate of interest in decimal form.

Learning Activity #1

Now try these exercises.

1. What is the interest charged to borrow $3,000 for 180 days at 6% simple interest?
2. If $55 interest was charged for a loan at 5.5% simple interest for 125 days, how much was
borrowed?
3. How many days will it take a savings deposit of $900 to earn at least $65 interest, if the simple
interest rate is 7.5%?
4. What rate of simple interest is used when a deposit of $975 earns $36.73 interest in 220 days?

105
Calculating the Future Value

The future value (or maturity value) is the total amount due at the end of a loan and is calculated by
adding the interest due to the original principal.

Example

1. If $9,600 is borrowed and $800 interest is due, what is the future value (maturity value) of the
loan?

•
•
•

2. Calculate the future value (maturity value) of a $6,500 loan at 8.5% (per annum or pa) simple if the loan
was taken out on February 12, 2023 and repaid on August 15, 2023.
First we count the days:
Using the Calculator:
DT1 = 2.1223 [ENTER]
↓DT2 = 8.1523 [ENTER]
↓[CPT] DBD = 184
Using Table 3-1:

Therefore,

And

107
108

Key Takeaways

Note: Some texts refer to the Future Value of a Simple Interest Problem as , instead of .

You can simplify the Future Value equation as follows:

Since and

now, substitute for . Therefore,

Factoring out the , you get

Time Diagram

The time diagram, or time line, graphically represents the time value of money.

The time diagram (Figure 1) is also called the time line . It is used to graphically represent the time value
of money.

Figure 1: Time Diagram or Line

Although this diagram seems very simple and almost trivial at this point in the course, it is very
important that you learn the basics here, and that you include the diagram in all problem solutions that
involve cashflow.

Examples

1. Calculate the maturity value of a 6-month loan of $5,000 at 8.25% simple interest.

Therefore:

2. Calculate the maturity value of a $4,200 deposit made at a simple interest rate of 6.75% pa from
March 3, 2001 to November 9, 2001.

109
110

(from table 3.1)

OR
Using the Calculator:
DT1 = 3.0301 [ENTER]
↓DT2 = 11.0901 [ENTER]
↓[CPT] DBD = 251

Therefore:

Learning Activity #2

Now try these examples (be sure to draw the time diagrams).

1. How much would have to be repaid if you borrowed $4,000 for 210 days at 8% simple interest?
2. Calculate the maturity value of $1,250 which was invested from March 10, 2002 to September 8,
2002 at 6.75% simple interest.
3. Joan Smith borrowed $2,500 from her father to start the school term. If she agreed to fully repay
him the amount borrowed plus interest to be calculated at 3.75% simple, how much would she
have to repay in exactly two years?
Calculating Present Value

Key Takeaways

“Moving” money backwards in time.

Whenever interest is paid for the use of money, the value of the original principal will increase in relation
to time. This concept is known as the time value of money.

Quite often, you need to calculate the Principal (when the future or maturity value, the rate and the time
are known). You call this principal the present value. It can be found by rewriting the relationship as
follows:

Therefore, dividing both sides by , you get:

Examples

Examples

1. Calculate the present value of a 6-month loan which requires a repayment of $6,500 including
interest calculated at 8.25% pa simple interest.

Therefore,

111
112

2. How much should be invested on April 6, 2001 to amount to $9,200 (FV or maturity value) on September
19, 2001 at 8.5% simple interest?

(from table 3.1)

OR
Using the Calculator:
DT1 = 4.0601 [ENTER]
↓DT2 = 9.1901 [ENTER]
↓[CPT] DBD = 166

Therefore,

NOTE:

When you use your calculator, be careful when you apply the ORDER OF OPERATIONS. Also, DO NOT
ROUND OFF any intermediate values; instead use appropriate keystroke sequences or the calculator
memory.
 Business Mathematics 113

The following is a suggested sequence of keystrokes for the BA II Plus Calculator:

[166][÷][365][×][0.85][=][+][1][=][1/x][×][9200][=]

Recap

The two formulae, and , interlink five variables, and .

Depending on the context any unknown of the five variables may be calculated if you know three of the
variables. A useful way to deal with problems in this area is to write down the “known,” and look for a
formula which includes the “known” variables and the “unknown” variable.

Examples

How long will it take to earn $50 interest if $1,000 is deposited at 6%?

Note that will be in “years” since the interest rate is understood to be “per year.”

Now look at the same type of problem in a slightly different way.

Example
114

How long will it take $2,000 to accumulate to $2,100 if the simple interest rate is 6%?

So:

Then:

And (given that ):

Learning Activity #3

1. What rate of simple interest is used if a deposit of $2,000 amounts to $2,210 over 1.5 years?
2. What deposit will amount to $1,871.25 over a period of 33 months if interest is calculated at 9%
simple?
Time Value of Money

The value of money involves accounting/or interest over time.

Introduction Using Future Value

The concept of VALUE of money involves accounting for interest over time.

Consider this question:

Would you rather have $5,000 now or $5,450 one year from now? Before you can answer this question,
you must know what interest rate could be earned on the $5,000 if you made that choice. Assume 9%
simple interest, and calculate the future value.

So, if you chose the $5,000 now and deposited it at 9%, in one year you would have $5,450, which
“coincidentally” is the same as your other alternative. So there is no monetary difference between the
two alternatives. The two VALUES are EQUIVALENT.

Key Takeaways

$5,000 now and $5,450 one year from now have EQUIVALENT VALUES AT 9%.

Remember that VALUE involves both interest rate and time. Try the following example in Learning
Activity #4.

Learning Activity #4

115
116

Would you rather have $10,000 now or $10,325 in 6 months time?

a. the interest rate is 7%.

b. the interest rate is 6%.

Equivalent Values

Do not add $ values at different points in time.

Now consider this problem:

Your company has borrowed $10,000 one year ago and $15,000 today. How much does the company
owe? If you answered $25,000 you are making a common error. Dollars may NOT be compared (added
or subtracted) when they are at different points in time. They may ONLY be compared by calculating
EQUIVALENT values at the SAME POINT in time.

Example

Examples

Assume an interest rate of 9% and look at the problem again. (We are effectively saying that the $10,000
borrowed one year ago has a 9% simple interest obligation.) We can find the equivalent debt by calculating
the equivalent value now of the $10,000 debt.

Now the two values may be added, since they are at the same point in time.

EQUIVALENT DEBT = $10,900 + $15,000 = $25,900

If both debts are settled TODAY, the company must pay $25,900.

How much must be paid to settle both debts SIX MONTHS from now?
 Business Mathematics 117

If both debts are “moved” individually to the 1 year 6 month point they may be added.

INTERPRETATION:

Each debt accumulates interest charges based on 9% per year, for the time the debt is outstanding.

Debt #1: $10,000 outstanding for 1½ years accumulates $1,350 interest charge and requires $11,350
repayment.

Debt #2: $15,000 outstanding for 6 months accumulates $675 interest charge and requires $15,675
repayment.

The total repayment is $27,025, which includes $2,025 total interest charges, at a point 6 months from
now.

Learning Activity #5

Debts of:

1. $20,000 borrowed nine months ago, and

2. $5,000 borrowed four months ago, and
3. $10,000 borrowed today
must be repaid, together with simple interest at 8%, 6 months from now. How much must be paid to settle all
the debts?
118

Present Value

In a similar manner to the “forward movement” along the time line, to obtain the future value, dollar
amounts can be “moved backward” along the time line. The value of a FUTURE dollar amount at a
point EARLIER in time is called the PRESENT VALUE. Usually this present value is calculated as the
value now of an amount in the future, hence the name “Present” value. However, this is not a necessary
condition. Any value, earlier in time than the dollar amount being considered is called “Present Value”
at the point in time, and can be calculated in the same way.

Example

Find the value on March 1, 2021, of a repayment of $2,000 due on August I, 2021.

Note: The day count number is in brackets.

To calculate the present value, a rate of interest, , is required. The concept is that the present value can
be considered as a deposit, at a given interest rate, which would amount to the $2,000 in the given time.
For example, at an interest rate of 10%:

Three interpretations of the answer are:

1. $1,919.54 is the present value of $2,000, 153 days ahead in time if the interest rate is 10%.
2. $1,919.54 now and $2,000 in 153 days have EQUIVALENT VALVES at 10%.
3. To accumulate $2,000 in 153 days at 10%, a deposit of $1,919.54 is required.

The wording of the three interpretations is different but they really all say the same thing monetarily.
 Business Mathematics 119

Learning Activity #6

Try these examples:

1. Find the value today of a promise to pay $5,000 1 year 7 months from now, if the
simple interest rate is 9%.
2. Find the total equivalent debt today of two future debts.

a. $2,000 in 7 months, and

b. $4,000 in 13 months.
Use a simple interest rate of 7% to value the debts.
Equations of Value

All debts “moved” to date of final payment.

In many business situations, debts are not paid exactly as specified in contracts. Often a payment is made
to partially offset a debt.
When two companies regularly carry out transactions with each other, there is often a running account
arrangement, where debts and payments accrue over a period of time, with a final payment to settle the
account.

Focal Dates

When there are multiple inflows and outflows, it is common to evaluate them all at a common date, often
the date of the last payment. In this case, the time of the final payment is used as a FOCAL DATE, and
all debts and payments are “moved” to the focal date, and their EQUIVALENT VALUES calculated.

Examples

Assume that we have two debts: $10,000 owed today and $15,000 owed one year from today. The company
makes a payment of $8,000 six months from today and will make a final payment 1.5 years from today. The
interest rate is 9%.

If the company wishes to settle the outstanding debt at the 1 year 6 month point, all the dollar amounts are
“moved” to the 1 year 6 month point (the date of the final payment) where they can be added and subtracted.
This point is called the FOCAL DATE.

First, calculate all FV. (EQUIVALENT VALUES)

121
122

Next, think about a balancing transaction at the focal date, where:

Key Takeaways

INTERPRETATION: On the FOCAL date, each debt will have accumulated interest CHARGES.

The $10,000 debt is a debt of $11,350 on the focal date.

The $15,000 debt is a debt of $15,675 on the focal date.
The payment will have accumulated interest CREDIT, so that the $8,000 payment is worth $8,720 on
the focal date.
The total debt value on the focal date $11,350 + $15,675 = $27,025 is offset by the value of the payment,
$8,720, so that the balance owing is $27,025 – $8,720 = $18,305. All payments and debts are “moved”
to a focal date at the time of the final payment, and a payment-debt balancing EQUATION of VALUE is
set up and solved for the unknown value.
The effect of interest is calculated every time a payment is made.

Solving Equations of Value

Key Takeaways

Balancing equation with a specified focal date.

The technique of “moving” all dollar amounts to a FOCAL DATE and setting up a balancing equation,
can be used in a variety of situations where unknown values must be calculated. There are many
 Business Mathematics 123

occasions when the focal date may be established at ANY TIME by agreement between the creditor and
the debtor.

Example

To settle a current debt your company has agreed to make payments of $10,000, 3 months from now and
$15,000, 9 months from now. When the first payment becomes due, the company finds itself short of cash
and enters into negotiation with the creditor. Eventually the creditor agrees that if the company makes a
partial payment of $4,000 at the 3 month point, the balance must be paid at the 6 month point.
This is the situation:

Both debtor and creditor agree that the six month point will be the FOCAL DATE for calculations and
that the payments will be valued using 9% simple interest. The two old payments are replaced by two
new payments, with the second new payment, unknown, shown as .
All dollar values are compared at the focal date.
Each dollar value is “moved” to the agreed focal date, and an EQUATION OF VALUE is set up to
balance the values of old payments and new payments at the FOCAL DATE.
124

The FOCAL DATE EQUATION is:

Now, let us look at a slightly more complicated set of payments. Assume that the agreement is for two
payments, one at the 3 month point and one at the 6 month point as before, but with the second payment
being exactly $15,000 more than the first payment. Now both new payments are unknown. However,
they are related. If is the first payment, then ( +$15,000) must be the second payment.

The EQUATION OF VALUE at the focal date is:

Value of new payments = Value of old payments

 Business Mathematics 125

The first new payment ( ) is $4,892.43 and the second new payment is $4,892.43 + $15,000 or
$19,892.43.

Learning Activity #8

Payments of $3,500 at month 4 and $5,500 at month 11 are to be replaced by a $3,000 payment at month 6
and a final payment at month 12. The agreed simple interest rate is 8% and the agreed focal date is the date of
the second payment. Find the size of the final payment.

Learning Activity #9

Mr. M owes Ms. K a payment of $10,000 that was due four months ago. He also owes her a second payment
of $9,000 due two months from today. The two parties negotiate a new payment arrangement whereby Mr. M
will repay these debts with two equal installments -one due today and the other due six months from today .
The agreed simple interest rate is 9% and the agreed focal date is today. Find the size of the two new equal
payments.
Solutions to Chapter 3 Learning Activities

Learning Activity #1

1. = $3,000; = 6% = 0.06; =180/365 years

2. =$55; =5.5%=0.055; =125/365 years

3. = $900, = $65, = 7.5% = 0.075

To convert this answer to days, you must multiply by 365. To eliminate a rounding error, be sure to use
the exact value from your calculator, i.e., just multiply the above value by 365 without re-entering the
displayed value .

This should now be rounded up to 352 days.

4. = $975, = $36.73, =220/365 years

Learning Activity #2

1. = $4,000, = 8% = 0.08, = 210/365 years

127
128

2. = $1,250, = 6.75% = 0.0675 = (251 – 69)+365 =182/365 years (from Table 3- 1)

3. = $2,500, = 3.75% = 0.0375, = 2 years

Learning Activity #3

1. = $2,000, = $2,210, = 1.5 years

Either of the two following approaches is acceptable:

Approach A:

So
 Business Mathematics 129

Approach B:

2. = $1,871.25, = 9% = 0.09, = 33 months =33/12 years.

Learning Activity #4

a. Find at 7%:

Conclusion: The value of $10,000 now, in six months’ time is $10,350. Since this is $25 greater than
$10,325, you would prefer $10,000 now from a purely financial point of view.

b. Find at 6%:
130

Conclusion: The value of $10,000 now, in six months time is $10,300. Since this is less than $10,325,
you would prefer $10,325 in six months time.

Learning Activity #5

Total Debt Outstanding = $37,733.33(6 months from now)

Learning Activity #6

1.
 Business Mathematics 131

2.

Total Equivalent Debt Now = $5,639.59

Learning Activity #8

Value of “old” payments at the focal date :

Value of “replacement” payments at the focal date:

132

Therefore:

Learning Activity #9

Let the amount of two equal payments be . Value of “old” payments at the focal date:

Value of “replacement” payments at the focal date:

And we can set these to be equal:

And solve, remembering to store all intermediate values in the calculator:

 Business Mathematics 133

Therefore: The size of the two equal payments is $9,794.38.

Chapter 3 Review Questions

Do not forget to draw your time diagrams!

1
For each principal, rate and time given below, compute the interest:

a. $2,500 at 14.2% for 1.5 years.

b. $3,200 at 8.75% for 16 months.
c. $8,300 at 11.2% for 160 days.
d. $800 at 13.6% for 212 days.

2
Calculate the interest for each of the following loans:

a. $850 at 11.5% from June 14, 2022 to October 19, 2022.

b. $2,800 at 11.25% from September 9, 20199 to March 19, 2020. (2020 was a leap year!)
c. $4,100 at 7.5% from July 15, 2022 to September 6, 2022.

3
. Complete each row in the following table:

Interest Principal Rate Time

a. ? $2,800 12% 210 days

b. $461.25 $6,000 ? 8 months

c. $ 54.00 $1,440 11.5% ? days

d. $ 81.30 ? 6.25% 205 days

4
. Find the interest rate which will pay $36.40 interest on a principal of $2,140 borrowed for 69 days.

5
. If a loan of $1,900 borrowed from October 22, 2021 to December 17, 2021 resulted in $33.85
interest, what was the simple interest rate charged?

135
136
6
. What principal will earn $95.20 if borrowed at 13.5% for 4 months?

7
. How many days will it take for a principal of $19,200 to earn $650.00 interest at 10%?

8
. What is the future value of $1,680 over 260 days at 11.25%?

9
. Find the principal and the interest if a loan at 12.5% for 9 months is completely paid off by the
payment of $1,732.22 at the end of the 9 months.

10
. If 9 months interest at 8.725% is $186.20, what principal was borrowed?

11
. A loan at 9% was repaid by a payment of $3,710 of which $307.40 was interest. What was the
length of time (in days) of the loan?

12
. If the future value of a loan for 222 days at 11.75% was $937.72, what was the principal of the
loan?

13
. A loan is to be repaid in 9 months by a payment of $1,300. If interest is allowed at 13.15%, what is
the present value of the loan?

14
. Payments of $5,000 due in 3 months and $6,000 due in 9 months are to be paid off with interest
allowed at 13%. How much would be required to pay off the loan today? (Use today as the focal date.)

15
. LH should have paid a loan company $2,700 3 months ago and should also pay $\1,900 today. He
agrees to pay $2,500 in 2 months and the rest in 6 months, and agrees to include interest at 11%. What
would be the size of his final payment? Use 6 months as the focal date .

16
. AW borrowed $9,000 on January 30, 2022 and agreed to pay 14% simple interest on the balance
outstanding at any time. She paid $5,000 on March 9, 2022 and $2,500 on May 25, 2022. How much
will she have to pay on June 30, 2022 in order to pay off the debt? Use June 30, 2022 as the focal date.
 Business Mathematics 137

17
. Debts of $8,000 due 8 months ago and $3,000 due in 4 months are to be paid off today with interest
at 12%. Use today as a focal date and find the size of the payment.

18
. $5,000 due today is to be paid instead by payments of $2,000 in 4 months and the balance in 9
months. Find the size of the last payment if interest is at 9% and the focal date is today.

19
. Two payments of $1,200 each were due 30 and 60 days ago. They are to be paid off by two equal
payments, one in 60 days and one in 90 days. If the focal date is 90 days from today and interest is at
12%, find the size of the payments.

20
. Find the present values of the following payments if money is worth 8%:

a. $2,800 to be paid in 60 days.

b. $950 to be paid in 120 days.
c. $56,000 to be paid in 1 year.

21
. You invest $1,000 for 4 years at 8% simple interest. How much interest will you earn?

22
. You invest $6,000 for 2.5 years at 9% simple interest. How much interest will you earn?

23
. $6,000 earns $180 in interest when invested for 30 months. What simple rate of interest is being
paid?

24
. A $1,000 savings bond earns $600 in interest over the 12 years of the investment. What simple
rate of interest is being paid?

25
. You would like to earn $1,000 in interest each year. If the interest rate is 6% simple how much
money should you invest?
138
26
. You take a 3-year loan and repay the loan and $800 in interest. How much did you borrow if the
interest rate was 10% simple?

27
. You would like to save for a vacation in Edmonton. You need $4,000 for your dream vacation.
You deposit $3,000 in an account that pays 8% simple. How many months will it take you to save for
your vacation if you make no other deposits?

28
. You invest $1,000 for 18 months at 8% simple interest. How much interest will you earn?

29
. You take out a loan for 400 days at 10% simple interest and at the end of that time you repay your
loan plus $500 in interest. How much did you borrow?

30
. You invest $8,000 on March 3rd and withdraw the money on October 4th. If the interest rate is 9%
simple, how much interest did you earn?

31
. You borrow $7,000 on August 16th and agree to pay back the loan plus interest calculated at 5%
simple on June 15th of the next year (not a leap year). How much interest would you pay?
32
. You borrow $5,000 on June 15th and agree to pay back the loan plus interest calculated at 8%
simple on March 31st of the next year (not a leap year). How much interest would you pay?

33
. You put $5,000 into a savings account earning 6% simple interest.

a. How many months will it take to for you to earn $75 of interest?
b. How many months will it take for your money to grow to $6,200?

34
You invest some money today at 4.5% simple interest for 120 days and the money grows to $7,408.
How much did you invest today?

35
. You invest $12,000 today into a fund that pays 6% simple. How much money will you have in 40
months time?
 Business Mathematics 139
36
. You borrow $6,000 to purchase a Jeep and agree to pay back all the money in 3.5 years. How much
should you pay back if the interest rate is 12% simple?

37
. You need $6,000 to return to school in 8 months time. How much should you invest today at 6%
simple to achieve your goal?

38
. A Freedom 35 financial planner claims you will need $1,175,000 to retire in 15 years time. How
much should you invest today at 9% simple interest to reach your retirement goal?

39
. How long will it take a sum of money to double if it earns 12% simple interest? (Answer in months)

40
. You work as a real estate agent for Honest Dave’s Realty Co. located in Burnaby. You have two
debts corning due, one in six months for $5,000 and one in 12 months for $6,000. You recently sold a
couple of houses and now have some extra cash. How much must you pay today to pay off both debts if
interest is 6% simple? Use today as your focal date.

41
. One of your customers has two debts outstanding, $600 is due 3 months from today and $900 was
due 6 months ago. Instead, the customer would like to pay off both debts with a single payment one year
from today. Calculate the size of that payment if interest is 12% simple. Use one year from today as
the focal date.

42
. You should have made two car payments of $1,000, 6 months ago and 3 months ago. The bank has
agreed to let you repay the loan with equal payments in 3 and 6 months (from today). Calculate the size
of these payments if interest is 14% simple. Use 6 months as your focal date.

43
. You are attempting to repay your line of credit. One year ago you borrowed $5,000 and 6 months
ago you borrowed $4,000. You have examined your cash flow projections and decide to repay the line of
credit with two payments in 12 and 18 months. The second payment will be $2,000 larger than the first.
Find the size of the payments using 18 months as your focal date. Interest is 6% simple.

44
. You have borrowed from your line of credit. 6 months ago you borrowed $5,000 and today you
borrowed $15,000 . You plan to pay off the entire line of credit with three equal payments at 3, 5 and
140

8 months (from today). Find the size of each payment if your bank charges you 9.75% simple interest?
Use today as the focal date.

