Faculty of commerce – English Section mathematics of finance

Second year
Chapter 3-i Compound Interest

Example 1: A new car cost $12,000 and depreciates 25% a year. Find the book value at
the end of each year for 5 years and the annual depreciation in dollars

S = P (1 + i) n
= 12,000 (1-.25) 5
= $2478.66
Year Book Value Depreciation Allowance
0 12,000
1 12,000 × .75 = 9,000 $3,000
2 9,000 × .75 = 6,750 2,250
3 6,750 × .75 = 5,062.5 1,687.5
4 5,062.5 × .75 = 3,796.88 1,265.62
5 3,796.88 × .75 = 2,847.66 949.22

Example 2: How many years will it take $175 to amount to $230 at 4.4%?

S = P (1 + i) n
230 = 175 (1+.044) n
(1.044) n = 230/175
n log (1.044) = log 230 – log 175
n = (2.361728-2.243038)/.018700 = 6.347 years
Example 3: If a speculative investment increased in value from $30,000 to 80,000 in 5
years, what was the annual compounded rate of growth?

80,000 = 30,000(1+i) 5
(1+i) 5 = 80,000/30,000
1+i= (80,000/30,000)1/5 = 1.2167
i=.2167 = 21.7%