45
. Repeat Problem 24 using five months as the focal date. (By comparing the answers to Questions 24
and 25 you will see that it depends slightly on the focal date chosen -but only for simple interest.)

46
. You were supposed to make a payment of $3,500 three months ago and a second payment of $6,100
five months from today. Instead you have arranged with the bank to make a payment one month from
now and a second payment, half as large, 6 months from today. Calculate these payments if the bank
charges 8.25% simple interest. Use the date of the first unknown payment as the focal date.

47
. You borrowed $1,000 on November 30th and another $1,500 on December 31st. Your arrange with
the bank to pay the entire amount on February 15th of the following year. If the interest is 12% simple
(per annum) how much must you pay on February 15th? Use February 15th as the focal date.

48
. You are considering purchasing a car. The owner has offered to let you make two payments of
$4,000 each with the first payment at 6 months and the second payment at 10 months. Instead, you would
like to make a payment of $4,000 in 8 months and pay the rest today. Find the size of today’s payment if
the interest rate is 6% simple. Use today as your focal date.

49
. You have two debts coming due. A $1,500 debt is due in 15 months and another debt for $1,000 is
due in 33 months. Instead, you would like to repay the debts with two equal payments at 3 and 9 months.
Find the size of the equal payments if interest is calculated at 6% simple per year. Use 9 months as your
focal date.

Notes

1. a. $532.50
b. $373.33
c. $407.50
d. $63.19
2. a. $24.01
b. $165.70
c. $44.65

3. a. interest = \1933.32 b. rate= 11.53125%c. time= 119.02 or 120 days d. principal = $2,316.06
 Business Mathematics 141

4. 8.9977% or 9%
5. 11.6121%
6. $2,115,56
7. 123.5677 or 124 days
8. $1,814.63
9. Principal= $1,583.74 Interest= $148.48
10. $2,845.46
11. 366.3898 or 367 days
12. $875.17
13. $1,183.30
14. $10,309.59
15. $2,335.58
16. $1,770.03
17. $11,524.62
18. $3264.68
19. $1,247.11
20. a. $2,763.66
b. $925.65
c. $51,851.85

21. $320
22. $1,350
23. 1.2%
24. 5%
25. . $16,666.67
26. $2,666.67
27. 50 months
28. $120
29. $4,562.50
30. $424.11
31. $290.55
32. $316.71
33. a. 3 months b. 48 months
34. $7300 exactly
35. $14,400
36. $8,520
37. $5,769.23
38. $500,000
39. 100 months
40. $10,514.75
142

41. $1,716
42. $1,103.19 each
43. First payment: $4,054.19; second payment: $6,054.19
44. .7,038.53
45. $7,036.45
46. $6,426.52 and $3,213.26 in 6 months
47. $2,548.00
48. $3,846.87
49. $1,157.23
Chapter 4: Compound Interest

In the previous chapter, you saw that, in simple interest calculations, the amount of interest earned is the
same for every time period – for example, the amount earned during the first 30-day period is the same
as the amount earned in the second 30-day period.

In long-term loans, an increase in the amount of interest paid should follow an increase in the loan’s
value.

In long-term loans, it is felt that, since the value of the loan increases with time (because of interest), the
amount of interest should increase in later time periods. This increase is accomplished by calculating the
interest as compound interest.

Compound interest is the interest paid on previously earned interest as well as on the original principal.

Example

Consider a loan of $1,000 for two years at 10% per year interest. If simple interest is used, the lender would
receive at the end of the loan.

But at the end of the first year, the lender could reasonably consider the value of the loan to be

and feel that the interest for the second year should be based on this amount as principal. The lender would
then receive

at the end of the second year. This is described as interest compounded annually, or converted (changed to
principal) annually.

Compounding takes effect in accounts where interest is regularly added to the balance.

While it is possible to consider the principal of a loan as continuously increasing because of interest, the
usual way to state and calculate compound interest is to follow the idea above and increase the principal

143
144

by the interest at regular intervals. The interval to be used is stated in the rate. Commonly used intervals
are given by the terms:

• Annually
• semi-annually (every half year = every six months)
• quarterly (every three months)
• monthly
• biweekly (every two weeks or fortnight)

Occasionally loans are compounded weekly or daily.

The interest rate in the example on the previous page would be described as 10% compounded annually.
Compounding takes effect in accounts in which the interest is added to the balance at regular intervals.

Example

Imagine a trust account set up with an initial balance of $5,000 and an earning of 8% compounded semi-
annually. After two years the account would look like this:

Time Interest Balance

0 $5,000.00

6 months $200.00 $5,200.00

1 year $208.00 $5,408.00

18 months $216.32 $5,624.32

2 years $224.97 $5,849.29

The interest calculations for the account would be as follows: At 6 months:

Note: 8% compounded semi-annually means 4% every half year. At 1 year:

At 18 months:
 Business Mathematics 145

At 2 years:

The total interest is $849.29 vs $800 at 8% simple interest.

Learning Activity #1

1. Try to perform these fundamental operations of compound interest. Complete the following
account table, using an interest rate of 16% compounded quarterly.

Time Interest Balance

0 $8,000.00

3 months $320.00 $8,320.00

6 months $332.80 ?

9 months ? $8,998.91
Nominal and Periodic Rates

Key Takeaways

Nominal rate: Percent annual rate; Periodic rate: Rate that gives percent interest each period.

When compound-interest rates are given as above, the percent annual rate is called the nominal rate and
denoted by . To show clearly what the compounding interval is, add a subscript to the ( ) . This
indicates the number of times per year the interest is to be compounded.

• Thus, 8% compounded semi-annually would be , .

• Thus, 18% compounded monthly would be , .

The periodic rate is used in most BAII Plus calculations.

The rate that gives the percent interest each period is called the periodic rate and is denoted by . This is
the rate actually used in most formulas. The following are examples.

Example

Examples

1. For 8% compounded semi-annually ( )

2. For 18% compounded monthly ( )

In general, to get from :

147
148
Compound Interest Formula

The procedure for adding interest each period can always be used to find the future value of a loan or
deposit, but the following general formula gives the future value more directly.

where:

• = future value of the loan

• = present value of the loan (principal)
• = periodic interest rate
• = number of compounding periods

Figure 1: Cash Flow

Example

Examples

To see how the formula is developed, consider the $5,000 loan at 8% compounded semi-annually for two
years.
First,

The balances would be:

At 6 months:

149
150

At 1 year:

At 18 months:

At 2 years:

This last calculation for the two-year balance is the general formula for FV with:

• = $5,000
•
•

In general, the values for and are found by:

and

Learning Activity #2

Use the compound-interest formula to find the following future values:

1. The future value of a deposit of $8,000 at 16% compounded qua1terly for nine months.
2. The future value of a loan of $1,000 for two years at 10% compounded annually.
3. The future value of a loan of $2,500 for four years at 8% compounded monthly.
Present Value

For many investment decisions, it is necessary to find the principal, or present value, that corresponds to
a given future value.

Examples

Consider a note that will pay $10,000 to whoever owns it three years from now. If an investor wants to earn
10% compounded annually, what is the most he or she should pay for the note?

You have:

• per year
• years
• $10,000
Thus, using the compound-interest formula:

This result can be checked by accumulating the money in an account, as shown in the next box.

Time Interest Balance

0 $7,513.15

1 $751.32 8,264.46
2 826.45 9,090.91

3 909.09 10,000.00

151
152

Formula for Present Value

The compound-interest formula can be rewritten to give the present value directly. Divide both sides of
the equation by

Cancel and rewrite:

Learning Activity #3

Find the present values by using the formula for given above.

1. The present value of $5,849.29 due in two years if interest is at 8% compounded semi-annually.
2. The present value of $8,998.91 due in nine months if interest is at 16% compounded quarterly.
3. The principal of a loan that would amount to $50,000 in six years at 8.5% compounded annually.
Multiple Cash Flows

Up to this point, you have considered situations that have only a single loan or deposit and a repayment.
There are, however, many cases in which there are many inflows and/or outflows to a particular
individual or company. For example, consider the company that is developing a business and needs cash
inflows (such as loans) early in its life and will balance these inflows with outflows later.

Example

Examples

Suppose, for instance, that a builder plans to finance a project through a bank and will borrow $150,000 now
and $100,000 in three months, then repay $50,000 in six months and the rest in one year’s time. Interest is to
be paid on the outstanding balance at 12% compounded monthly.

Then you can find the size of the last payment (denoted by above) by following through an account and
adding interest every month.
Cash inflows to the builder are positive.

153
154

Time (months) Interest Cash Flow Balance

0 0.00 $150,000.00 $150,000.00

1 1,500.00 0.00 151,500.00

2 1,515.00 0.00 153,015.00

3 1,530.15 100,000.00 254,545.15

4 2,545.45 0.00 257,090.60

5 2,570.91 0.00 259,661.51

6 2,596.62 -50,000.00 212,258.12

7 2,122.58 0.00 214,380.70

8 2,143.81 0.00 216,524.51

9 2,165.25 0.00 218,689.76

10 2,186.90 0.00 220,876.65

11 2,208.77 0.00 223,085.42

12 2,230.85 0.00 225,316.27

A shorter way to check the account is to accumulate the future value on the outstanding balance only at
the time of cash flows. For the above account, then, the result is as follows:

hmmm

hmmm

Time
Interest Cash Flow Balance
(months)

0 $150,000 $150,000

3 100,000.00 254,545.15

6 -50,000 212,258.12

12 -225,316.27 0
Equivalent Values

We say that the payments of $50,000 and $225,316.27 at the given times are equivalent to the loans of
$150,000 and $100,000 at their given times.

It is often the case that there are two sets of flows. (In the builder’s case mentioned previously, the
$150,000 and $100,000 inflows form one set; the $50,000 and $225,316.27 outflows form the other.)

Two sets of cash flows are equivalent in value whenever they have the same value after interest is
allowed for.

If you proceed through an account with two sets of equivalent cash flows – one viewed as inflows to the
account, the other as outflows – the final balance must be $0.

Key Takeaways

In an equation of value, the values of inflows, after interest, are equal to the values of outflows.

Evaluating payments by following through an account is fundamental to understanding equivalence, but

this method is difficult to apply to more complex cash flows where the cash flow to be determined occurs
earlier, or where there are several cash flows to be determined. In such cases, the following equation of
value method is preferred.

An equation of value make the values of inflows equal to the values of outflows after interest is allowed
for – that is, after allowing for the time value of money. This is accomplished by finding the value of
every cash flow at some fixed date, the Focal Date. The results obtained will be the same as those found
by calculating the values by an account, as shown above.

The compound-interest formula,

is in itself a simple equation of value, with the focal date at the nth period

155
156

Example

The builder’s situation discussed above could be analyzed by an equation of value and corresponding cash-
flow diagram, as follows:

For a focal date of one year, the equation is:

Through the example above, you will appreciate that the equation of value allows for the same interest
as the account method does. This is true no matter what focal date is chosen – which is not the case in
Simple Interest.

Since the time of the last flow was chosen as the focal date, all flows are evaluated by future value. Any
cash flow that precedes the focal date is evaluated by finding its future value. Any cash flow that follows
the focal date is evaluated by finding its present value.

To see how that works, study the next example, which uses a focal date of three months for the problem
above.
 Business Mathematics 157

Example

This is the same answer as that obtained before, but stating and solving the equation are slightly more
complex. Choosing the best focal date is a matter of convenience.

Problems may have several unknown cash flows, but it must be possible to state them in terms of one
variable, since there is only one equation.

Example

As an example, suppose, in the builder’s case, the loans were to be repaid with two equal-sized payments: one
at six months, the other at one year.
158

The equation is simplest if you choose one year as the focal date.
Then:

To check that this is correct, enter the values in an account as shown in the box:

Time (months) Interest Cash Flow Balance

0 $150,000 $150,000

3 100,000.00 254,545.15

6 -135,042.23 127,215.89

12 -135,042.23 0

It is easy to check results by an account, but it would be difficult to solve such a problem by an account.
And in this case an equation would have to be solved at some point.
Compound Interest with the BAII Plus

Using Financial Calculator Functions

The financial calculator recommended for this course is the BAII

Plus. Both this and other financial calculators have built-in
compound-interest functions. It is possible to do almost all of the
course calculations to the same accuracy without these functions, but
the process is much faster if they are available.

The functions you will use in this chapter are controlled by the
following keys:

P/Y and C/Y N I/Y PV PMT FV

0 Future Value
How many times do we Number of Nominal Interest Present
compound per year?(m) periods Rate, jm Value (for (One of PV and FV is
now) negative!)

Key Takeaways

Financial Calculators should have built-in compound-interest functions.

In the same row is the PMT key which you will use in the next chapter. For this chapter, the PMT value
should be set at 0. It’s always best practice to set it to 0 each and every time!

Examples

159
160

Invest $100 at % for 4 years. periods.

 Business Mathematics 161

Step To Press Display

Clear previous saved values 2ND

1
(except P/Y and C/Y)
[CLR
TVM]

2 Enter N=8 periods

8 N=8

I/Y

3 Enter nominal interest rate, I/Y = 6%. (Annual interest rate in percentage) I/Y = 6

2ND
4 Select P/Y and C/Y worksheet

[P/Y]

ENTER

Set number of payments per year, P/Y = 2

5 P/Y = 2
2
162

Set Number of compounding periods per year, C/Y=2

6 (By default, C/Y is set as the same as P/Y) 2 C/Y = 2

ENTER

2ND
7 Return to standard calculator mode 0

[QUIT]

Enter present value, PV =100

8 (negative value for outflow) +|- PV = -100

PV

1
 Business Mathematics 163

PMT

9 Enter periodic payment, PMT =0 PMT = 0

0

FV

Compute future value, FV FV =

10 (positive value for inflow) 126.6770081
CPT

We write this as:

P/Y C/Y N I/Y PV PMT FV

4 4× 2 = 8 6 100 0 CPT: -125.6770

Examples

To illustrate the use of the financial calculator, suppose you want to obtain the future value of a $5,000 loan at
8% compounded semi-annually for two years.

P/Y C/Y N I/Y PV PMT FV

2 2× 2 = 4 8 5,000 0 CPT: -5,849.29

164

You will see the answer, $5,849.29, which was obtained earlier in the chapter by an account and by the
formula. Note that the answer appears as a negative value on the calculator. This is because the calculator
performs an equation of value in the form of:

Hence it must make either inflows or outflows negative. (Since PV was made positive, it must make FV
negative.)

From now on, you will normally indicate the procedure for solving problems – especially if they are
likely to be done with computer functions – by listing the available values of the variables and what is
required.

The answer would be negative on the calculator, but this will be mentioned only if confusion may arise
from the answer.

With the calculator functions, any one of the functions N, I/Y, PV, or FV can be found from the others.
How this is done is illustrated in the next example, which uses some previous problems.

The calculator assumes each problem has a cash outflow (entered as a negative) and a cash inflow
(entered as a positive).

Example

You borrow $1,000 and agree to repay the loan with a single payment in 2 years. How much should you pay
if interest is charged at 8% compounded quarterly?

P/Y C/Y N I/Y PV PMT FV

4 4× 2 = 8 8 1000 0 CPT: -1,171.66

 Business Mathematics 165

To look at values entered in your calculator, just press RCL and then the value you want to check, e.g.,
RCL N should show 8.

Examples

Examples

1. If an invested $8,000 results in a future value of $8,998.91 in nine months, what is the interest
rate compounded quarterly?

You have:

P/Y C/Y N I/Y PV PMT FV

4 4× 9/12 =3 CPT 8,000 0 -8,998.91

Answer: 16% compounded quarterly.

Alternatively, you could solve the algebra problem:

Which simplifies to:

But this is a much tougher problem!

Examples
166

If $150,000 is invested at 12% compounded monthly and results in a future value of $169,023.75, for how
long must it have been invested?

P/Y C/Y N I/Y PV PMT FV

12 CPT 12 150,000 0 -169,023.75

Answer: 11.9999973 or 12 months.

Alternatively, we could solve the algebra problem:

Which simplifies, using logarithms to:

In general, the calculator is a very good option – you do not need to use logarithms, and can solve much
faster.

Learning Activity #5

1. Find the future value of a loan of $12,000 for 16 months at 15% compounded monthly. In doing
this, you should write down the values entered into the TVM:

P/Y C/Y N I/Y PV PMT FV

 Business Mathematics 167

2. How much must be invested at 11% quarterly to get $9,500 in two years?

P/Y C/Y N I/Y PV PMT FV

3. If a bank deposit of $80,000 amounts to $84,934.22 after gaining interest compounded monthly
for one year, what was the nominal rate per month?

P/Y C/Y N I/Y PV PMT FV

Equivalent and Effective Rates

Interest rates are EQUIVALENT if they provide the same amount of interest on any loan. Consider the
two rates:

1. 20.5% compounded semi-annually.

2. 20% compounded quarterly.

If you take any principal and any length of time, you will find that the two rates always result in
exactly the same future value – hence the same interest. This is because they are related by the algebraic
expression:

To check the equivalence, consider the following example.

Example

Suppose $50,000 is invested for seven years at the interest rates noted above. Find the future value of the
$50,000 for each interest rate.
You have:

Key Takeaways

If two rates produce the same result for any principal and time, the rates will do so for any values.

169
170

For rate a: 20.5% compounded semi-annually

• half-years
• i= %
•
• =?

Answer: $196,006.46 for rate b

That exactly the same future value is obtained for both rates bears out the claim that the rates are
equivalent. In fact, if two rates produce

the same result for any (non-zero) principal and time, then the rates will do so for any values. Hence
they are equivalent.

You can use calculator functions to find equivalent rates fairly easily, but first we will use the Future
Value formula. You can use any size of investment and any length of time, but to illustrate this in the
next example, $1 for one year is used.

Example

Suppose you are given the 20% compounded quarterly rate mentioned above and are asked to find the
equivalent rate compounded
semi-annually. You are given:

•
•
• $1
 Business Mathematics 171

Using the Future Value Formula, we have;

(Leave this answer in the calculator.)

For the new rate, the only thing that will be different (aside from ) is that it is to be compounded only twice
in the year.

So we have

•
•
• $1
• $1.21550625

Using the Future Value Formula, we have;

So the nominal rate would be .

Effective Rates

The equivalent rate compounded annually for a given compound interest rate.

Compound-interest rates are compared by finding for each rate the equivalent rate compounded
annually. For a given compound-interest rate, the equivalent rate compounded annually is called its
effective rate.
172

Examples

Find Effective rates for the following:

a. 20.5% compounded semi-annually: so

To find the effective rate, we can just evaluate the Future Value equation for year:

This is trivial to solve: %. In fact, the interest earned on $1 invested for a year is the
equivalent rate!

b. 20% compounded quarterly.

n = 1 x 4 quarters, i = 20–,-4 = 5%, PV = $1, FV =?

So we can see that the effective rate is also . You can see, then, that each rate was
equivalent to 21.550625% compounded annually – which also shows that they were equivalent, since they
were both equivalent to the same effective rate.

Effective Rates with the BAII Plus

Example
 Business Mathematics 173

A bank offers a certificate that pays a nominal interest rate of 15% with
quarterly compounding. What is the annual effective interest rate?
174

Step To Press Display

1 Select Interest Conversion worksheet 2ND

NOM = 0
[ICONV]

ENTER

5
2 Enter nominal interest rate, NOM = 15
NOM = 15
1

ENTER

4
3 Enter number of compounding periods per year, C/Y = 4 C/Y = 4

4 Compute annual effective rate, EFF EFF = 15.8650415

CPT
 Business Mathematics 175

Example

Try the following: ↓

Find the interest rate, compounded quarterly, that is equivalent to 15% compounded monthly.
[2ND][ICONV]
NOM = 15 [ENTER]
↑C/Y = 12 [ENTER]
↑EFF = [CPT] 16.07545177
↓C/Y = 4 [ENTER]
↓NOM = [CPT] 15.18828125
Thus, the following three rates are all equivalent:
Fractional Periods

Occasionally it may be necessary to deal with compound interest for a fraction of a period, for example
taking money out of a savings account after two weeks. In these cases, it is important to understand
what the policy of the bank or lender is.

For a savings account that pays interest monthly you may still receive interest for the two weeks (at the
end of the month) if they pay interest on the daily balance but pay it monthly. In other words, some
banks calculate interest based on the equivalent daily rate ( ) , but pay monthly. The interest rate
paid depends on the total daily closing balance. Interest rate is applied to the entire balance, calculated
daily, and paid monthly.

However, for GICs if you cash them in early you may get no interest or if it is a redeemable GIC you
will get interest for the time that you had it. So if you have a 3-year cashable GIC that pays interest
annually and you cash it in after 10 months it is unclear whether they will use simple interest or fractional
exponents. We reached out to a bank to ask – the head office of TD Bank has stated that they had no
idea, they said the “computer calculates it”.

For such cases, unless otherwise stated, use the compound-interest formula:

with having a fractional part. The following example justifies this procedure.

Examples

Suppose that $1,000 was borrowed at an interest rate of 10% compounded annually, and originally was
scheduled to be repaid after two years. Instead, it was decided to repay the loan after 1.5 years.

1. Both parties have agreed to have interest calculated for the partial period. At that time, by
the compound-interest formula, the amount to be repaid would be:

Now suppose this amount were to be reinvested at the same rate for the remaining half year. In
this case, the money accumulated would be:

Which is exactly what would have resulted from the original two year loan:

177
178

2. Both parties have not agreed to have interest calculated for the partial period. In this case,
we would round down, so , and we recieve no interest for the final year.

In this case, we get a lot less interest!

In fact, part 1 gives us a general property of compound interest: If the balance is found at any time
and reinvested at the same rate, nothing changes. You may find that some financial institutions prefer
to deal with the fractional period by assuming that simple interest is paid for that portion. At one time
this method was popular because of the difficulty of performing the calculations for the formula without
calculators or computers. It also meant that the institutions would receive more money since, for a partial
period, simple interest is slightly higher than compound interest.

Key Takeaways

General property of compound interest: If the balance is found at any time and reinvested at the same rate,
nothing changes.

Learning Activity #4

A loan for $6,000 will be taken out for four years at 14% compounded semi-annually. However, it is decided
that the money should be repaid after three years and two months.

a. Find the accumulated amount to be repaid.

b. Check to see that reinvesting this amount for the remaining 10 months would produce the same
amount as the original four-year loan.
Business Mathematics 179
Average Rates

Often, Interest rates change over the life of an investment. In this case, we often try to find the average
rate. To illustrate, here is an example:

Examples

7 years ago, Warren’s grandmother gave each of her grandchildren different amounts of money. Warren
invested $4,000 of his money with CJC investments. For the first year, CJC put his money in a GIC which
paid an effective rate of 5.9%. For the next 2 years, CJC moved the money into Canada Savings Bonds,
which paid out a semi-annual rate of 7.8%. To capitalize on the markets, CJC moved the money into a
mutual fund, where it earned an average monthly interest rate of 4.8% for three years. For the final year, the
money was put it into stocks which paid out 5.6% compounded quarterly. How much money does Warren
have today?
To solve this, we will take the Present value, and find its value at each point:

P/
Y I/
YEAR N PV PMT FV
C/ Y
Y

1 1 1 5.9 4,000 0 CPT: -4236

2 ×2 =
2-3 2 7.8 4236 0 CPT: -4936.488637…
4

12×
4-6 12 4.8 4936.488637… 0 CPT: -5699.43497…
3=36

7 4 4 5.6 -5699.43497… 0 CPT: 6025.36864…

We can also look at this algebraically:

So Warren has $6025.37.

Now we can work out what Warren’s average effective rate is. We take the PV and FV, and use the
calculator to find out what effective rate will turn $4,000 to $6025.37 in 7 years. Make sure to use your
memory buttons to store all of the decimal points.

181
182

P/Y C/Y N I/Y PV PMT FV

1 7 CPT 4000 0 -6025.36864…

We get an effective rate of %. This is Warren’s average rate.

Once we have the effective average rate, we can use it to solve other problems:

Examples

Amy also invested with CJC investments, who invested her money in the same manner. If Amy now has
$8150, how much did she invest 7 years ago with CJC?

To solve this, we can use the average rate already computed:

P/Y C/Y N I/Y PV PMT FV

1 7 6.027290102 CPT 0 -8150

Which tells us that Amy invested $5,410.46, 7 years ago.

Chap 4 Learning Activities Answer Key

Learning Activity #1

Time Interest Balance

0 $8,000.00

3 months $320.00 $8,320.00

6 months $332.80 $8,652.80

9 months $346.11 $8,998.91

Learning Activity #2

1.
2.
3.

Learning Activity #3

1.

2.

3.

Learning Activity #4

a. With , , = $9,209.76

b. ,FV=$10,309.11,
when PV = $6,000, $10,309.12

The difference is due to rounding off the FV in (a).

183
184

Learning Activity #5 FIX

1. $14,638.67

P/Y C/Y N I/Y PV PMT FV

16 15 12,000 0
12

2. $7,646,61

P/Y C/Y N I/Y PV PMT FV

8 11 CPT 0 -9,500
4

3. 6% nominal

P/Y C/Y N I/Y PV PMT FV

12 CPT 80,000 0 84,934.22

12
Review Questions for Chapter 4

1
Complete the following table, assuming an interest rate of 10% compounded quarterly.

Time Interest Balance

0 0 $8,000.00 (PV)

3 months
$200.00
6 months 8,405.00
9 months

12 months 8,830.50 (FV)

2
Make a table with the same headings as previous, but for a loan of $12,000 for 5 months at 15%
compounded monthly.

3
Write the following nominal rates in the “ ” notation and find the corresponding periodic rates,
(include the period with these). The first line is completed as an example.

Periodic
Nominal Rate Frequency Nominal Rate,
rate,

8% semi-annually

15% monthly ? ?

10% quarterly ? ?

9% annually ? ?

10.4% weekly ? ?

4
Write each of the following rates as nominal rates and complete the table.

185
186

Nominal
Nominal Rate Compounding Frequency Periodic Rate,
Rate,

? ? ?

? ? ?

? ? ?

? Quarterly ?

? Monthly ?

? Semi-annually ?

5
Complete the following table, using the compound-interest formula to calculate the future value of
each loan.

PV Interest Rate Length

$11,500 9% compounded quarterly 2 years ? ? ?

$7,400 6% compounded annually 4 years ? ? ?

$14,000 8.6% compounded monthly 8 months ? ? ?

6
Government compound-interest savings bonds have the interest compounded every year. Suppose
that a $1,000 bond paid interest at 8.5% compounded annually and was kept for three years. Find the
value (Future Value) of the bond at the end of the three years by:

a. Showing the interest and balance each year.

b. Using the compound-interest formula to get FV at the end of two years.

7
A loan of $24,000 for two years is to carry interest at 14% compounded semi-annually. Use the
compound-interest formula to find the value of the loan at the end of two years.

8
. A “junk” bond was supposed to pay interest at 25% paid annually. Unfortunately, no payments were
made for the last seven years, so the interest was allowed to compound at 25% compounded annually.

a. Find the value at the end of each of the seven years for a bond with a principal of $1,000 at
the start.
b. Also find the value the loan would have had at the end of each year if the interest had been
simple interest at 25% annually. Note the difference caused by compounding.
 Business Mathematics 187

9
. Find the present values of each of the amounts below, filling in the rest of the table when you do so.

PV Interest Rate Length n FV

? 6.5% compounded semi-annually 2 years ? $11,364.76

? 16% compounded monthly 3.5 years ? $25,000.00

? I0% compounded quarterly 1 year ? $30,000.00

Check your last result by assuming the PV was invested for one year in an account paying 10%
compounded quarterly and adding on the interest each period as in Problem 1.

10
According to the terms of his uncle’s will, Tom Jones is to receive $50,000 2.5 years from now.
Tom would like to borrow as much as he can now and pay it off with his inheritance. Use the compound-
interest formula to find out how much he can borrow if the interest rate is as follows:

a. 10% compounded monthly.

b. 9% compounded monthly.
c. 8% compounded monthly.

11
Ann Lee has a lease on a government property which must be paid by a lump sum of $6,000 every
year. The next payment is due in 10 months from now, and Ann plans to invest enough money in an
account at her bank so that the amount in the account in 10 months will cover the $6,000 payment. If the
interest rate is 8.5% compounded monthly, how much should she place in the account?

12
Ajax Company is borrowing $100,000 now and has agreed to pay 11% compounded annually on
the outstanding balance at all times. Ajax plans to pay $30,000 at the end of the first year of the loan
and $35,000 at the end of the second year. The remaining debt is to be completely paid off by a single
payment at the end of the third year. Draw a cash-flow diagram and find the amount that should be paid
at the end of the third year by:

a. Finding the interest and balance due at the end of each year.
b. Using an equation of value at a focal date (e.g., at year 3).

13
AC Holdings has taken over a company with a debt that was to be paid by a payment of $85,000
one year from now. Instead, AC has agreed with the holder of the debt to pay it off early and be allowed
12% compounded quarterly for early payment. It plans to pay $40,000 now and the rest in six months.
188

a. Draw a cash-flow diagram and find the amount that should be paid in 6 months.
b. Repeat (a) but assume the payments now and in 6 months are to be equal in size.

14
. North Credit Union advertises that it will pay 7% compounded annually on money on deposit for
periods longer than one year and that the money may be taken out, with interest, at any time after the first
year. A depositor placed $20,000 on deposit at the above rate for four years, but decided to withdraw it
after 2.5 years.

a. How much should the depositor receive?

b. Show that, if this amount were deposited at the same rate for the remaining 1.5 years, the
result would be the same as if it had never been withdrawn.

15
15. A loan of $17,000 for three years resulted in a future value of $21,560.11. Use your calculator
functions to find the nominal interest rate if the loan was compounded:

a. quarterly
b. semi-annually.

16
Use your calculator functions to find the FV of a principal of $1.00 invested for one year at 16%
compounded quarterly, and leave the results in your calculator. Then find the nominal monthly rate that
will give the same FV – the rate compounded monthly that is equivalent to 16% compounded quarterly.
Check your answer by finding the future value of a principal of $10,000 invested for two years at each
rate. You should get the same answer in each case.

17
Complete the following table of equivalent nominal rates, giving answers in percent to six
decimals. Each row will contain equivalent rates.

Effective Rate,

? ? ? 16%

? ? 12% ?

? 9% ? ?

18
Use your results in Row 1 in the previous problem to find the future value of a loan of $4,000 for
18 months by doing the compounding:
 Business Mathematics 189

a. monthly.
b. Quarterly.
c. Semi-annually
d. Annually

19
Your first child was born this year and you decide to save for her education. You deposit $2,000
into an RESP (registered education savings plan) that pays 4.5% compounded annually ( ).
How much will your child have in 18 years? Use both the formula and the TVM Keys.

20
You borrow $5,000 from a private loan company and agree to pay it back with interest calculated at
10% compounded quarterly. How much will you owe in 30 months? Use both the formula and the TVM
Keys.

21
You are expecting a tax refund of $3,000 six months from now. You take your T4 slips to H&P
Square Tax preparation service and they agree to give you the money now if you sign over the refund
to them. How much money will you receive today if interest is calculated at %. Use both the
formula and the TVM Keys.

22
You go to purchase a brand new motorcycle and the dealer quotes you a price of $14,000 to be
paid as a single payment in 30 months. You would like to pay cash today for the motorcycle. How much
should you offer if interest is calculated at 8% compounded semi annually? Use the formula and the
TVM Keys.

23
You have $75,000 and decide to purchase a 30 year Government of Canada strip bond with an
interest rate of 7.0% compounded semi-annually. How much will the bond be worth in 30 years? (i.e.,
what is the maturity value of the strip bond?)

24
Financial planners predict you will need one million dollars to retire.

a. You would like to buy a 30-year strip bond with an interest rate of 7% compounded semi-
annually that has a maturity value of one million dollars. How much will you need to pay for
this strip bond today?
b. Unfortunately, you only have $75,000 available to buy a bond. You are considering buying a
junk bond (risky bond) because you know that the interest rates are much. higher than for a
Government of Canada bond. What nominal interest rate, compounded semi-annually, do you
190

require so that the bond will have a maturity value of $1,000,000 in 30 years?
c. Your friend convinces you that junk bonds are too risky to be used as a retirement
investment. If instead, you buy the Government of Canada bond (with your $75,000) that
pays 7% compounded semi-annually, how many years will it take you to reach your goal of
having $1,000,000?

25
If an investment grows from $10,000 to $16,000 in 27 months, what was the nominal rate of
interest, compounded quarterly?

26
If an investment grows from $4,000 to $6,000 in 48 months, what was the nominal rate of interest:

a. compounded monthly?
b. compounded quarterly?
c. compounded semi-annually?
d. compounded annually?

27
You would like to save to return to school. You deposit $4,000 into a GIC that pays . You
have decided to return to school when your savings grows to at least $6,000. If you make no more
contributions, how many years will it take you to reach your goal?

28
How many years will it take $300.00 to accumulate to $425.29 at 7% compounded monthly?

29
An investment of $1,500.00 made 27 months ago is now worth $1753.48. What nominal rate of
interest, compounded quarterly, did this investment earn?

30
You have always wanted to go to Orlando, Florida. You estimate you will need $6,000 for your trip.
You deposit your tax refund of $5,016.10 into an account that pays 12% compounded monthly. How
many years will it take to reach $6,000?

31
You put $5,000 into a 3-year term deposit that pays interest at 6.3% compounded quarterly. After the
end of the three years you renew the term deposit plus accumulated interest at 7.2% compounded semi
annually for an additional three years.
 Business Mathematics 191

a. How much money will you have at the end of the six years?
b. How much interest did you earn?

32
You borrowed some money from the Honest Shark Finance Co. You made only one payment of
$25,292.49 at the end of 5 years to pay off the loan. The interest rate was 18.5% compounded semi
annually for the first 2 years and 19.6% compounded quarterly for the remaining years.

a. How much did you borrow?

b. How much interest did you pay?

33
You are going to purchase a car and are given two options to pay.

• You can pay $18,000 in cash today, or

• $5,000 after one year, and a second payment of $15,000 in 2 years (from today).

Which option is better? Your answer should be stated in terms of today’s dollars. The prevailing
interest rate is 7% compounded monthly ( %)?

34
You have a line of credit that charges interest at %. You borrowed $4,000 six months ago
and $2,000 two months ago. You would like to repay the loan with a single payment in 6 months time.
Calculate the size of the payment. Use 6 months as the focal date.

35
Repeat the above question with you making two equal payments at six and twelve months. Find the
size of the equal payments. Use 6 months as the focal date. Note: To save time use some of the values
you calculated above since the focal date is the same.

36
You purchased a machine for your plant and the contract calls for equal payments of $12,000 in 12
months and 24 months. Your cash flow is better than you projected so you would like to repay the loan
early with a single payment today. Calculate the size of the payment if interest is 9% compounded semi
annually. Use today as the focal date.

37
Repeat the above question with you making two equal payments, one today and one in six months
time. Find the size of the equal payments. Use today as the focal date. Note: To save time use some of
the values you calculated above since the focal date is the same.
192
38
You were supposed to pay $5,000 today. Up until yesterday you had the money but you lost it all
gambling at the Great American Casino. You arrange with the bank to defer the payment. You will pay
$2,000 at the end of 18 months and 3 equal payments at the end of 24 months, 30 months and 36 months
. The interest rate is 10% compounded quarterly ( %).

a. Find the size of the equal payments. Use 30 months as the focal date.
b. How much interest did you pay as a result of gambling and losing the $5,000?

39
You borrowed $12,000 2.5 years ago. You agreed to repay the loan with one payment 15 months from
today, and a second payment, $3,000 larger than the first, 27 months from today. Find the size of each
payment if money is worth 11% compounded quarterly? Use 27 months as the focal date.

40
You have $10,000 to invest today. How much would you have (to the nearest $100) at the end of
30 years if your money earns:

a. 12% interest, compounded monthly?

b. 12% simple interest?
41
Your Credit Card charges you a nominal interest rate of 18.6% per year. If they compound interest
monthly, what effective rate of interest do they charge?

42
You are offered two options for your mortgage.

• A Canadian bank offers you a rate of %

• A US bank offers you %.

Which rate is better? Convert both rates to effective rates to compare them.

43
What is the effective rate of interest earned on an investment of $10,652,952,497,853.65 that earns
15% compounded quarterly?

44
What nominal rate, compounded semi-annually, is equivalent to 8% compounded quarterly?

45
What nominal rate, compounded quarterly, is equivalent to 8% compounded monthly?
 Business Mathematics 193
46
What is the effective interest rate of 8% compounded monthly?

47
Canada Premium Bonds are a new kind of Canada Savings Bond. They were available for sale until
November 1, 2022. They proposed to pay the following interest rates, compounded annually.

Year 1 2.50%

Year2 3.00%

Year3 4.00%
Year4 4.85%

Year 5 6.00%

What effective interest rate would a Canada Premium Bond purchaser average over the five years? Hint:
use the formula to find the FV. Do not round the FV.

48
What nominal rate, compounded monthly, is equivalent to 10% compounded semi-annually?

49
What is the effective interest rate of 20% compounded quarterly?

50
You have $5,000 saved. You are considering two investments:

• Canada Savings Bonds (CSB) which pay 5.25% in the first year, 6% in the second year, and
6.75% in the third year, compounded semi-annually.
• A 3-year “Bond-Beater” Guaranteed Investment Certificate (GIC) offered by a bank that pays
5.75%, 6.5%, and 7.25% compounded annually in the three successive years.

a. How much would you have at the end of 3 years if· you bought a $5,000 CSB and how much
if you bought a $5,000 GIC?
b. Find the average effective interest rate earned for the entire 3-year period for both the CSB
and the GIC.

51
You invest $6,000 in a mutual fund. Your investment of $6,000 earns the following returns.
194

Year Return

Year 1

Year 2

Year 3

Year 4

a. How much would your $6,000 investment be worth at the end of the fourth year?
b. How much did you earn (in dollars) during those four years?
c. In the fifth year the mutual fund loses money and the value of your investment decreases by
$400. Calculate the average annual rate of return, compounded semi-annually, for the five
years you have held your investment.
d. A friend has invested in a different mutual fund and says she doubled her money in seven
years. What effective interest rate did she average over the seven years?

52
A Canada Savings Bond pays % in the first year, % in the second year, and
% in the third year. What nominal interest rate, compounded quarterly, would provide the
same return? Do not round the FV.

53
An investment earned 12%, compounded quarterly, for two years and 10% compounded annually
for the next three years. Calculate the average annual rate of return, compounded monthly, for the five
years. Do not round the FV.

54
An investment earned 20%, 15%, -10%, 25%, and -5% in 5 successive years. What average annual
rate of return, compounded annually, was earned for the entire 5-year period? Hint: use the formula to
find the FV. Do not round the FV.

Notes

TimeInterestBalances:
1.
0m $8,000.00

3m $200.00$8,200.00
6m $205.00$8,405.00

9m $210.13$8,615.13

12m $215.37$8,830.50
 Business Mathematics 195

TimeInterestBalances:
2.
0m $12,000.00

lm $150.00$12,150.00

2m $151.88$12,301.88
3m $153.77$12,455.65

4m $155.70$12,611.35

5m $157.64$12,768.99

Nominal Rate Frequency Nominal Rate, Periodic rate,

3.
8% semi-annually

15% monthly

10% quarterly

9% annually

10.4% weekly

Nominal RateCompounding FrequencyNominal Rate, Periodic Rate,

4.
7% annually

9% quarterly

6% monthly

12% quarterly

24% monthly

17% semi-annually

PV Interest Rate Length

5.
$11,500 9% quarterly 2 years 0.0225 8 $13,740.56
$7,400 6% annually 4 years 0.06 4 $9,342.33

$14,000 8.6% monthly 8 months 0.007166 8 $14,823.09

YearInterestBalances
6.
0 $1,000.00

1 $85.00 $1,085.00
2 $92.23 $1,177.23

3 $100.06$1,277.29

7. $31,459.10
196

a. YearBalance
8.
0 $1,000.00

1 $1,250.00

2 $1,562.50
3 $1,953.13

4 $2,441.41

5 $3,051.76
6 $3,814.70

7 $4,768.38
b. Year Balance

0 $1,000.00

1 $1,250.00

2 $1,500.00
3 $1,750.00

4 $2,000.00
5 $2,250.00

6 $2,500.00

7 $2,750.00

PV Interest Rate Length n FV

9.
$11,5006.5% compounded semi-annually2 years 8 $11,364.76
$7,400 16% compounded monthly 3.5 years4 $25,000.00

$14,000I0% compounded quarterly 1 year 8 $30,000.00

10. a. $38,980.40
b. $39,959.34
c. $40,963.72

11. $5,591.10

Year Balance
12.
1 $81,000.00

2 $54,910.00

3 $60,950.10

b.
 Business Mathematics 197

13. a. $37,684.65 b. $38,876.54

14. 1. $23,685.88

2.
15. a. 8% compounded quarterly
b. 8.08% compounded semi-annually

16. 16% compounded quarterly= 15.7913% compounded monthly

Effective Rate,
17.
17.227080% 16.214281%16.542910%16%

12.550881% 12.180000%12% 11.881961%

9.202500% 9% 8.900966% 8.835748%

18. a. $5,076.94
b. $5,076.94
c. $5,076.94
d. $5,076.94 (using a fractional period )

19. $4,416.96
20. $6,400.42
21. $2,868.47
22. $11,506.98
23. $590,856.82
24. a. $126,934.31
b. 8.82331%
c. 37.65 years

25. %
26. a. %
b. %
c. %
d. %

27. 5.5 years

28. 5.0years
29. 7.0000%
30. 1.5 years
31. $7,457.11 (the interest earned is $2,457.11)
32. $10,000 (the interest paid is $15,292.49)
33. In today's dollars the 2nd option is worth $17,708.60 which is less than $18,000 so the second option is cheaper
34. $6,441.19
35. $3,284.78
36. $21,051.50
198

37. $10,757.36
38. a. Payment= $1,396.46
b. the interest paid is $1,189.38

39. First payment: 11,083.05

40. a. $359,500 b. $46,000
41. % (effective means compounded annually)
42. Canada: %; US: %, Canadian bank is the better deal
43. %
44. %
45. %
46. %
47. %, not 4.07%
48. %
49. 21.550625%
50. a. CSB: $5,970.10 GIC: $6,039.45
b. CSB: %; GIC: %
51. a. $8,134.05
b. $2,134.05
c. %
d. %

52. %
53. %
54. 8.08142% compounded annually
Chapter 5: Annuities

Annuities Introduction will go here

199
Chapter 5 Review Problems

1
Calculate the future value of the ordinary annuity in each part:

Term of the Nominal Payment and

Size of Payment FV
Annuity Interest Rate Conversion Period

a. $2,100 10 years 9.50% 6 months ?

b. $4.25 12 years 9.00% 1 day ?

c. $750 8 years 10.00% 1 month ?

d. $3,500 27 months 12.00% 3 months ?

Note: b. might explain how much an “average” smoker could save in 12 years (assuming a constant
price for cigarettes and a fixed interest rate).

2
$500.00 is deposited at the end of every six months for nine years in an account paying 10.0%
compounded semi-annually. Calculate the accumulated value of the deposits.

3
Calculate the amount of interest included in the accumulated value of $600.00 deposits made at the
end of each month for 5 years. The interest rate is 13.5% compounded monthly.

4
Bill Holden is preparing retirement plans for his employees. He requires each employee to deposit
$265.00 at the end of each month for 9 years. The interest rate is 8.75% compounded monthly.

a. How much money will be in each employee’s account at the end of 9 years?
b. How much will each employee have actually contributed?
c. How much of the amount will be interest?

201
202
5
Corinne Smith made $2,750 deposits every 6 months into a registered retirement savings plan
paying 11.25% compounded semi-annually. Just after making the 16th deposit, the interest rate changed
to 10.00% compounded quarterly. If neither deposits nor withdrawals were made during the next five
years how much would Ms. Smith then have in her account?

6
Calculate the present value of the ordinary annuity.

Term of the Interest

Size of Payment Payment and Conversion Period PV
Annuity Rate

a. $2,100 10 years 9.50% 6 months ?

b. $4.25 12 years 9.00% 1 day ?

c. $750 ?
8 years 10.00% 1 month

d. $3,500 27 months 12.00% 3 months ?

7
You wish to take two years off work to attend school and also wish to receive $950.00 at the end
of every month for the 2 years. If you were able to deposit money into an account paying 10.00%
compounded monthly:

a. How much should be deposited when you take the time off?
b. How much interest will you receive in the two years?

8
A laptop was bought by paying $750 down and an installment contract with payments of $85 at the
end of each month for 2.5 years. If the interest was calculated at 16.9% compounded monthly:

a. What was the equivalent cash price of the laptop?

b. How much was the cost of the financing?

9
Peter Van Dusen opened a trust account to fund his son’s education. The account paid 10.25%
 Business Mathematics 203

compounded quarterly. His son is expected to require four years of quarterly payments of $2,000 with
the first payment occurring 10 years 3 months from today . How much must Mr. Van Dusen deposit now
so that his son will be able to receive the 4 years of payments? This is an example of a deferred annuity.

10
To purchase a new trawler-type yacht for chartering, Henry Skipper signed an agreement to borrow
the entire amount and to make payments of $2,750 at the end of every month for seven years.

a. What was the purchase price of the yacht if money was worth 15.5% compounded monthly?
b. In his third year of operation, an economic downturn caused Mr. Skipper to miss payments
25 and 26. What payment was required at the time that payment 27 was due in order to bring
the contract up to date?
c. Upon receipt of payment 27, the mortgage company wished to invoke a contractual clause
and cancel the mortgage. How much (in addition to the payment calculated in part b above)
would Mr. Skipper have to pay in order to fully pay out the mortgage?

11
Calculate the payment for each annuity:

Present Interest Payment and Conversion

Future Value Time PMT
Value Rate Period

4 years, 6
a. $0 $17,750 10.5% 1 quarter ?
months

b. $12,000 $0 16.5% 6 months 20 years ?

9 years, 3
c. $6,500 $0 8.4% 3 months ?
months

d. $0 $12,500 10.5% 1 month 8 years ?

12
A used Corvette can be bought for $15,000 cash or for equal payments at the end of each quarter
for 5 years. Calculate the size of the quarterly payments at 10% compounded quarterly.

13
A gaming computer priced at $4,600 can be purchased for $1,900 down and the balance paid by
36 equal monthly payments at 13.8% compounded monthly. Calculate the size of the monthly payments.

14
Calculate the term of each annuity:
204

Payment and
Size of
Future Value Present Value Interest Rate Conversion Term (N)
Payment
Period

a. $0 $8,500 $675 10.75% 3 months ?

b. $23,500 $0 $491.25 8.25% 1 month ?

c. $0 $962 $100 10.00% 1 week ?

d. $85,000 $0 $2,500 13.00% 6 months ?

15
Charlie Horseshoe invested their$250,000 lottery winnings in a term deposit paying 8%
compounded monthly for 10 years. For how long can $3,500 be withdrawn from the account at the end
of each month starting at the end of the term deposit? Does your answer make sense? If not, why not?

16
$1,000 is deposited at the end of each month for 5 years. Find the nominal rate of interest
compounded monthly at which the deposits will accumulate to $80,000. (Answer in % using 2 places of
decimals.)

17
. A camper van can be purchased for $27,500 plus 14% taxes and fees. The dealer will finance the
balance owing after the payment of the sales tax and a down payment of 20% of the price (without the
taxes and fees). Payments will be $330.30 at the end of each month for 7 years. What nominal rate of
interest compounded monthly is being charged?

18
A computer valued at $2,800 can be bought for 25% down and monthly payments of $84.60 for
2.5 years. What effective rate of interest is being charged?

19
A loan of $30,000 is to be repaid with monthly payments over a period of 20 years. Calculate
the total savings in interest if the loan is financed at 12.25% compounded monthly rather than 13%
compounded monthly.

20
Judith Leisure-Lee is able to set aside $1,500 every 3 months from her income. She plans to buy a
studio condominium at Hemlock Valley Ski Area when she has accumulated at least $50,000. How long
will it take her if she can invest her savings at 9.5% converted quarterly? (State the answer in months.)
 Business Mathematics 205
21
A firm believer in technological education wishes to provide an educational institution with
$6,000 bursaries to be awarded at the end of each year for the next 10 years. If the institution can invest
money at 8.75% effective, how much should the philanthropist donate, one year prior to the first award,
to set up the fund for the 10 bursaries?

22
An agreement for sale contract carries payments of $4,500 at the end of every six months for
10 years. How much should you be willing to pay for the contract if you require a return of 12.25%
compounded semi-annually on your money?

23
Samuel Hardy received $48,650 as a severance settlement when his position was terminated.
Harvey had just celebrated his 41st birthday. He immediately and prudently invested the money in an
account paying a guaranteed 9.6% compounded semi-annually until his 60th birthday last year. At that
time, he converted the existing balance into an ordinary annuity paying $3,750 per month with interest
at 10% compounded monthly. For how long will the annuity run until all the funds have been paid out?

24

Judith Leisure-Lee purchased a small studio condominium at Whistler for $115,000. She paid $40,000
down and agreed to make equal payments at the end of every month for 25 years. The interest rate was
13.25% compounded monthly.

a. What size payment is Judith making each month?

b. After 10 years of payments, how much will Judith still owe?
c. How much will she have paid, in total, over the 25 years?
d. How much total interest will she have paid after 25 years of payments?

25
A well-used car, priced at $1,250 was sold on “easy terms” for a down payment of $250 and $50
per month for two years. What effective interest rate is being charged?

26

Dogwood Holdings financed a factory expansion by borrowing $325,000 at 10% compounded semi-
annually for 10 years. Payments are to be made at the end of every six months.

a. Calculate the size of the payment.

b. How much of the 4th payment is interest?
c. Calculate the outstanding balance after the 4th payment.
206

d. Construct an amortization schedule for the first 4 payments.

27

Save-On-Auto Parts borrowed $120,000 to purchase a fleet of seven vans. They intend to repay by
making monthly payments of $2,400. Interest is at 16% compounded monthly.

a. How many full payments will Save-On-Auto Parts have to make?

b. Calculate the size of the final payment, to be made one month after the last full $2,400
payment, which will fully amortize the debt.
c. How much interest is included in the 40th payment?
d. What percentage of the loan will have been repaid by the first 48 monthly payments?
e. How much total interest will be paid?

28
A New York lottery offers a choice to the winner of $1,000,000 cash or $8,500 per month for 15
years. Which alternative should the winner select if money is worth:

a. 6.0% compounded monthly?

b. 6.25% compounded monthly?

29
Find the present value and future value for an annuity whose periodic payments of $1,000.00 are
made at the beginning of every quarter for 7 years. The rate of interest is 13% compounded quarterly.

30
Find the present value and future value for an annuity whose periodic payments of $3,000 are
made at the beginning of each six months for 15 years. The rate of interest is 8.5% compounded semi-
annually.

31
Amby Dextrous bought a grand piano, and agreed to a series of monthly payments of $225 for
4 years starting the date of sale. The rate of interest is 13% compounded monthly.

a. Calculate the cash price.

b. How much will be paid over the term of its financing?
c. How much of the total payments will be interest?
 Business Mathematics 207
32
Find the cash value of a three year service contract for monthly payments of $1,600 paid at the
beginning of each month. The value of money is 14% compounded monthly.

33
If an annuity with a present value of $50,000 has periodic payments at the beginning of each
quarter for 10 years, find the size of the periodic payment. The rate of interest is 12% compounded
quarterly.

34
An annuity whose present value is $50,000 is extinguished by payments of $650.00 made at the
beginning of each month for 12 years.

a. Find the nominal rate of interest compounded monthly.

b. Calculate the effective rate.

35
Payments of $200 were made into a stock ownership plan at the beginning of each quarter for
15 years. They now have a net value of $50,000. What has been the nominal rate of return on the
investment?

36
$100 is deposited into a retirement plan at the beginning of every month for 20 years. One month
after the last deposit, money is withdrawn in equal monthly payments for 15 years. If interest is 8.5%
compounded monthly, find the size of the monthly withdrawals.

37

If $75 is deposited into an education fund at the beginning of each month for 18 years and one month
after the final deposit monthly withdrawals of $310.56 a month are made until the fund is exhausted,
find the term of the annuity of withdrawals. Interest is 7.5% compounded monthly. (Try this problem
both as an annuity due and an ordinary annuity.)

38
Find the present value of a deferred annuity whose periodic payment is $550 at the beginning of
each year for 20 years, with the first payment following a two year period of deferment. The interest rate
is 3.6% compounded annually.

39
Find the present value of a deferred annuity whose periodic payment of $360.00 is made at the
end of every semi-annual period for 18 years after a deferment period of six months. The interest rate is
10% compounded semi-annually.
208

40
A deferred annuity has a present value of $15,000 and periodic payments are made at the
beginning of each quarter for 10 years after a deferral period of 8 years. The rate of interest is 6%
compounded quarterly. Find the size of the periodic payment.

41
Tri-City Holdings borrows $500,000 to fund the expansion of the firm into its eastern market
region. If the loan is to be repaid by making equal payments at the end of each quarter for 8 years
beginning after a deferral period of 2 years, find the size of the periodic payments. Interest rate is 11%
compounded quarterly.

42
Find the present value of a perpetuity whose periodic payments of $4,000 are made at the end of
each quarter. Interest is at 6.8% compounded quarterly.

43
An institute lecturer position in Math of Finance is being funded by a perpetual fund . The fund
earns interest at I0% compounded annually and is to pay $60,000 at the end of each year, with the first
payment two years from the date of the fund being set up. Find the size of initial funding required.

44
You want to have accumulated $4,000 for your European trip four years from now. If interest is
6.4% compounded quarterly, find the size of quarterly deposits required for 4 years if deposits are made:

a. at the beginning of each quarter.

b. at the end of each quarter.

45
A three-year car lease has a present value of $16,600. If money is worth 13.5% compounded
monthly, find the equivalent monthly lease payments, payable in advance for 3 years.

46
A Caribbean holiday tour package may be financed by making monthly payments of $300 at the
beginning of each month for 2 years. Interest is 15% compounded monthly.

a. Find the purchase price now.

b. What will be the total paid in installments over the term?
c. How much interest will be paid over the term of the financing?
 Business Mathematics 209
47
A building will produce net monthly incomes of $2,000 at the beginning of each month
indefinitely. What is the maximum purchase price if one can get 14% compounded monthly on one’s
money?

48
$400 is deposited into a retirement fund at the end of each quarter for 10 years and interest is paid
at a rate of 9.6% compounded quarterly.

a. Find the accumulated balance at the end of the 10 years.

b. How much of that balance is interest?

49
A recreational property is purchased for $54,000 with a down payment of 10% and the balance
secured by a mortgage, amortized by equal monthly payments over 20 years. Interest is 16%
compounded monthly.

a. Find the size of the monthly payments.

b. Find the balance after 5 years.
c. How much will have been paid for the property in total over the 20 year term of the
financing?
d. How much of the total payments will represent interest?

50
An agreement for sale contract carries payments of $4,500 at the end of every six months for 10 years.
How much should you be willing to pay for the contract if you require a return of 12.25% compounded
monthly on your money?

51
John Leisure purchased a small studio condominium at Whistler for $115,000. He paid $40,000
down and agreed to make equal payments at the end of every month for 25 years. The interest rate was
8.75% compounded semi-annually. (see #36)

a. What size payment is John making each month?

b. After 10 years of payments, how much will John still owe?
c. How much will he have paid, in total, over the 25 years?
d. How much total interest will he have paid after 25 years of payments?

Notes

1. a. $67,631.83
b. $33,511.96
210

c. $109,635.81
d. $35,556.87

2. $14,066.19
3. $15,021.08
4. a. $43,307.02
b. $28,620.00
c. $14,687.02

5. $112,179.12
6. a. $26,734.40
b. $11,382.03
c. $49,426.12
d. $27,251.38
7. a. $20,587.31
b. $2,212.69

8. a. $2,818.12 b. $481.88
9. $9,443.94 if you assume the first withdrawal occurs 10 years and three (3) months from today or $9,685.94 if
you assume that the first withdrawal occurs at the 10 year point.
10. a. $140,461.30
b. $8,357.02
c. $110,460.68
11. a. $1,250.01
b. $43.36
c. $117.93
d. $193.00

12. $962.21
13. $92.02
14. n = 15.58 -> 16 quarters n = 41.5 -> 42 months[ n = 9.72-> 10 weeks n = 18.51-> 19 semi-annual periods
15. Payments are indefinite because the withdrawals are less than the interest accumulated for the period.
16. 11.2269% compounded monthly
17. 6.8381% compounded monthly
18. 15.2222% compounded monthly= 16.3305% effective
19. $3,816.00 total savings
20. n = 24.84-> 25 quarters or 75 months
21. $38,933.32
22. $51,094.94
23. 123 months at $3,750 and one (1) month at a smaller amount
24. a. $860.03
b. $67,097.29
c. $257,998 with the last payment= $849.03
d. $257.998 - 75,000 = $182,998
 Business Mathematics 211

25. 19.7469% effective

26. a. $26,078.85 (rounded up)
b. $14,700.73
c. $282,636.43

Pmt#Amount Interest PrincipalBalance

0 $325,000.00

1 $26,078.85$16,250.00$9,828.85315,171.15

2 26,078.85 15,758.56 10,320.29304,850.85

3 26,078.85 15,242.54 10,836.31294,014.55

4 26,078.85 14,700.73 11,378.12282,636.43

27. a.
a. 82 full payments and one (1) smaller payment
b. $2,266.47
c. $1,058.99
d. 44.4%
e. $79,066.47
28. a. PV of monthly payments= $1,007,279.88 which is more than the $1 million cash payment. Choose the payments.
b. PV of monthly payments= $991,342.82 which is less than the $1 million cash payment. Choose the $1 million cash
payment.

29. PV = $18,794.90; FV = $46,021.60

30. PV = $52,476.38; FV = $182,913.49
31. a. $8,477.78
b. $10,800.00
c. $2,322.22

32. $47,360.41
33. a. $2,100.12
b. $10,800.00
c. $2,322.22
34. a. 11.9930%,
b. compounded monthly = 12.6747% effective

35. 16.1008% compounded quarterly

36. $617.43
37. n = 185.9986 -> 186 monthly payments (15 years and 6 months)
38. $7,477.38 assuming that the first payment occurs at year two
39. $5,673.21 assuming that the first payment occurs at 12 months
40. $795.49 with first payment at year eight
41. $29,439.84 assuming that there are eight years of payments (for example, n = 32)
42. $235,294.12
212

43. $545,454.55
44. a. $217.86
b. $221.35

45. $557.06
46. a. $6,264.61
b. $7,200.00
c. $935.39

47. $173,428.57
48. a. $26,370.83
b. $10,370.83
49. a. $676.16 (rounded up)
b. $46,036.44
c. $162,261.81 with the last payment= $659.57
d. $162,261.81 - $48,600 = $113,661.81

50. $50,447.62
51. a. $608.72 (rounded up)
b. $61,465.87
c. $182,606.20 d.
d. $107,606.20
Chapter 5 Supplementary Problems

Simple Ordinary Annuities, Annuities Due, General Annuities

1
Starting today, Mrs. Robinson will put $500 into her RRSP every month for 20 years. If her RRSP
earns 6% compounded monthly, how much will she earn in interest over the 20 years?

2
Mrs. Watson wants to save $52,450 for a down payment on a house. She will save $2,000 per
quarter, starting today.

a. If her invested funds earn 6% compounded quarterly, how long will it take her to reach her
goal?
b. How much interest will she earn during that time?

3
You have just graduated from BCIT. You owe $15,238.98 in student loans. You will be charged
7% interest compounded monthly. You can afford to make monthly payments of $300 starting today.

a. How long (in years) will it take you to repay your student loans?
b. How much interest will you have paid?

4
How long will it take to save $100,000 if you start saving$1,597 every 3 months, starting today?
Assume an interest rate of 6%, compounded quarterly.

5
You borrow $50,000 from the bank to consolidate your credit card debt and student loans. The bank
charges you 12% interest, compounded monthly. The first payment is one month from now.

a. How long will it take to pay off the loan if you pay$504.25 per month?
b. What is the cost of financing?
c. How long will it take to pay off the loan if you pay only $500 per month?

6
Mr. Eskanderian contributes $1,000 into his RRSP at the end of every quarter for 10 years. If his
RRSP earns 10% compounded quarterly, how much interest will he earn in the 10 years?

213
214

Deferred Annuities
7
Judith transfers $25,000 into an RRSP today. She plans to let the RRSP accumulate earnings at
the rate of 8.75% compounded annually for exactly 10 years and then immediately purchase a 15-year
annuity. The first withdrawal will start 3 months after she purchases the annuity. The annuity earns 9%
compounded quarterly. What size of payment will she receive every 3 months?

8
Katherine has recently received an inheritance. She wants to set aside part of the inheritance to put
it into an RRSP to save for her retirement. She anticipates that she will need to receive $1,200 per month
for 15 years with the first withdrawal starting exactly 10 years from today. The invested funds will earn
7% compounded monthly for the entire 25 years. What amount must she contribute to her RRSP today?

9
Barry wants to set up an annuity that will pay him $3,000 per month for 20 years beginning when
he turns 65 years of age. If his current age is 50 years and the invested funds will earn 6.5% compounded
monthly, what amount must he invest today?

10
Samuel recently inherited money from his grandfather’s estate. He wants to purchase an annuity
that will pay $5,000 every 3 months between age 60 (when he plans to retire) and age 65 (when his
permanent pension will begin). The first withdrawal is to be 3 months after he reaches 60, and the last
is to be on his 65th birthday. If Sam is currently 50.5 years old, and the invested funds will earn 6%
compounded quarterly, what amount must he invest today?

11
It is time to start saving for your retirement. You are 40 years old and want to retire when you
tum 60. You will deposit $1,000 into an RRSP at the beginning of every month for 20 years. You will
then use the accumulated funds to purchase a 15-year annuity with the first withdrawal one month after
your 60th birthday. Assume that the RRSP earns 7% compounded monthly, and the funds invested in the
annuity earn 5% compounded monthly.

a. Find the size of the monthly withdrawals.

b. You decide that you will need at least $5,000 per month to live on when you retire at age 60.
How much extra money must you contribute to your RRSP each month so you can withdraw
$5,000 every month for 15 years?

12
Starting today, Giselle Lafleur will deposit $200 in her RRSP each month for 20 years. One month
after the last deposit, she will withdraw the money in equal monthly withdrawals for 10 years.
 Business Mathematics 215

a. Find the size of the monthly withdrawals if the invested funds earn %.
b. How much interest will Miss Lafleur earn over the next 30 years?

13
You have just celebrated your 20th birthday. You want to retire when you tum 65. Starting today , you
are going to make monthly contributions to your RRSP, so that when you retire you can withdraw $2,250
per month for 15 years. The first withdrawal is made when you turn 65. You anticipate the invested funds
will earn 7% compounded monthly.

a. How much money must you contribute each month to your RRSP to achieve your goal?
b. How much interest did you earn during the entire time?

14
Jean is thinking about retiring in five years. He would like to have $50,000 in an account when he
retires. He decides to make monthly deposits (at the beginning of each month) in his local credit union
where he can earn 7.0% compounded quarterly.

a. What would be the required monthly deposit to accumulate $50,000 in five years?
b. How much interest does John earn over the 5 years?

15
Six years from now, when you tum 55, you are planning to retire. You want to set aside some
money today so you can receive $2,500 at the end of every quarter for 15 years with the first withdrawal
3 months after you tum 55. The invested funds earn 9% compounded semi-annually.

a. What amount must you invest today?

b. How much interest will you earn during the 21 years?

Perpetuities and General Annuities

16
You have become wealthy beyond your wildest dreams and would like to create a scholarship at
BCIT. You would like to give $2,000 per year to a student studying business math. You would like your
scholarship to continue in perpetuity.

a. How much money should you set aside today if the first payment is in one year and the
interest rate is 8% compounded annually?
b. How much should you set aside if the first scholarship is today?

17
You take out a loan to buy a black Honda S2000 convertible sports car with leather interior . The
216

bank requires that you put $9,000 down followed by payments of $925 at the end of every month for 5
years.

a. If the bank charges you 12% interest compounded monthly, what is the selling price of your
car?
b. If the bank charges you 12% interest compounded semi annually, how much would your
monthly payments be? Note: You borrow the same amount as found in part (a).

18
Mr. Bean borrows $7,500 today. He will repay the loan with quarterly payments at the end of
every three months for three years. The interest rate charged is 9% compounded monthly. Find the size
of the payment.

19
. A corporation donates $11,000 to Langara. The funds are invested at 10% compounded annually
per year. The interest is paid out each year as a scholarship. How much will be paid out each year if
the first scholarship is paid immediately after the donation is received? Note: It’s easier to use the
calculator.

20
You have just won the Set for Eternity Lottery; the lottery will pay you and your descendants
$5,000 per month forever with the first payment in one month . Instead of receiving $5,000 per month
forever you would like to receive the cash now. What is the cash value of the prize if the interest rate is
%?

21
The TRIUMF research lab at UBC recently received a donation from a private individual. The
funds were matched two-to-one by the government. Each year they plan to pay out a scholarship of
$8,596.59 as they anticipate earning 11% compounded quarterly on the invested funds. What amount
did the private individual donate? (The first scholarship will be one year later). Round answer to the
nearest dollar.

22
You have decided to purchase preferred shares of Plutonium Fuel Cells Inc. that pays a semi-
annual dividend of $1.25 per share.

1. What would you be willing to pay per share if you want to earn at least 5% compounded
semi-annually on your investment and the next dividend is to be paid in 6 months?
2. You are short of cash and need to sell your shares of Plutonium Fuel Cells Inc. Unfortunately,
interest rates have risen to 8% compounded semi-annually. Calculate your gain or loss per
share if the next dividend is due in six months – and the dividend per share remains the same.
 Business Mathematics 217
23
You purchase 500 preferred shares of Yardmucks Coffee that pays a quarterly dividend of $0.26
per share. The next dividend is due in 3 months. Current interest rates are 8% compounded quarterly.

a. What would you be willing to pay for the 500 shares?

b. If interest rates drop to 6.5% compounded quarterly, how much would you expect to gain or
lose if you sell all of your shares? Note: the next dividend is due in 3 months and the
dividend per share is still $0.26.

24
The Winfall lottery offers you two choices for its grand prize. Either a cash prize of $1,500,000
today or $7,000 per month forever (with the first installment one month from now).

a. Which choice should you select if interest is 6% compounded monthly?

b. You choose the $1,500,000 today and deposit it into an account earning 6% compounded
monthly. How much could you withdraw each month forever? Assume the first withdrawal
is one month from now.

25
You borrow $50,000 and agree to make monthly payments for 15 years starting one month later.
Calculate the size of your payments if the interest rate is 9% effective.

26
You borrow $20,000 today from a moneylender called, The Money Branch. As a result of your
bad credit The Money Branch charges you an interest rate of 28.8%. You will repay the loan with equal
monthly payments over four years with the first payment one month from now.

a. Find the size of the monthly payment if the interest is: (i)28.8% compounded monthly or (ii)
28.8% compounded semi-annually.
b. How much less interest would you pay if they compound the interest semi-annually, instead
of monthly?

27
The University of Edmonton received a donation from a wealthy individual. Some of the donated
money will be set aside to create a scholarship fund that will pay out $10,000 at the end of every 6
months, in perpetuity. If the invested funds can earn 8% compounded semi-annually, instead of 5%
compounded semi-annually, how much less money must they set aside today to pay out a $10,000
scholarship?

28
You purchase 200 preferred shares of Black Bear Brewing that pays a dividend of $1 per share every
3 months. Current interest rates are 12% compounded monthly. The next dividend is due in 3 months.
218

a. How much would you be willing to pay for the 200 shares?
b. If interest rates fall to 8% compounded quarterly, how much would you expect to gain or lose
if you sell all of your shares? Note: the next dividend is due in 3 months and the dividend per
share is unchanged.

Mortgages

29
You take out a $200,000 mortgage:

a. What is the periodic interest rate per month if the rate is

i. 12% compounded monthly?
ii. 12% compounded semi-annually?
b. If you borrow $200,000, how much interest is paid in the first month? Use both rates and
compare your answers.

30
A debt of $1,200 is repaid by monthly payments of $350 at the end of each month. The interest rate
is 12% compounded monthly. Construct the complete amortization schedule without using the AMRT
keys. Then go back and verify all the answers using the AMRT and Pl/P2 keys .

Principal
Payment Interest Balance Owing
Paid
Period
PMT INT BAL
PRN

TOTALS

31
You purchase a house in Surrey for $220,000 and put 25% down so you could receive a
conventional mortgage. You decide to get your mortgage at Superstore since they give you free groceries
each year as an incentive. A 5-year term mortgage (i.e., the interest rate is fixed for 5 years) is negotiated
with Simplii Financial in which the balance is amortized over 20 years (repaid with equal payments over
20 years) at 6.70% interest compounded semi-annually.
 Business Mathematics 219

a. Calculate your monthly payment. The bank rounds up the payment to the next dollar.
b. COMP n to verify that n is slightly smaller than 240. If the value of n = -100 then you forgot
to make the payment negative. If the value of n is exactly 240 then you forgot to re-enter the
payment.
c. Find out how the first payment is distributed between interest and principal. Compare this to
the results for the 60th payment.
d. How much interest did you pay in the first year? By how much was the balance outstanding
reduced in the first year?
e. What percent of the original mortgage was paid off in the first two years?
f. How much principal was paid off in the first five years? How much interest did you pay in
the first five years?
g. How much interest did you pay in the fifth year of the mortgage? How much principal was
repaid in the fifth year?
h. How much will you still owe after you have made five years of payments?
i. Calculate the value of the final payment assuming that the interest rate never changes during
the 20 years.

32
The Archibald’s are eligible for a Canada Mortgage and Housing Corp. insured mortgage allowing
them to qualify for a mortgage of up to 95% of the selling price of the house. They are also subject to
the 30% rule: no more than 30% of their gross income can go towards paying the mortgage and property
taxes.

a. What is the maximum mortgage they qualify for if their gross monthly income is $5,000 and
they want to amortize the mortgage over 25 years? Assume that the property taxes on the
house are $1,800 per year (after the home owner’s grant). Current mortgage rates are 6.80%
compounded semi-annually. Round answer to the nearest $100.
b. The Archibald’s take out a mortgage for $195,000 with Citizen’s Bank amortized over 25
years at 6.8% interest compounded semi-annually for a 5-year term. What is the size of the
monthly mortgage payment(round up to the next dollar)?
c. How much interest did they pay in the first five years of the mortgage?
d. How much money would they still owe on this mortgage after five years of payments?
e. When they renew their mortgage in five years time, mortgage rates have fallen to 6.0 %
compounded semi annually for a five-year term. They have saved $15,000 and will use it to
reduce the size of the mortgage. Find the size of their new monthly payments assuming the
balance outstanding is amortized over the remaining time. The bank rounds up the payment
to the next dollar.
f. What is the size of the final payment of the renewed mortgage assuming that the interest rate
does not change during the remaining 20 years?
220
33
Banks normally use the 30% rule: no more than 30% of your gross income can go towards paying
your mortgage and property taxes.

a. If your gross monthly income is $4,000 per month and your property taxes are $2,400 per
year (after the $470 home owners grant), what is the largest mortgage a bank would authorize
if the mortgage is amortized over 25 years and the rate of interest is 7.45% compounded
semi-annually. Round answer to the nearest $100. (Assume monthly payments).
b. You purchase a fixer-upper house in downtown Mission for $164,000. Your down payment is
25% and you negotiate a first mortgage for the balance. The mortgage is at 7.45%,
compounded semi-annually, amortized over 25 years for a 3-year term. How large a monthly
payment is required? The bank rounds payment up to the next dollar.
c. How much interest did you pay in the fust three years of the mortgage?
d. What percent of the original mortgage have you paid off in the first three years?
e. How much interest did you pay in the third year only?
f. In three years the term of your mortgage is up and you wish to renew. Interest rates have
increased to 9.25% compounded semi-annually for a three-year term mortgage. At this time
you make a lump-sum payment of $10,000 to reduce the size of your mortgage. Calculate the
size of the new monthly payments assuming the balance outstanding is amortized over the
remaining time. Round up to the next dollar.
g. What is the size of the final payment of the renewed mortgage assuming that the interest rate
does not change during the remaining 22 years?

34
Suppose you take out a mortgage amortized over 25 years for $179,940 at j2 = 12.5%.

1. Find the size of the monthly payment. Round payment to nearest penny.
2. How much time and money would you save if you make 26 bi-weekly payments (equal to
half of the monthly payment) instead of twelve monthly payments each year? Assume that
the interest rate never changes during the 25 years.

35
In March 2012 the Beckers purchased a house in Delta for $512,500. They made a down payment
of exactly 20% and took out a mortgage with TD Canada Trust for the balance at an interest rate of 7.5%
compounded semi-annually, for a 5-year term, amortized over 25 years.

a. What is the size of the monthly payment? The bank rounds the payment up to the next dollar.
b. How much of the 30th payment is· interest?
c. How much interest did the Beckers pay in the 3rd year of the mortgage?
d. Today, (March 2017), they have decided to increase the size of their mortgage and use the
money for house renovations. How much extra money can they borrow if they want to keep
the same monthly payment as before but still pay off the mortgage by March 2037 (twenty
 Business Mathematics 221

years from now)? The interest rate has fallen to 5.1%, compounded semi-annually for a five-
year term.
e. The Beckers increase their mortgage to $450,000 and amortize it over 20 years at 5.1%,
compounded semi annually. What is the size of their monthly payment? (The bank rounds up
the payment to the next dollar.)
f. What is the size of the final payment assuming that the interest rate stays the same over the
remaining twenty years?

36
The Blacks are considering purchasing a three bedroom townhouse in the Killarney area of
Vancouver. Their gross monthly income is $12,000 per month. The property taxes on the townhouse are
$3,000 per year, and they also have to pay a monthly maintenance fee of $150 per month for the upkeep
on the townhouse complex. Banks normally use the 30% rule: no more than 30% of your gross income
can go towards paying your mortgage, property taxes, and monthly maintenance fees. What is the largest
mortgage a bank would authorize if the mortgage is amortized over 25 years and the rate of interest is
5.6%, compounded semi-annually? (Assume monthly payments.)

37
Five years ago the Smiths purchased a home in North Vancouver for $650,000. They made a
down payment of exactly 20% and mortgaged the balance with Westminster Savings Credit Union. The
interest rate was 5.6%, compounded semi-annually, for a 5-year term, amortized over 25 years.

a. Calculate the size of the monthly payment required. The credit union rounds the payment up
to the next dollar.
b. What percentage of the original mortgage was paid off in the first 3 years?
c. How much interest did the Smiths pay in the fourth year of the mortgage?
d. The Smiths, after having made 5 years of payments, made a lump-sum payment to reduce the
outstanding balance to $450,000. What was the amount of the lump-sum payment?
e. After making the lump sum payment, the Smiths renew their mortgage for another 5-year
term, amortized over the remaining time, at 6.8%, compounded semi-annually. Calculate the
new monthly payment. Round the payment up to the next dollar.
f. Assuming the interest rate remains the same over the remaining time, what is the size of the
final payment?

38
In October 2002 the Reids obtained a mortgage for $380,000 at 6.8% interest compounded semi-
annually, for a 5-year term, amortized over 25 years. (The bank rounds the payment up to the next
dollar.) Today, (October 2007), they have decided to increase the size of their mortgage and use the
money for house renovations. How much more money can they borrow if they want to keep the same
monthly payment as before but still pay off the mortgage by October 2027 (twenty years from now)?
The interest rate has fallen to 4.3%, compounded semi-annually for a five-year term.
222

39
You purchase a new car. The dealer offers you terms of 20% down and the remainder financed
over five years at an interest rate of 8% compounded monthly.

a. Find the size of your monthly payment if your first payment is due at the end of the
month and the price of the car was $33,906.25 including GST, PST, documentation
fee, and government environmental levies.
b. What is the cost of financing (how much interest will you pay over the life of the
loan)?

40
You would like to save for your retirement by making monthly deposits of $200 into an account.
What nominal interest rate of interest, compounded monthly, must you earn to accumulate $1,000,000
in thirty years? Assume that the first payment will be at the end of the month.

41
You are considering quitting smoking due to the high cost of a pack of cigarettes. You smoke 1
pack a day at a cost of $7.50. If you put the $7.50 you would have spent on cigarettes, into a savings
account earning 5.75% interest compounded daily, how much would you have in the bank at the end of
ten years?

42
Upon graduation, you have a student loan of $15,000. The most you can afford to pay is $550
per month. How long will it take you to repay the loan with payments of $550 per month starting in one
month if the interest rate is 6% compounded monthly?

43
Kent sold his car to Carolyn for $1,000 down and monthly payments of $120.03 at the end of
every month for 3.5 years. The interest rate charged is 12%, compounded monthly. What was the selling
price of the car?

44
Terry bought a car with $5,000 down followed by equal monthly payments of $783.41 at the end
of every month for 2 years at 16% compounded monthly.

a. What is the selling price of the car?

b. What is the cost of financing?

45
Fred paid $14,000 to buy a used car. He made a down payment followed by equal monthly
payments of $249.50 at the end of every month for 4 years at 8% compounded monthly.
 Business Mathematics 223

a. What is the size of the down payment?

b. What is the cost of financing?

46
For $42,000 an individual can purchase a 5-year annuity from Continental Life and receive
monthly payments of $871.85 for 5 years with the first payment one month from now. What effective
rate of interest does this investment earn?

Deferred Perpetuities
47
. A scholarship fund is to be set up. The fund will pay out a scholarship of $20,000 every year with
first scholarship paid out two years after the fund is set up. Find the size of the donation needed. Assume
the fund will earn 10% effective.

48
A bursary fund for BCIT honor students is to be funded by a perpetual fund. The fund earns interest
at 10% compounded annually and is to pay $30,000 each year, with the first payment four years after the
fund is set up. Find the size of the initial funding that is required.

49
An alumnus wants to donate a sum of money to his Alma Mater that will provide a scholarship of
$750.00 every six (6) months in perpetuity. If money can be invested at 6% compounded semi-annually
and the first $750.00 is to be awarded at the end of one year, how much must he donate to the school
today?

50
You are considering purchasing shares of New Wave Technology Corp. The company has stated
that they will pay dividends of $0.72 per share every three (3) months with the first dividend paid
exactly four (4) years from today. If the current interest rates are 8% compounded quarterly, what
would you be willing to pay for one share today?

Using All 5 Keys

51
You just celebrated your 40th birthday. You dream about retiring when you tum 55. You currently
have $80,000 accumulated in your retirement plan. You decide to make deposits each month into a
retirement plan for exactly 15 years, starting today. You want to purchase an annuity which will pay you
$6,000 per month for l 0 year, with the first withdrawal starting one month after your 55th birthday. The
retirement plan and the annuity earn 6% compounded monthly.

a. How much must you deposit each month into your retirement plan?
224

b. How much interest will you earn over the ENTIRE 24 years?

52
Barney just celebrated his 40th birthday . He currently has $52,034 accumulated in his retirement
plan and he plans to continue making equal monthly deposits into a savings account for 15 years,
starting today. Two months after his last deposit, he intends to withdraw $4,000 per month for his living
expenses for a period of 5 years. The invested funds earn 6%, compounded monthly, for the entire 20
years.

a. Find the size of the monthly deposits.

b. How much interest will he earn over the entire 20 years?

53
You have $50,000 in your RRSP today. For the next 12.5 years you will contribute $500 per month
into your RRSP with the first deposit made one month from now. How much will you have in your
RRSP at the end of 12.5 years if you earn 6.9598% compounded monthly on your RRSP?

54
You take out a loan for $50,000 and make monthly payments of $500 with the first payment made
one month from now. If the interest rate on the loan is 6.9598% compounded monthly, how long (in
months) will it take you to pay off the loan?

55
Starting today, you will contribute $695.09 per month into an RRSP for a period for 5 years. You
will then use the accumulated funds to purchase an annuity with monthly payments paid out over 12.5
years. What will be the size of the monthly withdrawals if the first withdrawal is made 2 months after
the last deposit? Assume you earn 6.9598% compounded monthly the entire time.

56
What amount will be in an RRSP after 20 years if monthly contributions of $300 are made for the
first 15 years and then contributions of $600 per month are made for the subsequent 5 years? The first
deposit is made one month from now and the funds invested in the RRSP earn 7% compounded monthly.

57
Starting today, you contribute $1,200 every 3 months into your RRSP for five years. The interest
rate was 10% compounded quarterly for the first 2 years and 9% compounded quarterly for the last 3
years. How much will you have in your RRSP at the end of 5 years?

58
Herb has made contributions of $2,000 to his RRSP at the end of every 6 months for the past 8
years. The RRSP has earned 9.5% compounded semi-annually. Today, he moved the funds to a different
 Business Mathematics 225

play, paying 8% compounded quarterly. He will now contribute $1,500 at the end of every 3 months.
How much will he have in his RRSP 7 years from now?

59
The Alumni Association of BCIT would like to set up a scholarship that will pay out $2,000 every
6 months forever. The funds will be deposited in an account which earns 8.16% effective. The first
scholarship will be awarded 2 years after the funds are deposited. How much money do they need to set
aside today?

60
You plan to contribute $900 every 6 months into your retirement plan for a period of 15
years. How much INTEREST would you earn over the 15 years if your RRSP earns 7% compounded
monthly? The first contribution is made 6 months from now.

61
Barney just celebrated his 25th birthday. Starting today he will make contributions every month
into his retirement plan for a period of 30 years. How much must Barney contribute every month to his
retirement plan so he can withdraw $5,000 per month for a period of 20 years with the first withdrawal
starting two months after his last deposit? Assume Barney earns 8.5%, compounded quarterly, the entire
time.

62
Marika has already accumulated $18,000 in her RRSP . If she contributes $2,000 at the end of
every 6 months for the next 10 years, and $300 per month for the subsequent 5 years, what amount
will she have in her plan at the end of the 15 years? Assume that her plan earns 9%, compounded semi
annually, for the first 10 years and 9% compounded monthly for the next 5 years.

63
How much larger will the value of an RRSP be at the end of 25 years if the contributor makes
month-end contributions of $300 instead of year-end contributions of $3,600? In both cases the RRSP
earns 8.5%, compounded semi-annually.

64
What will be the amount in an RRSP after 25 years if contributions of $2,000 are made at the
beginning of each year for the first 10 years and contributions of $4,000 are made at the beginning of
each year for the subsequent 15 years? Assume that the RRSP earns 8%, compounded quarterly.

Notes

1. $112,175.55
2. $5.5 years, $8,450 interest earned
3. a. 5 years
226

b. $2,761.02

4. 11 years
5. a. 40 years and $192,040 of interest
b. b. You never will since the payment only covers the interest.

6. $27,402.55
7. $1,766.18
8. $66,820.18
9. $152,996.91
10. $48,752.43
11. a. $4,143.48
b. $1,206.71-$1,000 = $206.71 per month
12. a. $1,692.10

b.
13. a. $66/month

b.
14. a. $695.09
b. $50,000 - $695.09 × 60 = $8,294.60
15. a. $48,559.18
b. $2,500 × 60 - $48,559.18 = $101,440.82
16. a. $25,000
b. $27,000
17. a. $50,583.41
b. $918.93 per month

18. $720.87
19. $1,000
20. $1,000,000
21. $25,000
22. a. $50.00/share
b. a loss of $18.75/share

23. a.
a. $6,500
b. Gain of $1,500.

24. a.
a. The PV of the $7,000 perpetual payment is $1,400,000, so $1,500,000 today is better
b. $7,500 per month forever

25. $496.74 per month

26. a. i. $706.23/month ii. $688.03/month
b. $873.60

27. $150,000 less

 Business Mathematics 227

28. a. $6,600
b. $3,400 gain
29. a. i. 1% per month ii. 0.975879417% per month
b. $2,000 for the 1st month 1% per month and only $1951.76 using 0.975879417% per month.

Period Payment PMT Interest INTPrincipal Paid-PRNBalance Owing-BAL

30.
0 $1,200.00

1 $350 $12.00 $338.00 862.00

2 350 8.62 341.38 520.62

3 350 5.21 344.79 175.83

4 175.83 + 1.76 = $177.591.76 175.83 0

TOTAL $27.59 $1,200.00

Final payment is $350- $172.42 = $177.58 using the calculator (slight difference due to rounding).
31. a. 1240.74 -> $1241.00/month
b. n = 239.8969885
c. 1st month: $332.35 principal, $908.65 interest 60th month: $459.53 principal, $781.47 interest
d. Principal paid off= $4,111.26: Interest is $10,780.74 e. $8,502.60/ $165,000 = 5.153%
e. Principal paid off= $23,554.39: Interest is $50,905.61
f. Principal paid off= $5,351.30: Interest is $9,540.70
g. Would need $141,445.61 to pay it all off
h. $1,113.48
32. a. $196,200 rounded
b. $1,341.82 → $1,342/month
c. $62,591.48
d. $177,071.48
e. $1,154.254 - $1,155/month
f. $813.47
33. a. 137,283.97..., $137,300 (rounded)
b. $895.95 ..., $896/month
c. $26,478.31
d. $5,777.69/$123,000 = 4.697%
e. $8,683.64
f. 939.527 ..., $940/month
g. The balance outstanding is $107,222.31
h. $545.58
34. a. $1,920.00 per month
b. 447.8742287/26 = 17.2259 years, so save 25 years - 17.23 years = 7.77 years The interest savings is: $1,920 × 300- $960 ×
447.8742287 = $146,041
35. a. $3,000 (n = 299.8201542)
228

b. $2,430.53
c. $29,143.82
d. $77,273.24 ($452,806.23 - $375,532.99)
e. $2,982
f. $2,737.26

36. $519,290.79 $519,300

37. a.
a. $3,205 (n = 299.8729184)
b. 6.056% ($31,492.35/\$520,000)
c. $26,748.44
d. $14,419.50
e. $3,410
f. $3,297.03

38. $76,785.12 ($421,860.24- $345,075.12)

39. a. $550

b. $5875

40. 13.58942%
41. $36,994.34
42. 30 months
43. $5,100
44. a. $21,000
b. $2,801.84
45. a. $3,780
b. $1,756

46. %
47. $181,818.18
48. $225,394.44
49. $24,271.84
50. $26.75/share
51. a. $1,177.37
b. $428,073.40

52. $271.00/month $139,186 53.

53. $238,086.11
54. 150 months or 12.5 years
55. $500/month
56. $177,755.87
57. $30,723.99
58. $136,300.67
59. $44,449.82
60. $19,855.69
 Business Mathematics 229

61. $352.39/month
62. $188,830.07
63. Month-end: $302,244.75 Year-end: $290,846.96 $11,397.79 more
64. $223,904.53
Chapter 6: Investment Decisions

An investment consists of spending money or other resources (e.g., time) with the aim of receiving
benefits later.

INVESTMENT → BENEFITS

(now) (later)

Depositing money in an interest-bearing account is an investment. The purchase of a bond or treasury

bill is an investment. Also, company projects such as the purchase and installation of equipment, the
development of new products and increasing inventory held for sale are investments.

In this chapter we consider the problem of deciding whether or not an investment is worthwhile and
deciding which investments are preferable to others.

We view the financial aspect of an investment as being entirely determined by the cash flows associated
with it by how much money is spent and received and when it is spent and received.

To (substantially) simplify the analysis we will omit tax considerations and view the expected cash flows
of projects as being certain. Our methods and calculations will be similar to cases with taxes and risks
included, but will be less complex.

Example #1

Suppose a business plan would require an investment of $20,000 now and would result in cash flows of
$13,000 in one year and $8,000 in two years.

231
232

Then, if you ignore (just for a moment!) the time value of money, you can see that:

showing a positive profit.

Key Takeaways

A positive profit is a minimum requirement for a successful investment. No company would choose
investments which they expect to result in a loss.

Beyond this the question is: How can we decide whether this investment is preferable to others?

Suppose that an alternative investment was to place the money in a trust account which would pay 6%
effective over the two-year period, and from which withdrawals could be made at any time.

Then, if you try to match the sequence of cash flows you would have:

Time Interest Deposit Withdrawal Balance

0 $20,000.00 $0.00 $20,000.00

1 $1,200.00 13,000.00 8,200.00

2 492.00 8,000.00 692.00

The final balance of $692.00 shows that in the account we could have withdrawn a total payment of
$8,692 at the end of the second year, which is more than the original investment would allow; hence,
 Business Mathematics 233

the trust company account would be a better investment. The first investment made money, but not fast
enough to earn 6% effective.
Rate of Return

The rate at which profit is earned, the rate of return, is the key factor in investments. It is described
and used in exactly the same way as a compound interest rate. Usually it is stated as an annual
rate of return (a rate compounded annually, an effective rate). As in the usual calculation of compound
interest, the rate of return is applied to the outstanding balance (the unrecovered part of the investment).
Once the investment has been recovered, all additional inflows represent profit beyond the minimum
requirements.

We need a way to evaluate investments so that we can choose the best ones. The major methods of
evaluation involve discounting cash flows to find their present values (values at the beginning of the
investment).

There are several approaches to dealing with the rate of return. The first approach we shall consider is
to set a minimum rate, called the minimum acceptable rate of return (MARR), or minimum return on
investment (ROI).

If a company sets such a rate, then investments must meet or exceed this rate of return before the
company will fund them. Consequently, the company’s resources will be directed to only those projects
which provide adequate returns.

The setting of the minimum acceptable rate of return is a management decision and depends on a number
of factors, including the company’s historical earnings rate and the cost of capital raised by the company.

235
Net Present Value

Suppose that we set a minimum rate of return of 6% effective and apply it to our first example. Then,
the future inflows would have present values of:

And

So $12,264.15 is the amount it is worth investing now to receive $13,000.00 in one year (and earn 6%),
and $7,119.97 is the amount it is worth investing now to receive $8,000.00 in two years (and earn 6%
compounded annually).

Thus, to earn a rate of return of 6% per year, it would be worth paying a total of:

But the investment costs $20,000, which is $615.88 more than it should if 6% is to be earned!
Consequently, the investment should not be made if 6% is the minimum acceptable rate.

The discounting procedure above finds the net present value (NPV) of investments. This dollar amount
is the difference between what “should” be worth investing and what actually has to be invested. So the
inflows (benefits) are discounted to see the maximum amount worth investing, and the outflows (costs)
are discounted to see what actually is being invested.

Using PV for present value:

Example #2

Example #2

A small manufacturing business will cost $200,000 paid immediately and other expenses incurred are

237
238

expected to result in a net negative cash flow of $40,000 by the end of the first year. It is then expected to
earn annual positive net cash flows of $50,000 starting at the end of the second year and continuing each year
until the end of the fifth year. It will be sold at the end of the last year (year five) for $250,000.

If the investors have set a minimum rate of return of 20%, should they invest in the business?

To evaluate this investment by NPV we find for outflows:

PV of $200,000 is $200,000.00

PV of $40,000 (yr 1) is $33,333.33

Total PV Outflows $233,333.33

PV of $50,000 (yr 2) i $34,722.22

PV of $50,000 (yr 3) is $28,935.19

PV of $50,000 (yr 4) is $24,112.65

PV of $300,000 (yr 5) is $120,563.27

Total PV Inflows $208,333.33

So that:

The negative NPV shows that the investment did not earn the required rate of return.

Note that the net outflow of $40,000 in year 1 was also discounted to its present value of $33,333.33 to
make the evaluation. You could assume that if $33,333.33 were invested elsewhere it would earn 20%
and be available as $40,000 at year 1.

To summarize decisions based on NPV:

• If, for a given required rate of return, an investment has NPV > 0 (i.e., a positive net present
 Business Mathematics 239

value), then the investment earns more than the required rate.
• If NPV < 0 (i.e., a negative net present value), then the investment earns less than the
required rate.
• If NPV = 0, then the investment earns exactly the required rate.

Be careful to note that a negative NPV does not necessarily imply that the investment resulted in a loss.
It may be that the investment earned a profit, but did not do so fast enough to make the required rate of
return. This was the case in the example above, which would have had a profit of $210,000, but would
not have made the profit at a rate of 20% effective.

Learning Activity #1

To check the result of the last example, complete the following “account” calculation at 20% effective.

Time Interest Deposit Withdrawal Balance

0 $200,000 $200,000

1 $40,000 40,000 ?

2 ? 50,000 ?

3 ? 50,000 ?

4 ? 50,000 ?

5 ? 300,000 ?

You should find a final balance of $62,208 which shows that to earn 20% an extra $62,208 would be required
at the end of the fifth year. This again shows that the original investment did not earn 20%.

Question: How is the required $62,208 related to the NPV of -$25,000?

240

Learning Activity #2

Find the present value of each cash flow in the above problem using a minimum acceptable rate of return of
15% effective, and use the NPV to determine whether or not the investment would be acceptable using this
lower rate.

Now consider the problem of choosing between two different investments, which might both be acceptable
when considered [Link] the investors in Example 2, who are considering the manufacturing
business, have also the choice of purchasing a share in an existing business, which is described below. If they
have set a minimum rate of return of 15%, how can we determine which investment is preferable?

Example #3

The share of the existing business would cost $225,000 cash and is expected to produce cash inflows of
$15,000 a year for five years, then to be sold for $425,000.
For the share investment we have the following cash diagram:

To evaluate this investment by NPV at 15% effective, we have for the only outflow a present value of
$225,000, and for the inflows:

Time (year) Inflow PV

1 $15,000 $13,043.48
2 15,000 11,342.15

3 15,000 9,862.74

4 15,000 8,576.30
5 440,000 218,757.76
Total PV Inflows $261,582.43
 Business Mathematics 241

Then the net present value is:

In Learning Activity #2 you should have found that at 15% the NPV of the manufacturing investment is
$13,641.07; hence, by this criterion the purchase of the share would be more profitable.

Learning Activity #3

Use the net present value criterion to evaluate the following investments:
OPTION A: A small restaurant business in leased premises can be purchased for $30,000. It is expected to
produce cash inflows from operations of

14,000.
OPTION B: A similar restaurant with its own premises can be purchased for $92,000. It would produce net
cash inflows of $21,000 at the end of each year for 5 years and would be sold for $95,000 at that time.
If the prospective investors set a minimum rate of return of 20%, should they purchase a restaurant, and if so,
which one would be the best deal?

You should attempt the problem by discounting each cash flow and finding the NPV that way. In the
following setup for OPTION A, we have assumed that outflows will be treated as negative. This is a
standard practice and allows a straightforward total to get NPV.
242

Time (yr) Cash Flow PV

0 -$30,000 ?

1 12,000 ?

2 12,000 ?

3 12,000 ?

4 26,000 ?
(12,000 + 14,000)

NPV = $7,816.36

For OPTION B you should get an NPV of $8,981.22.

On the basis of NPV both restaurants are acceptable investments, but the second restaurant (OPTION B)
would be the most beneficial if only one is to be purchased.

Calculating the present value of the inflows can always be done by discounting each flow separately, but
in the case of equal flows it can also be done by an annuity. For example, in OPTION A the first three
cash flows of $12,000 can be treated as an annuity by setting:

and finding PV. Then find the present value of the final $26,000 at year 4. You should get a total of
$37,813.36, which agrees with the result above.
Cash Flow on the BAII Plus

goes here….

243
Internal Rate of Return

When NPV is positive we know that the project being examined earns more than the required rate. When
NPV is negative we know that the project being examined earns less than the required rate.

Only when NPV is zero does the project actually earn exactly the required rate. In this special case we
can view the inflows as paying back our investment plus interest at the required rate. The internal rate
of return (IRR) is the rate at which this happens, i.e., the rate for which:

Consider the manufacturing company in Example 1. In that case at a 20% effective rate of return the
present value of inflows was

$208,333.33 and the present value of outflows was $233,333.33 so that:

We also found in Learning Activity #2 that the NPV at 15% was $13,641.07.

If the required rate is changed to 10% effective, the present value of inflows becomes $299,315.12 and
the present value of outflows becomes $236,363.64 so that:

Similarly we can establish the following values:

Required Rate 16% 17%

NPV $5,156.73 -$2,927.98

It should be clear that the rate which would make NPV = 0 is between 16% and 17% effective. From the
graph below we can see that this value, the internal rate of return of this project, is about 16.6%.

245
246

The internal rate of return can be obtained from business calculators. In the case of the BAII Plus, place
the cash flows in the calculator as for the NPV and then:

Press I IRR11 CPT I

IRR= 16.63227%

The answer in your calculator will always be a periodic rate for whatever period was used for the flows.
Since the cash flows were yearly, the rate is an effective rate in this case.

[ADD NOTE: Since we are working with estimates, it is not uncommon to work exclusively with annual
rates.
Chapter 6 Review Problems

1
For an investment of $15,000 now, a company can receive $9,250 one year from now, and $9,200
two years from now. Check its earnings rate on this deal by comparing it to an account using the
following rates. For each part, fill out the following balance sheet

Time (year) Interest Deposit Withdrawal Balance

0 $15,000 $15,000

1 ? $9,250 ?

2 ? 9,200 ?

a. 10% effective
b. 20% effective
c. 15% effective

2
For the investment in the previous problem , find the NPV at each of:

a. 10% effective
b. 20% effective
c. 15% effective.

Relate each value to the results in (a), (b) and (c)

3
A finance company has an opportunity to purchase three promissory notes from a broker for a total
of $140,000 cash. The first note would pay $20,000 in one year, the second would pay $70,000 in two
years and the third $80,000 in three years. The finance company has set for itself a minimum acceptable
rate of return of 10% effective.

a. Evaluate the net present value of the investment at the company’s MARR.
b. State your conclusion about the acceptability of the profitability of this deal.

4
. A project is to cost $60,000 immediately and to produce net cash inflows of $20,000 at the end
of the first year, $30,000 at the end of the second year and $25,000 at the end of the third year. At the

247
248

end of the third year the business will be sold for $5,000. The company aims at a rate of return of 15%
effective.

a. Show whether or not the company will achieve its objective.

b. Find the value of the bonus paid at the start which would cause the project to earn exactly
20% effective.
5
Samuels Co. plans to start a repair business. It would provide net returns of $35,000 at the end of
the first year, and $50,000 at the end of each of the next three years. The equipment would then be sold
for $11,000 and the business terminated. Samuels aims at a rate of return of 15%. How much should
Samuels be willing to invest (now)?

6
Williams Co. has the chance to start a transportation company in the north. It would require
$108,000 to start the business and it would provide net returns of $35,000 at the end of the first year, and
$40,000 at the end of each of the next two years. The equipment would then be sold for $9,000 and the
business terminated. Williams aims at a rate of return of 12%.

a. Find the NPV at 12% effective, and the IRR. Should Williams Co. start this company?
b. If the government wanted to subsidize Williams so that it would earn 15% compounded
annually, what subsidy paid at the end of the three years would be required?

7
PA Lumber Co. is bidding on the right to cut lumber from a private forest for 10 years. The amount
of lumber permitted to be cut each year would allow PA to produce a net cash flow (excluding cost of
cutting rights) of $120,000 a year. If PA aims at a rate of return of 12.5%, how much could it afford to
bid as a lump sum for the cutting rights?

8
Iffi Co. plans to install insulation in a building which it plans to use for six years. The insulation
and its installation will cost $193,000 and will result in savings of $37,000 a year and will increase the
residual value of the building by $90,000. Find the internal rate of return of the planned installation of
the insulation.

9
Tessa Quaid has purchased a 10-year video rental franchise for $12,000. She will have to invest
another $22,000 in the store immediately. She expects returns of $8,000 a year at the end of each year.
Will TQ make a rate of return of at least 15%? What will be the internal rate of return?

10
TW Cable Co. plans to begin operation in a large town and to expand later to a nearby small town.
TW estimates its net cash flows to be:
 Business Mathematics 249

Time (year) Cash Flow

0 -$600,000

1 100,000

2 100,000

3 -50,000 (expansion)

4-9 150,000
10 700,000 (includes sale of business)

Find the net present value at 17% and the internal rate of return.

11
A food concession at an airport has a five year life and costs $130,000. Initial investments in
equipment, training and inventory amount to $75,000. The concession’s operation is expected to produce
net cash inflows of $50,000 a year and the residual value of equipment and the ending inventory are
expected to total $30,000.

a. Find the NPV at 15% effective.

b. Find the internal rate of return.

12
The owners of a small business are considering three offers from potential purchasers:

▪ Offer #1: $100,000 cash.

▪ Offer #2: $80,000 now and $10,000 at the end of each year for five years.
▪ Offer #3: $25,000 now and $25,000 at the end of each year for five years.

Which offer is most attractive if money is worth 9% to the owners?

13
A “10%” Government bond is to pay interest of $100 per year for nine years. Find the price
investors should be willing to pay for the bond if they want to earn:

a. 15% effective.
b. 10% effective.
c. 5% effective.
14
The Titan Package Co. finds that a $95,000 investment in automated packaging equipment will save
it $20,000 a year for the next 10 years. The equipment will have no value at the end of the 10 years. If
the company aims at a rate of return of 15% effective should it purchase the equipment? Why/why not?
250

15
The Fast Food Co. can expand into either of two locations. Location A will need an expenditure of
$130,000 now and will result in a yearly net cash inflow of $35,000 (at the end of each year) for 10 years
and no other benefits. Location B will need expenditures of $150,000 now and $50,000 in one year. It
will then produce a yearly net cash flow of $45,000 a year for the following 12 years (all at the end
of each year). In location B there would also be no other benefits. Which location gives the higher net
present value at a required rate of return of 16% effective per year?

Notes

1. a. Final Balance = -$1225, so this investment earns more than 10% effective
b. Final Balance = $1300, so this investment earns less than 20% effective
c. Final Balance = $0, so this investment earns exactly 15% effective
2. a. NPV = $1,012.40
b. NPV = -$902.78
c. NPV = $0

3. NPV = -$3,861.76. The deal does not earn 10% effective MARR.
4. a. NPV = -$198.90 at 15% effective. The company does not achieve its objective.
b. The NPV of the cash flows using i = 20% effective is -$5,138.88. To earn 20%, the NPV must = $0. Therefore the size of
the bonus must be $5,138.89 to have a net project cost $54,861.11 instead of $60,000.

5. NPV = $135,994.73
6. a. NPV = -$9,985.01 at 12% effective and IRR = 6.8305% for this three year project.
b. To earn 15% effective, NPV must = $0. Without the subsidy, the NPV at 15% is -$15,101.18. This is the PV of the required
subsidy at the end of the third year. Therefore, the subsidy = future value of this amount at 15% in three years or
$22,967.01.

7. NPV = $664,371.70. This is the amount PA can afford to bid.

8. IRR = 12.7118%
9. NPV at 15% effective = $6,150.15. TQ will make more than 15% effective. IRR = 19.6004%
10. NPV = $9,076.27 IRR = 17.29597% effective.
11. NPV = $22,476.94 IRR = 10.5635%
12. NPVs are $100,000, $118,896.51 and $122,241.28 respectively. Offer #3 is the most attractive one at 9%
effective.
13. A 10% bond implies that if the bond is purchased for $1,000, it will generate $100 annual interest, and the
bondholder will receive the $1,000 bond investment back at the end of the ninth year. To solve this problem,
find the PV of nine annual cash flows of $100 and the $1,000 paid at the end of the ninth year using the target
interest rate. a. $761.42 b. $1,000.00 c. $1,355.39
14. NPV = $5,375.37 Yes, the company should purchase the equipment.
15. NPV for A is $39,162.96 NPV for B is $8,508.47. Location A has the higher NPV at 16% effective.
Chap 6 Supplementary problems

1
You are considering a home-based business. You would like to open a kennel. You estimate that
your start-up costs will be $250,000 this year and you will need to spend another $10,000 next year.
You expect revenues of $35,000 per year for the first two years and $42,000 for the next three years.
Your expenses are thought to be $6,000 per year. At the end of five years you plan to sell the kennel
and anticipate receiving $255,000. You want to earn a minimum of 14% compounded annually on your
investment. All revenue occurs at the end of the year and all expenses are paid at the beginning of the
year.

a. Calculate the payback for this project.

b. Calculate the net present value for this project. Should you open a kennel?
c. If you require only 12% effective should you open a kennel? Why or why not?
d. How much should the start-up costs be reduced by so that you would be willing to open a
kennel? Use a MARR of 14%.
e. Your estimate of the kennel’s selling price may be too low. You think you may be able to sell
the kennel for more than $255,000. What is the minimum selling price you must have so that
you would be willing to open the kennel? Assume the start-up costs remain unchanged.
Round to the nearest $. Use a MARR of 14%.
f. Calculate the internal rate of return (IRR) for this project. Should you open a kennel if you
want to earn at least 14% compounded annually on your investment?

2
You are considering purchasing a home-based business that streams videos over the Internet. You
think that you can buy the business from the current owner for $120,000. You expect revenues of
$40,000 per year. Your expenses are thought to be $20,000 per year for the first 2 years and $10,000
per year for the last 3 years. At the end of five years you plan to sell the business, retire and move to
Las Vegas. You anticipate you could sell it for $130,000. You want to earn at least 16% compounded
annually on your investment?

a. Calculate the payback for this project.

b. Find the NPV. Should you buy the business?
c. How high could the purchase price of the business be and still make it worthwhile for you to
buy the Internet business?
d. You think you might be overly optimistic in your estimate of the selling price of the business.
What is the lowest selling price that you can accept and still be willing to buy the business?
Round to the nearest $.
e. Calculate the internal rate of return (IRR) for this investment. Should you buy the business?

251
252

f. Your accountant tells you that your projected annual revenue is too high. What is the
maximum annual decrease in revenue you could withstand and still have this investment be
worthwhile?

You want to start up a business in a mall selling CFL souvenirs. You plan to spend $80,000 in start up
costs. You anticipate that you will break even in the first year and second year, make $20,000 the third,
and make $20,000 each year after that. You plan to sell the business for $100,000 at the end of the sixth
year. You want to earn at least 15% effective on your investment.

a. What is the net present value of your business plan?

b. What is the internal rate of return?
c. Should you undertake the business plan? Why or why not?
d. You think you might be overly optimistic in your estimate of the selling price of the business.
What is the lowest selling price that you can accept and still undertake the project? Round to
the nearest dollar.

4
You are a restaurant owner and are considering expanding your business by buying the recently
vacated store next door. The purchase price is $50,000. You will also need to spend an extra $35,000 in
re-modeling. The larger dining room is expected to generate net profits of $12,000 a year for the first 4
years and $15,000 a year for the next 6 years. At the end of 10 years, you will retire. You expect to be
able to sell the restaurant for $70,000. You want to earn a minimum of 20% on your investment.

a. What is the net present value?

b. What is the Internal Rate of Return?
c. Should you expand the restaurant? Why or why not?
d. You hear news reports that real estate prices may rise over the next few years and that this is
especially true for commercial real estate. You now think you can sell the restaurant for more
than $70,000. What is the minimum selling price you must have so that you would be willing
to expand the restaurant? Round to the nearest $.

5
. You have decided to start a business selling herbal supplements. You estimate that you will have
$200,000 in start-up costs. Annual expenses are expected to be $30,000 and revenue is expected to be
$50,000 per year for the first 2 years and $75,000 in each of the next 3 years. You plan to sell the business
at the end of 5 years for an estimated $250,000. You want to earn at least a 15% rate of return on your
investment (MARR is 15%).

a. Should you invest? What is the IRR?

 Business Mathematics 253

b. What is the NPV? Should you invest?

c. Your accountant tells you that your estimated selling price is too high. What is the minimum
selling price you could accept and still have this investment be worthwhile?
d. One of the herbal supplements you were going to sell has recently been banned. This will
cause a substantial decrease in your revenue. What is the maximum annual decrease in
revenue you could withstand and still have this investment be worthwhile?

6
You are operations manager for Flatugas, a small natural gas producer in the Peace River Region
of British Columbia. You are considering investing in a new technology that captures more of the gas
from the wellhead. The technology will cost $1,000,000 and operating costs are estimated at $25,000
per year payable at the beginning of each year. The technology should result in $250,000 in extra natural
gas revenue per year and have the added benefit of reducing greenhouse gas emissions. The technology
is expected to last for 5 years when it could be sold back to the manufacturer for a guaranteed price of
$249,908.70. The company has a 15% MARR and requires a payback period of 4 years or less.

a. What is the payback period of the investment? Should you invest?

b. Calculate the IRR for the investment and explain how you would use IRR to make a decision
on whether to invest or not.
c. Calculate the NPV. Should you invest?
d. The director of finance reviews your analysis and tells you that a MARR of 13% is more
appropriate for the project. He also informs you that the company should be able to sell clean
air credits under the Kyoto agreement. What annual revenue would be required from the
credits to make this a worthwhile investment at a 13% MARR? (Assume 5 equal payments at
the end of the year).

7
The Blue Sky Resort plans to install a new chair lift to serve a new ski area. Construction of the lift
is estimated to require an immediate outlay of $190,000. In addition, the company must spend $30,000
today and $30,000 per year for the next 3 years to clear and groom the new area. The life of the lift
is estimated to be 11 years with a salvage value of $80,000. Profits from the lift (excluding the cost of
grooming and clearing) are expected to be $40,000 per year for the first five years, and $70,000 per year
for the next six years. The company wants to earn a minimum of 14% effective on the investment. All
revenue occurs at the end of the year and all expenses are paid at the beginning of the year.

a. Determine the net present value. Should they go ahead with the project? Why or why not?
b. Determine the internal rate of return. Should they go ahead with the project? Why or why
not?
c. Determine the payback.
d. You hear on the news that we might be in a recession for the next few years. You now
wonder if your salvage value estimate of $80,000 is too high. What is the lowest salvage
value you can accept and still undertake the project? Round to the nearest $.
254

8
A project is to cost $60,000 immediately and to produce net cash flows of $20,000 at the end of the
first year, $30,000 at the end of the second year, and $25,000 at the end of the third year. At the end of
the third year the business will be sold for $5,000.

a. If the company requires 15% effective, will it be able to achieve its goal?
b. Find the value of the bonus paid at the start which would cause the project to earn exactly
20% effective.

9
Due to a restricted capital budget, a company can undertake only one of the following 3-year
projects. Both require an initial investment of $650,000 and will have no significant salvage value at the
end. Project X is anticipated to have annual profits of $400,000, $300,000, and $200,000 in successive
years, whereas Project Y’s only profit, $1.05 million, comes at the end of year three.

a. Calculate the IRR of each project. On the basis of their IRRs, which project should be
selected?
b. On the basis of NPV, which project should be selected if the firm wants to earn at least 14%
effective on their investment?
c. On the basis of NPV, which project should be selected if the firm wants to earn at least 11%
effective on their investment?

Notes

1. a. 4+136/297 years = 4.46 years

b. -$17,152.42 ? No, because the NPV is negative.
c. The NPV is +$1,111.42 which is above zero so you should open a kennel.
d. $17,152.42
e. minimum selling price is $255,000 + $33,025.52 = $288,026
f. 12.12%, No because the IRR is below the minimum acceptable rate of return of 14%.
2. a. 4+30/170 = 4.176 years
b. $16,263.94 Yes buy the business because the NPV is positive (earning more than 16% per year).
c. Purchase price could increase by up to $16,263.94 to $136,264.
d. Lowest selling price you could accept is $95,840.
e. 19.45%/year. This exceeds the required rate of 16%/year so buy business.
f. Up to a $4,967.16/year decrease in revenue.
3. a. NPV = +$6408 .24
b. IRR = 16.73%
 Business Mathematics 255

c. Yes, undertake the business plan because the NPV is positive and the IRR is 16.73% which exceeds the minimum required
return of 15%.
d. $100,000-$14,822.65=$85,177 is the minimum selling price for the business.
4. a. -$18,573.73
b. 14.77%
c. No, because the NPV is negative and the IRR = 14.77% < MARR of 20%.
d. $70,000 + $115,004 = $185,004 is the minimum selling price.
5. a. 17.25% > 15% MARR so yes invest.
b. +$19,413.74. Yes, since the NPV is positive.
c. $210,952 (rounded to nearest dollar)
d. $5,791.42/year
6.

• a. 4.25 years so no, it is longer than 4 years.

• 9.95% is below 15% so no, do not invest.
• -$134,086.89 which is below zero, therefore do not invest
• $24,000/year
•
• NPV =+$7,979.31; yes, undertake the project because the NPV is positive
• IRR = 14.58% exceeds the MARR of 14%
• 6.57 years
• $80,000 -\33,722.42 =$46,277.58 is the minimum salvage value.
•
• NPV = -$198.90; no, the company does not achieve its objective.
• The bonus must be $5,138.89 to make the NPV equal zero
• 1. Project X: 20.8% Project Y: 17.3% Project X has the higher IRR and should be selected.
2. NPV: Project X: $66,712 Project Y: $58,720 Project X has the higher NPV and should be selected.
3. NPV: Project X: $100,085 Project Y: $117,751 Project Y now has the higher NPV and should be selected.
Chapter 7: Extra Problems

The following groups of questions may be useful in studying for tests.

257
Chapter 1 and 2 Review

1
Gems Inc., an upscale jewelry store, purchased a diamond ring for $2,500 less 40% and 5%. The
store’s average per unit operating expenses (overhead) is 30% of cost. The “regular selling price” of the
ring is established so that if the ring is sold in a “20% off sale” the net profit at the reduced price will be
20% of cost.

a. What is the reduced price of a ring in a “20% off’ sale?

b. What is the “regular price” of the ring?
c. What is the net profit if the ring is sold at the “regular price”?

2
Samsong Inc., a TV manufacturer lists its deluxe models for $450 each, less trade discounts of
15% and 8%. A retailer wants to make a net profit of 10% of the selling price. If expenses are 15% of
the selling price, at what price must he sell the TV?

3
The Alfacenturi Corp received an invoice dated July 12th for $5,400 with terms 3/10, 1.5/20, n/
45. ABC made a payment of $2,000 on July 20th, and a second payment on July 31st that reduced the
balance owing to $1,000. Find the size of the second payment.

4
An item that normally sells for $550 is put on sale for $357.50. Find the rate of markdown.

5
Radio Shock Electronics Co. makes televisions. Radio Shock sold a number of TV sets to a
wholesaler at $399.90 per set, after discount rates of 15%, 9% and 6%.

a. What is the list price of a TV set?

b. What is the size of the 3rd discount (in dollars)?

6
A retailer has a policy of maintaining a margin of 60% on all items.

a. What is their rate of markup?

b. Another company maintains a 60% rate of markup on all items. What is their percent margin?

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7
A company purchases a line of basketball sneakers for $60 from Niko Inc. and sells them for $120.

a. What is the markup in dollars?

b. What is the percent margin?
c. What is the rate of markup?

8
A pair of radically shaped skis costs the retailer $600 less chain discounts of 50%, 30% and 10%.
The retailer maintained a 65% margin on all items. Since spring was fast approaching the retailer
drastically reduced the selling price of the skis by 60%.

a. What was the regular selling price?

b. What is the sale price?
c. What is the rate of markup? (use the sale price not the regular price)

9
What is the cost of an item that sells for $80 if the rate of markup is 60%?

10
You know that a retailer makes $450 on the sale of a snowboard and the retailer has a rate of markup
of 60%.

a. What is the selling price of a snowboard?

b. What is the percent margin?

11
Filters-R-Us makes plastic coffee filters . It costs the company $6,500 to make 2,000 filters and
$8,000 to make 4,000 filters. Assume the relationship between cost and the number of coffee filters
produced is linear.

a. Find an equation that determines the cost, based on the number of filters produced.
b. How much would it cost to produce 3,000 coffee filters?

12
Dick, Ed and Fran formed a partnership. The partnership agreement requires them to provide capital
when and as required by the partnership in the ratio of [Link], respectively.

a. If the total required initial investment was $96,000, how much did each contribute?
b. One year later, Dick’s share of another injection of capital was $10,500.
1. What is the total investment made by the partnership including the initial
 Business Mathematics 261

investment?
2. What is Ed’s share of the entire investment?

13
At the Mac’s store in Burnaby a 500 ml bottle of sparkling water sells for 1.19CAD. Convert this
price to US dollars per gallon.

Rates:

• 1 CAD= 0.7125 USD

• 1.0567 Quarts= 1 Litre
• 1 Gallon = 4 Quarts
• 1,000 ml= 1 Litre

14
A diamond ring cost a jeweler $4,200. He requires a margin of 45%.

a. At what price should he sell the ring?

b. What rate of markup did he realize?

15
You are planning to open a neighbourhood pub and are doing some financial analysis. You can
lease the pub for $4,300 for one month, salaries will cost $12,100 per month, hydro and miscellaneous
expenses will be $450 per month. You can sell pints of beer for $4.75 each. Each beer costs you $2.05.

a. Write down the revenue and cost equations.

b. Determine the number of pints of beer you must sell in a month to break even. What are your
total sales (in dollars) at the breakeven point?
c. You’d like to make a profit of $4,000 in one month. Determine the number of pints that you
would need to sell.
d. Find the profit/loss if monthly sales (in dollars) are $14,250.

16
Liquidation Electronics sells an article for $1,020.00 less 25% and 15%. A competitor carries the
same article for $927.00 less 25%. What further discount must the competitor allow so that its net price
is the same as the discount store’s?

17
Find the equation of the line that passes through the points (-2, 5) and (3, 2).
262

18
The license to operate a taxicab costs $2,000 per month. Insurance is $250 per month and
maintenance averages $225 per month. Fuel costs $0.20 per kilometre. Taximeter rates are regulated and
set at $0.45 per kilometre.

a. Determine the breakeven point for operating a taxicab.

b. What are the units for , and what are the units for the slope?
c. What will be the profit/loss if 4,900 km are driven?
d. How many kilometres must be driven to make a profit of $2,500?

19
Forever-Green Press prints its elegant advertising calendars in November and sells them for
$9.60 each. The Company’s production capacity for this run is 60,000 calendars at a variable cost of
$3.80 each. The fixed costs (including artwork and licensing fees) allocated to this production run are
$232,000. Assume that the company can sell all the calendars it produces.

a. What is the breakeven point in (a) units; (b) sales; dollars; (c) percent of capacity?
b. How many calendars must be printed and sold if they want to make a profit of $87,000?
c. If the plant operates at full capacity and November’s entire calendar production run is sold,
what profit (or loss) will be made?
d. Graph the cost and revenue equations (same graph). Mark the BEP on the graph.
e. If the variable cost increases by 25%, the fixed costs increase to $240,000, what new selling
price should they charge if they want to earn a profit of $50,000, from the sale of 40,000
calendars?

20
Plutonium fuel rods are sold at a list price of $5,000 with chained discounts of 15% and 25%.

a. Calculate the net price of a fuel rod.

b. Calculate the single equivalent discount rate.
c. The company selling the fuel rods would like to add a third discount to bring the overall
discount rate to 40%. How large should the third discount be?
d. A competing firm offers a single discount of 35%. This amounts to a discount of $1,680 off
the list price. What is the list price?

21
. Two long distance phone companies offer the following quotes:

• PLAN A: $22 per month plus $0.04 per minute.

• PLAN B: $15 per month plus $0.08 per minute.
 Business Mathematics 263

Determine the point of indifference (i.e., the number of minutes per month where the costs are equal).

22
Compute the single discount equivalent to the discount series 40%, 10%, 5%.

23
An invoice for $3,200.00, dated April 20, has terms 2/10, n/30. What payment must be made on
April 30th to reduce the debt to $1,200.00?

24
On May 30th, Restorative Services Ltd. received an invoice for $2,600, terms 1.5/10, n/30. On June
9, Restorative Services made a partial payment of $1,379.00 on the invoice. How much is still owing
after the payment?

25
Albert, Bob and Chuck form a partnership and agree that half of the annual profit be distributed
in proportion to the total number of hours worked in the business during the year and the other half
in the ratio [Link], respectively. The hours of work for Albert, Bob and Chuck were 300, 200 and 100,
respectively. How much of the $180,000 profit should Chuck receive?

26
The regular selling price of merchandise sold in a store includes a margin of 60%. During a sale, an
item that cost the store $250 was marked down 40%. For how much was the item sold?

27
An item that cost the dealer $500 less 20%, 15%, carries a price tag at a markup of 150% of cost.
For quick sale, the item was reduced 30%. What was the sale price?

28
An appliance shop reduces the price of an appliance for quick sale from $1,560.00 to $1,195.00.
Compute the rate of markdown.

29
Log-it-All Forest Products sells Grade-A sheets of plywood at trade discounts of 25%, 3%. A
competitor has been selling the plywood at the same list prices but with trade discounts of 20%, 12.5%.
Log-it-All wants to beat the competitor’s prices by offering a third trade discount. At least how big must
the additional discount rate be to meet this objective?

30
What amount must be remitted if the following invoices, all with terms 4/10, 2/30, n/60, is paid on
May 10?
264

• $850.00 less 20%, 10% dated March 21

• $960.00 less 30%, 16.67% dated April 10
• $1040.00 less 33.33%, 25%, 5% dated April 30

Notes

1. a. $2,137.50
b. $2,671.88
c. $819.38

2. $469.20
3. $2,303.07
4. 35%
5. a. $550
b. $25.53
6. a. 150%
b. 37.5%
7. a. $60
b. 50%
c. 100%
8. a. $540
b. $216
c. 14.3%

9. $50
10. a. $1,200
b. 37.5%

11. a. , = the number of filters produced.

b. $7250
12. a. Dick: $28,000, Ed: $36,000, Fran: $32,000
b. $132,000 in total; Ed $49,500

13. 6.42 USD per Gallon

14. a. $7,636.36
b. 81.82%

15. a. , where = the number of pints of beer.

b. 6241 pints, $29,644.75
c. 7,723 pints
d. loss of $8,750

16. 6.47% or 6.5%

17.
18. a. 9,900 km
 Business Mathematics 265

b. x = number of km driven, slope= $/km

c. -$1,250
d. 19,900 km
19. a. 40,000 calendars; $384,000; 66.7% of capacity
b. 55,000 calendars
c. $116,000
d. $12/calendar
20. a. $3,187.50
b. 36.25%
c. 5.8824% (or 5.88)
d. $4,800

21. 175 minutes

22. 48.7%
23. $1,960
24. $1,200
25. $35,000
26. $375
27. $595
28. 23.4%
29. slightly more than 3.78%
30. $1,635.04
Chapter 3 and 4 Review

1
. Sam agrees to make a payment of $1,000.00 in 3 months at 8% simple interest. How much money
is Sam borrowing today?

2
. Alixe borrowed $5,000 today at 12% simple interest. How much will she owe the bank when she
pays off the debt in 180 days?

3
. Myrna borrowed $5,000 from the bank some time ago at 9% simple interest. She paid off the loan
today with one payment of $5,675 . How many months ago did she borrow the $5,000? (Hint: it’s easier
to use I = Prt.)

4
. You would like to save to purchase a Kia automobile. You deposit $3,500 into a GIC that pays 8%
interest, compounded quarterly. You need to save at least $5,000 to buy the car. If you make no more
contributions, how many years will it take you to reach your goal?

5
Lindsay made an investment of $1,500.00 made 42 months ago. It is now worth $2,110.65. What
nominal rate of interest, compounded semi-annually, did this investment earn?

6
. Answer the following

a. What nominal rate, compounded semi-annually, is equivalent to 9% compounded quarterly?

b. What nominal rate, compounded monthly, is equivalent to 9% compounded quarterly?
c. What nominal rate, compounded quarterly, is equivalent to 12% compounded annually?

7
. A debt of $6,000 due today and $8,000 due 2.5 years from today is to be paid off with two
payments. The first payment is to be made six months from today, and a second payment, $5,000
larger than the first, 15 months from today. What should the two payments be if money is worth 9%,
compounded quarterly? Use 15 months as the focal date.

8
. Pavel was supposed to pay $10,000 today. Instead, he arranged with the bank to pay $3,000 12
267
268

months from today, followed by two equal payments in 18 months and in 30 months from today. The
interest rate is 8% compounded quarterly. Calculate the size of each payment? Use 30 months as the
focal date.

9
. Anna borrowed $3,000 from her line of credit 8 months ago and a further $5,000 3 months ago .
She arranged with the bank to pay off the line of credit with two payments. The first payment, 6 months
from today, will be twice as large as the second payment made one year from today. The bank charges
you 9% interest, compounded monthly. Use 6 months as the focal date.

a. Find the size of each payment.

b. How much interest will she pay?

10
. A debt of $15,000 is due today. Instead, the borrower agrees to make one payment of $5,000 in
6 months and 2 equal payments in 3 months and 12 months from today, with simple interest charged at
6%. What is the size of each payment? Use 6 months as the focal date.

11
. Matt is going to purchase a car and is given two options to pay.

• He can pay $25,000 in cash today, or

• $12,000 after one year, and a second payment of $15,000 after 18 months.

Which option is better? Your answer should be stated in terms of today’s dollars. The interest rate is 7%
compounded semi annually?

12
. Mortel Inc. borrows some money today. In 10 months it must pay back $854,962.11. How much
did Mortel borrow today if it is being charged 8% interest, compounded monthly?

13
. An investment of $5,000 made 27 months ago is now worth $7,756.64. What nominal rate of
interest, compounded quarterly, did the investment earn?

14
. Julia is seeking an investment and has narrowed her search to three different funds.

Fund A offers a return of 12.2% compounded quarterly.

• Fund B offers a rate of 12.4% compounded semi- annually.

• Fund Coffers a rate of 12% compounded monthly.
 Business Mathematics 269

Convert all rates to effective rates and explain which rate is the best investment.

15
. Serena invests $3,000 in a bond fund today. Her investment earns 4% compounded semi-annually
in the first year, 6% compounded quarterly in the second year and 8% compounded annually in the third
year.

a. How much would the $3,000 investment be worth at the end of the third year?
b. If, in the fourth year the bond fund loses money and the value of her investment falls by
$200, what average annual rate of return, compounded quarterly, did she earn for the four
years that she held the investment?
c. A friend has invested in a different bond fund and says she tripled her money in eight years.
What nominal rate of interest, compounded semi-annually, did she earn?
d. At 9% compounded quarterly, how long would it take you to triple your money?

16
. Mike purchased a two-year term deposit that pays interest at 5.7% compounded quarterly. At the
end of the two years he renews the term deposit plus accumulated interest at 6.2% compounded semi-
annually for an additional three years. At the end of the five years he has $6,724.84? How much did
Mike initially pay for the term deposit?

17
Yolanda has a debt that comes due on November 26th and another that comes due on April 6th
of the following year. She would like to celebrate Valentines Day by paying off the debts with a single
payment on February 14th. How much should she pay if interest is 5% simple and each debt was for
$1,000? (Use February 14th as the focal date.)

18
. Davis borrowed $5,000, and 18 months later repaid the loan with a single payment of $5,600.
Calculate the simple interest rate.

19
Your investment of $8,500 grew to $8,893.09 at an interest rate of 4% simple. How many days was
it invested?

20
. How much money do you need to deposit to earn $850 in interest in 18 months with interest at 6%
compounded quarterly?
270

Notes

1. $980.39
2. $5,295.89
3. 18 months
4. 4.5 years
5.
6. a. %
b. %
c. %

7. . First payment: $4,284.02; second payment: $9,284.02

8. . $4,231.33 is paid at 18 and 30 months
9. . a. First payment: $5,871.56; second payment $2,935.78. b. $807.34
10. . $5,262.17
11. . In today ' s dollars, second option is worth $24,731.27< $25,000 , second option is cheaper.
12. . $800,000
13. %
14. . A: 12.7696%, B: 12.7844%, C: 12.6825% , B is the best investment.
15. a. $3,577.75
b. %
c. %
d. 12.34 years

16. $5,000
17. $2,004.02
18. 8.0%
19. 422 days
20. $9,096.43
Chapter 5 Review

1
What will be the amount in an RRSP at the end of 20 years if monthly contributions of $500 are
made at the end of each month and the RRSP earns 6% compounded monthly for the first 15 years and
7.5% compounded monthly for the remaining 5 years?

2
. You have $4,000 in your savings account today. You will deposit $500 per month starting one
month from now.

a. How much will you have in your savings account at the end of 5 years if you earn 6%
compounded monthly?
b. How much interest would you earn?

3
. You have just purchased a preferred share for $50.00. The company pays a dividend of $1.00 every
quarter. One year later, when you sell the share, the interest rate is 10% compounded quarterly. How
much will you gain or lose? (The next dividend is due in three months.)

4
. You purchase a car and finance $10,000. The loan is to be repaid with monthly payments of $200
made at the end of the month for 5 years. What effective rate of interest is being charged?

5
. You begin a savings plan. Starting now and for ten years, you deposit $100 per month into an
account that pays = 6%. After 10 years, how much interest will you have earned?

6
. Upon graduation, you have a student loan of $15,000. The most you can afford to pay is $550 per
month. How long will it take you to repay the loan with payments of $550 per month starting in one
month if the interest rate is 6% compounded monthly?

7
. You purchase a car for $25,000 and make a 20% down payment. Interest is charged at 6%
compounded monthly, and you will make 6 years of monthly payments. Find the size of the monthly
payment if your first payment is in one month. (Round payment up to next cent.)

271
272
8
. You have decided to take a passive approach to fitness and order the ‘Ab-Cruncher’ from the
shopping network. The Ab-Cruncher can be purchased for four easy monthly payments of $19.95
starting in one month. If interest is charged at 112 = 12%, find the cost of financing.

9
. You are 25-years-old and want to retire when you turn 55. Starting today you will deposit $200
into an RRSP every month for 30 years. You will then use the accumulated funds to purchase a 10-year
annuity with the first withdrawal one month after your 55th birthday. Assume that the RRSP and the
funds invested in the annuity earns 6% compounded monthly.

a. Find the size of the monthly withdrawals.

b. You decide that you will need $3,000 per month to live on when you retire at age 55. How
much extra money must you contribute to your RRSP every month, so you can withdraw
$3,000 every month for 10 years?

10
. You contribute $2,500 into your RRSP at the end of every quarter for 5 years. If your RRSP earns
8% compounded quarterly, how much interest will you earn in the 5 years?

11
. You borrow $50,000 and agree to make monthly payments for 15 years with the first payment one
month from now. Calculate the size of your monthly payments if the interest rate is 9% effective.

12
. Paula, a BCIT business student, borrowed $5,000 from her parents to cover expenses and agreed
to repay the debt with 20 equal monthly payments with the first payment due in 2 years. The interest rate
is 12% compounded monthly.

a. How large is each payment?

b. How much interest did Paula pay her parents?

13
. Barton Fink bought a second hand car with $1,000 down and signed a contract agreeing to pay
$299 every month for 3 years at 9% compounded monthly. The first payment is made one month later.

What is the cash price of the car?

How much interest will Barton have paid over the 3 years?

14
. A debt of $5,000 is to be paid off by making payments of $502.31 at the end of every 3 months. If
interest is 12% compounded quarterly, how long will it take to pay off this debt?
 Business Mathematics 273

15
. You need to set aside $2,500 for your vacation in Moose Jaw to celebrate graduation from BCIT
21 months from today. If your bank pays 9% compounded quarterly, how much must you deposit into
your account at the end of every quarter to have $2,500 in 21 months?

16
. A home entertainment centre may be purchased for $2,299 or by making payments of $199 to be
made at the end of every month for 12 months.

a. What nominal rate of interest, compounded monthly, is being charged?

b. What is the effective rate of interest rate charged?

17
. Fred Rock will deposit $500 in his RRSP every month for 15 years starting today. One month after
the last deposit, he will withdraw the money in equal monthly withdrawal for 10 years.

a. Find the size of the monthly withdrawals if the invested funds earn 7.0% compounded
monthly.
b. How much interest will Fred earn over the 25 years?

18
. Sam Shepherd wants to borrow some money from the Federal Business Development Bank to open
a doggy daycare business. The terms of the loan specify that no payments are required in the first year
of the business. Starting in the second year, payments of $1,000 at the end of every three months are
required for a period of five years (i.e., until the end of the sixth year of the business). If interest is 8%
compounded quarterly, how much money is he borrowing?

19
. Sam N Ella has just turned 50 years old today. He has decided to start saving for his retirement.
He plans to retire when he turns 65. He will set aside $1,500 per quarter, starting today, into a money
market account that earns 4% compounded monthly.

a. How much will Sam have on the day he retires?

b. How much interest will he have earned?

20
. Judith Fortune recently won $500,000 from a hospital lottery. She has decided to put some of her
winnings into an RRSP. Miss Fortune is 55 years old and plans to retire at age 65. She would like to
receive $2,000 per month for twenty years starting on her 65th birthday.
274

a. If she can earn 6%, compounded monthly, how much of her winnings should she put into her
RRSP today?
b. Miss Fortune has changed her mind and has decided to put half of her winnings into an RRSP
instead. How much extra will she receive per month when she retires?

21
. A dining room suite sells for $4,999. It may be purchased from Junk-O Furniture by making a
down payment, followed by monthly payments of $245 for a year-and-half. (The first payment is one
month later.) Interest is %. Find the size of the down payment.

22
. An alumnus wants to donate a sum of money to his Alma Mater that will provide a scholarship
of $750.00 every 6 months in perpetuity. If money can be invested at 6% compounded semi-annually
and the first $750.00 is to be awarded at the end of six months how much must he donate to the school
today?

23
. You have decided to purchase preferred shares of No-Vision Eye Treatment Centre that pays a
semi-annual dividend of $1.75 per share. Current interest rates are 7% compounded semi-annually and
the next dividend is due in six months.

a. What should you be willing to pay per share?

b. Two years later the interest rates drop to 5% compounded semi-annually. You have decided
to sell your shares. Calculate your gain or loss per share if the next dividend is due in six
months – and the dividend per share remains the same.

24
. You purchase 250 preferred shares of Silent Witness Security Systems Inc. that pays a dividend of
$2.25 per share every 3 months. Current interest rates %.

a. What would you be willing to pay for the 250 shares?

b. If interest rates rise to 8% compounded quarterly, how much would you expect to gain or lose
if you sell all of your shares? Note: the next dividend is due in 3 months and the dividend per
share is still $2.25.

Notes

1. . $247,586.15
2. a. a. $40,280.42
b. b. $6,280.42
 Business Mathematics 275

3. \Loss of $10
4. %
5. . $4,469.87
6. . 30 months
7. . $331.46
8. . $1.96
9. .
a. $2,241.59 per month
b. $267.67-\200=$67.67 /month

10. . $10,743.42
11. . $496.74
12. .
a. $348.33
b. $1,966.60

13. .
a. $10,402.59
b. $1,361.41

14. 3 years
15. . $337.75
16. .
a. 7.0708%
b. 7.3045%
17. a. $1,840.10
b. $1,840.10× 120- $500×180 = $130,812

18. . $15,106.20
19. .
a. $123,866.46
b. $33,866.46

20. .
a. a. $154,203.50
b. b. $3,242.47 - 2,000 = $1,242.47

21. . $981.42
22. $25,000
23. .
a. a. $50/share
b. b. Gain of $20/share

24. .
a. $37,500
b. $9,375 (loss)
Entire Course Review

1
. The executor of Sam Jackson’s estate is to divide $880,000 between three charities, the United
Way, Heart Fund and Red Cross in the ratio of [Link] respectively. How many dollars will each charity
receive?

2
. A publisher sells its romance novels with chained discounts of 10% and 20%.

a. Find the single equivalent discount rate.

b. The publisher would like to add a third chained discount to bring the overall discount to
31.6%. Find the third chained discount rate.

3
. An invoice with terms 2/10, 1/20, n/45 for $3,000 dated November l was partially paid by a $1,470
payment on November 10th and a second payment of $495 on November 20th. What is the outstanding
balance after the November 20th payment?

4
. Black Bear Brewing received an invoice dated November 28th with terms 1.5/10, n/30 for $8,050.
On December 6th, Black Bear mailed a cheque for $4,925 in partial payment of the invoice. What is the
outstanding balance after the December 6th payment?

5
. Chemco Co. sells its products at trade discounts of 25%, 10%. A competitor has been offering
products at the same list prices but with trade discounts of 30%, 10%. Chemco wants to beat the
competitor’s prices by offering a third trade discount. At least how big must the additional discount rate
be to meet this objective?

6
. What single discount is equivalent to a chain discount of 15%, 10%?

7
. If we want a single equivalent discount of 19.25% by using chain discounts of 15% and , what
must the second discount rate be?

8
. A furniture manufacturer offers his clients discount rates of 22.5% and 10%.

277
278

a. What single rate is equivalent to this series of rates?

b. If a client of this manufacturer paid $1,395 for a sofa, at what price was the sofa listed?

9
. Find the selling price of an item bought for $1,050.00 if the margin is 30%?

10
. If a company maintains a margin of 20% on all items it sells, what is the rate of markup?

11
. The regular selling price of an item sold in a store includes a margin of 60%. During a sale, an
item that cost the store $240 was marked down 20%. For how much was the item sold?

12
. The net price of an article is $612 after discounts of 15% and 10%. What was the list price?

13
. An item that cost the dealer $850 less 35%, 20% carries a price tag at a markup of 25% of cost.
For quick sale, the item was reduced 25%. What was the sale price?

14
. Find the cost of an item sold for $2,800 to realize a rate of markup of 40%.

15
. An article cost $300 and sold for $450. What was the rate of markup?

16
. The markup on an item is $50. If the margin was 40%, what was the cost?

17
. The price of an item is reduced for quick sale from $950 to $760. Compute the rate of markdown .

18
. You are taking a holiday in Britain. You are taking 850 US dollars with you. How many British
pounds can you buy with this money?

Rates:

• 1 USD= 1.38358 CAD

 Business Mathematics 279

• 1 British pound(£) =$2.21824 CAD

19
. A manufacturer of major appliances provides the following information about the operations of the
refrigeration division:

• Fixed costs per period are $26,880

• Variable costs per unit are $360
• Selling price per unit is $640, and
• Capacity is 150 units.

Compute the break-even point:

a. in units.
b. as a percent of capacity.
c. in dollars.

20
. Find the cost-equation for shipping one ton of a product if we know that it costs $500 to ship it a
distance of1,000 kilometres and $750 to ship it 2,000 kilometres. Assume that the relationship between
cost of shipping and distance shipped is linear. What would it cost us to ship one ton of the product 1,500
kilometres? Check your answer by putting the two points back into the equation.

21
. The High Tech computer shop assembles and sells computers. After reviewing their accounting
data, the following was determined.

• Fixed costs: $100,000 per year

• Variable costs $1,450 per computer
• Selling price per computer: $2,450
• Capacity is 1,000 computers per year

a. How many computers must it sell per year to break even?

b. What is the total yearly sales (revenue) required to break even?
c. Determine the computer shop’s yearly profit if it sells 250 computers per year?
d. How many computers would need to be sold to make a $25,000 profit?
e. If the variable costs increase to $1,600 per computer, what should you increase the selling
price to if you want to earn a profit of $25,000 from the sale of 125 computers?
280
22
. A small production company has 3 choices when renting a mobile crane for short periods:

• Choice A:It can pay $200 per hour used.

• Choice B: Pay an annual fee of $5,000 and pay only $100 per hour used.
• Choice C: Pay an annual fee of $12,000 and pay only $50 per hour used.

a. Write the cost functions for each alternative.

b. Calculate the points of indifference (where the costs are equal).
i. between alternative A and B
ii. between alternative B and C
c. Determine the range of hourly usage where the three alternatives would be preferred.

23
. You take out a loan for $10,000. The most you can afford to pay is $425 per month at the end of
every month. If the interest rate on the loan is 7% compounded monthly, how many months will it take
you to pay off the loan? (No decimal answers!)

24
. Kate made $600 monthly deposits at the end of every month for 5 years into an RRSP paying 8%
compounded monthly. Immediately after the end of the 5th year the rate is reduced to 6% compounded
quarterly.

a. If neither deposits nor withdrawals were made during the next 10 years, how much would
Kate have in her account at the end of 15 years?
b. How much interest did Kate earn over the entire 15 year period of time?

25
. You have just turned 30 years old. Starting today, you will make monthly contributions of $600 into
a RRSP for 25 years. One month after your 55th birthday you will begin taking monthly withdrawals
with your last withdrawal on your 70th birthday.

a. Find the size of these withdrawals if the interest rate is 6.5% compounded monthly.
b. How much interest did you earn over the entire 45 years?

26
. Barney wants to start saving for his retirement. Starting today, he will make monthly deposits to
his RRSP for 20 years. One month after his last deposit, he wants to withdraw $4,000 per month for 10
years. Assume the invested funds earn 6% compounded monthly for the entire time.

a. How much must Barney deposit into his RRSP per month to achieve his goal?
b. How much interest will Barney earn over the 30 years?
 Business Mathematics 281

27
. If you agree to make a payment of $1,500 in 3 months at 6% simple interest, how much money are
you borrowing today?

28
. You borrow $6,000 on November 15, 2021 at 8% simple interest. How much do you owe the bank
when you pay off the debt on March 15, 2022? What is the cost of financing?

29
. You borrowed $3,000 from the bank some time ago at 6% simple interest. You paid off the loan
today with one payment of $3,360. How many months ago did you borrow the $3,000?

30
. A debt of $6,000 was due 6 months ago and a debt of $14,000 is due 5 months from today. Instead,
the borrower agrees to make 2 equal payments, to be made 3 months, and 8 months from today, with
simple interest allowed at 12%. What is the size of the payments? Use 5 months as the focal date.

31
. You would like to save to return to school. You deposit $4,000 into a GIC that pays %.
You have decided to return to school when your savings grow to at least $6,000. If you make no more
contributions, how many years will it take you to reach your goal?

32
. An investment of $2,000 made 30 months ago is now worth $2,676.45. What nominal rate of
interest, compounded semi annually, did the investment earn?

33
. What nominal rate, compounded semi-annually, is equivalent to 12% compounded quarterly?

34
. Debts of $800 due today and $900 due in 27 months are to be repaid with 2 equal payments, 1 year
and 2 years from today. If the interest rate is 9% compounded quarterly, find the size of the payments.
Use 2 years as the focal date.

35
. You are searching for a bond fund.

• Fund 1 offers a rate of return of 6.4% compounded quarterly.

• Fund 2 offers a rate of return of 6.6% compounded semi annually.
282

Convert all rates to effective rates. Which fund is the better investment?

36
. You purchase a new car. The dealer offers you terms of 20% down and the remainder financed over
three years at an interest rate of 9% compounded quarterly. The cost of the car is $21,640.79.

a. Find the size of your monthly payment if your first payment is due one month after you
purchase the car.
b. What is the cost of financing (i.e., how much interest will you pay)?

37
. A TV set may be purchased on these terms: a down payment of 20% of the selling price is to be
made on the date of purchase, followed by 18 monthly payments of $40 each, with the first payment one
month after the date of purchase. If the interest rate charged is 10% compounded monthly, what is the
cash price (selling price) of the TV set?

38
. A used car that sells for $15,000 may be purchased by making payments of $500 per month for 3
years with the first payment due the day the car is purchased.

a. What nominal rate of interest, compounded quarterly, is charged?

b. What effective rate of interest is charged?

39
. You take out a loan for $12,000 with quarterly payments of $806.59 at the end of each quarter. If the
interest rate on the loan is 12% compounded quarterly, how many years will it take you to pay off the
loan?

40
. John will purchase an annuity that will pay him $5,000 per quarter for 10 years beginning when he
turns 60 years of age. If John’s current age is 45 years and the invested funds will earn 7.0% compounded
quarterly, what amount must he invest in the annuity today so he can collect $5,000 per quarter for 10
years with the first payment on his 60th birthday?

41
. A bursary fund for BCIT honour students is to be funded by a perpetual fund. The fund
earns interest at 8% compounded semi-annually and is to pay $2,000 every six months, with the first
scholarship paid in six months. Find the size of the initial funding that is required.
 Business Mathematics 283
42
. A friend has invested in a bond fund and says she doubled her money in five years. What rate of
interest, compounded semi annually, did she earn?

43
. A person can buy a piece of land for $130,000 now or $60,000 now and $100,000 in 5 years.
Which option is better if money can be invested at:

a. 6% compounded quarterly?
b. 10% compounded quarterly?

44
. Meryl just turned 50 years old. She put $50,002 into her RRSP today. She will leave the money in
her RRSP until her 65th birthday. She will then purchase a 10-year annuity with the first withdrawal one
month later. Use

a. What will be the size of the monthly withdrawals?

b. How much interest did Meryl earn over the 25 years?
c. Meryl has determined that she requires a larger monthly payment than that found in part (a).
She would like to receive $2,000 per month. How much additional money must she transfer
to her RRSP today so she can collect $2,000 per month instead?

45
. You invest $4,000 in a mutual fund. Your investment of $4,000 earns the following returns.

Year Return

Year 1 %

Year 2 %

Year 3 %

What average nominal rate of return, compounded semi annually did you earn?

46
. You purchase a new car. The dealer requires that you put $6,000 down followed by monthly
payments of $999 over four years. (The first payment is made one month after you buy the car). The
interest rate is 9.9% effective.

a. What is the cash price (selling price) of the car?

b. What is the cost of financing?
284
47
. You contribute $2,500 into your RRSP at the end of every quarter for 5 years. If your RRSP earns
8% compounded quarterly, how much interest will you earn in the 5 years?

48
. A computer that sells for $3,999 may be purchased by making a down payment , plus a series of
month-end payments of $225 for one and a half years. If the interest rate is 9% compounded monthly,
what is the size of the down payment?

49
. You are buying a house for $260,000 with a down payment of 20%. The interest rate is 8.5%
compounded semi-annually. The mortgage is amortized over 25 years for a 3-year term.

a. Calculate the size of the monthly payment. The lender’s policy is to round payments up to the
next whole dollar.
b. How many payments would be required?
c. How much interest will you pay in the first 3 years?
d. How much interest would you pay in the third year only?
e. You make an extra lump-sum payment of $40,000 at the end of 3 years. What is the
outstanding balance after this lump-sum payment?
f. When you go to renew your mortgage at the end of
g. 3 years, the rates have fallen to only 5.5% compounded semi-annually for a 3-year term. Find
the size of the new payment.
h. The payment determined in part (f) is much smaller than you thought due to the lower rate
and lump sum payment. You have decided to increase the monthly payment so that you pay
off the remaining balance in only 12 years instead of 22 years. Find the size of the new
payment. Round up to the next dollar.
i. Find the size of the final payment.

50
. A summer cottage, valued at $120,000, may be purchased by paying a $20,000 down payment
and financing the balance with a mortgage at 9% compounded semi-annually and monthly payments for
15 years.

a. Find the monthly payment. Round up to the next dollar .

b. How much of the 60th payment pays interest and how much goes toward the principal?
c. After the 100th payment, how much of the original mortgage is still left to be paid?
d. After making 115 payments, what percent of the original debt will have been paid off?

51
. You are contemplating purchasing a business selling computer software over the Internet.
 Business Mathematics 285

• You estimate that the purchase price would be $40,000.

• Your expenses should be $10,000 per year.
• You expect annual revenues to be $15,000 for the first two years and $20,000 each year after
that.
• You plan to sell the business at the end of six years and estimate you will get $55,000.
• Your MARR is 15% effective.
• Assume all expenses are paid at the beginning of the year and revenues are received at the
end of the year. Time diagram is required.

a. What is the IRR? Should you purchase the business? Why or why not?
b. Calculate the NPV. Should you purchase the business? Why or why not?
c. What is the highest purchase price you could pay and still be willing to buy the business?
d. What is the lowest selling price you could tolerate and still be willing to undertake the
business? Round to the nearest dollar.
e. You accountant advises you that your annual revenue projections are too high. What is the
maximum annual decrease in revenue you could withstand and still have this investment be
worthwhile?

52
. A food concession at an airport has a 7 year life and costs $200,000. Renovations will cost you
another $50,000. The concession’s operation is expected to produce net incomes of $60,000 a year. The
salvage value of the equipment and ending inventory are expected to total $40,000. Your MARR is 20%.

a. Find the IRR. Would you buy this concession? Why or why not?
b. Find the NPV. Would you buy this concession? Why or why not?
c. By how much does the purchase price of the concession have to fall to make the investment
worthwhile? What is the new price?
d. Your accountant tells you your salvage estimate is too low. What is the minimum salvage
value you require to make the investment worthwhile?
e. The Canadian government has decided to offer a one-time subsidy to encourage the creation
of concession stands at the airport. The subsidy is received one year later. How large of a
subsidy would you require to make the investment worthwhile?
f. Your accountant advises you that your projected net incomes are too low. What is the
minimum annual increase in revenue you require to make the investment worthwhile?

Notes

1. . United: $480,000; Heart: $240,000; Red Cross: $160,000.

2. . a. 28% b. 5%
286

3. . $1,000
4. . $3,050
5. . 6.67%
6. . 23.5%
7. 5%
8. .
a. 30.25%
b. $2,000

9. . $1,500
10. . 25%
11. . $480
12. . $800
13. . $414.38 is the sale price, the price before the 25% markdown was $552.50.
14. . $2,000
15. . 50%
16. . $75
17. . 20%
18. . £530.17 (GBP)
19. .
a. in units, 96;
b. as a percent of capacity, 64%;
c. in dollars, $61,440.

20. where is the number of kilometers driven, $625.

21. .
a. 100 computers
b. $245,000
c. $150,000
d. 125 computers
e. $2,600

22. .
a. , = the number of hours
b. i. 50 hours; ii. 140 hours
c. < 50 hours use A; 50-140 hours use B; > 140 hours use C.

23. . 26 months (The final payment will be smaller.)

24. .
a. $79,973.02
b. $43,973.02

25. .
a. $3,935.10
b. $3,935.10× 180 - $600× 300 = $528,318
 Business Mathematics 287

26. .
a. $779.79/month
b. $4,000×120 - $779.79× 240 = $292,850

27. . $1,477.83
28. . $6,157.81 and $157.81 is the interest
29. . 24 months
30. . $10,377.35
31. . 5.5 years
32. 12.0%
33. . 12.18%
34. $877.20
35. . 6.5552%, 6.7089%, Fund two is highest.
36. .
a. $550;
b. $2,487.37

37. . $832.54
38. .
a. a. i/month = 1.083423742%, %
b. %

39. . 5 years
40. . $51,370.97 today
41. . $50,000
42. . 14.35%
43. .
a. Financing more costly because $134,247 > $130,000
b. Financing cheaper because $121,027 < $130,000.

44. .
a. $1,654
b. $148,478
c. $10,459.89

45. %
46. .
a. $45,781.31;
b. $8,170.69

47. . $10,743.42
48. . $223.68
49. .
a. a. 1654.356115 .... $1,655/month
b. b. 300 payments (299 full-sized payments and 1 smaller final payment. (n = 299.6072073)
c. c. $51,140.25
288

d. d. $16,809.59
e. e. $159,560.25
f. f. 1037.575056.... $1,038/month
g. g. $1511.061987.... $1,512/month
h. h. $1,322.06

50. .
a. a. $1,004.52 .... $1,005/month
b. b. $414.21 principal repaid, $590.79 interest
c. c. $60,495.03
d. d. 48.345%

51. .
a. 18.62% > MARR of 15% so yes, buy the business.
b. $7817.58 > 0 so yes, buy the business.
c. up to $47,817.58
d. $55,000- $18,083 = $36,917
e. decrease of $2,065.69/year

52. .
a. IRR= 16.83% < 20% MARR so no
b. No, NPV=-$22,561.23, NEG.
c. falls by $22,561 to $177,439
d. $120,841 ($80,841 increase)
e. $27,073.47
f. $6,259/year
Glossary

fixed cost

method of substitution

minimum acceptable rate of return (MARR)

net present value (NPV)

return on investment (ROI)

revenue function

Compound interest

interest paid on previously earned interest as well as on the original principal.

contribution margin

Markup in dollars for one item

effective rate

The equivalent rate compunded annually

EQUIVALENT

placeholder

FOCAL DATE

The date at which we make the calcualtions.... (FIX)

Glossary term placeholder

Wouldn't a glossary be amazing for international students?

gross profit

internal rate of return (IRR)

The rate for which the NPV = 0

markup

291
292

Nominal rate

Percent annual rate in compound interest.

partial payment

percent gross margin

percent markup

percent net margin

Periodic rate

Periodic Compound interest rate

Profit

explanation placeholder

variable cost