Professional Documents
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Ipe 481 Tahera Madam
Ipe 481 Tahera Madam
Prepared By,
:Lecture 1:
Accounting classification:
1) Managerial Accounting
2) Engineering Economy
Manager’s main duty is to make a plan. Then how can he execute that plan and how he controls
that (if problem arises). For this reason, manager need to know about some information related
to organization such as “cost”.
:Chapter – 2:
Organization
Types of organization:
3 types of organization in this world
These are:
1) Manufacturing
2) Merchandising
3) Service centre
Manufacturing Organization: from raw material buying to product production and handed over to
customer is done by Manufacturing Organization.
Merchandising Organization: buy from another person and then sell them to others
Service Centre Organization: selling services. Such as: Hospital, IT sector etc.
1. Manufacturing cost
2. Non-manufacturing cost
a) Direct material: to produce a product what is used as raw material. One company’s product can
be other company’s raw material
b) Direct labor: it is also known as Touch Labor. To produce a product, those employee touches the
product directly
c) Manufacturing Over Head (MOH): it has 7 different terms.
1) Indirect material: small/minor material such as glue
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
2) Indirect labor: without touching product physically those employee transfer or handle
product from one place to another such as night-guard, sweeper
3) Maintenance and repair
4) Heat and light
5) Property tax
6) Depreciation
7) insurance
These are:
Another Classification:
Product Cost: it is one type of inventoriable cost. It is cost needed to produce product and stock
them in the inventory.
Direct Direct
Material Labour
Prime Conversion
Cost Cost
Direct
Labor MOH
These are:
1. Indirect manufacturing
2. Factory Overhead
3. Factory Burden
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
:Lecture 2:
(1) Predicting cost behaviour in response to change in activity
(2) Assigning cost to cost object
(3) Making decisions
(4) Cost of quality
2000
1000 5000
5 10 5 10 15 20
Variable Cost Fixed Cost
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Quality of Conformance: if we produce a product and that become 100% defect free then it
is known as quality of conformance. It has to be done for upper 4 cost types.
(1), (2) : the cost to make a product defect free before it reaches the product customers
(1) : the cost before producing a product, from different faculty expert gathering of
comments is done and should provide training to employee etc
(2) : the cost related to the inspection and judgment done during production of product
(4) : the cost to repair defect after detecting defect in the product before we deliver product
to a customer
(3) : warranty cost (after handed over a product to customer, to sustain good name or profile
of company, there is a section to bear cost of repairing and maintenance to a certain period )
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Quality of Conformance
S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
QUESTION: some cost will be given and asked to specify which cost is what type of cost (P-68 of R.BOOK)
XYZ Company
Schedule Cost of Goods Manufactured
For the year ended (Date) [Manufactured Date]
----------------------------------------------------------------------------------------------------------------------------
Direct Material
Raw Material (RM) Inventory (Date) ----------
(+) Purchase of Raw Materials ----------
Raw Material Available for Use ----------
(-) Raw Material Inventory Ending (Date) ----------
Raw Material Used in Production ---------- ----------
Direct Labor ----------
Manufacturing Over-Head
--------------------------------------------- ----------
--------------------------------------------- ----------
--------------------------------------------- ----------
Total Overhead Costs ---------- ----------
Total Manufacturing Cost ----------
(+) WIP Inventory, Jan 01 (Opening Date) ----------
(-) WIP Inventory, Dec 31 (Closing Date) ----------
Cost of Goods Manufactured ----------
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XYZ Company
Income Statement
For the year ended (Date)
----------------------------------------------------------------------------------------------------------------------------
Sales ----------
(-) Cost of Goods Sold ----------
Gross Margin ----------
(-) Selling & Administrative Expenses:
Selling Expenses -------------
Administrative Expenses -------------
Total Selling & Admin Expenses ----------
Net Operating Income (NOI) ----------
Cost of goods sold how much product produce and how much product sold (calculation)
Net operating income loss or profit (if loss then the positive value shoed under “(XXXX)” first
bracket)
3 types of goods: (P-59 R.BOOK)
:Lecture 3:
o RM (Raw Material)
Klear-Seal Company
o WIP (Work In Process)
Schedule Cost of Goods Manufactured
o FG (Finished Goods)
For the year ended, December, 31
----------------------------------------------------------------------------------------------------------------------------
Direct Material
Raw Material (RM) Inventory, Jan 1 90000
(+) Purchase of Raw Materials 750000
Raw Material Available for Use 840000
(-) Raw Material Inventory Ending, Dec 31 60000
Raw Material Used in Production ---------- 780000
Direct Labor 150000
Manufacturing Over-Head
Utilities, Factory 36000
Depreciation, Factory 162000
Insurance, Factory 40000
Supplies, Factory 15000
Indirect Labor 300000
Maintenance, Factory 87000
Total Overhead Costs ---------- 640000
Total Manufacturing Cost 1570000
(+) WIP Inventory, Jan 01 (Opening Date) 180000
{1750000}
(-) WIP Inventory, Dec 31 (Closing Date) 100000
Cost of Goods Manufactured 1650000
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XYZ Company
Income Statement
For the year ended, December 31
----------------------------------------------------------------------------------------------------------------------------
Sales 2500000
(-) Cost of Goods Sold 1700000
Gross Margin 800000
(-) Selling & Administrative Expenses:
Selling Expenses 140000
Administrative Expenses 270000
Total Selling & Admin Expenses 410000
Net Operating Income (NOI) 390000
:Lecture 4:
:Chapter 5:
Types of Variable Cost: (1) True Variable Cost (2) Step Variable Cost
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Fixed Cost mainly 2 types. These are: (1) Committed Fixed Cost (2) Discretionary Fixed Cost
Mixed Cost:
Y = a + b X =>
Here,
a = fixed cost
b = per unit variable cost
X = activity level / base
Example: Cost of land is 5000 TK. After that per unit cost 10 TK. So, Mixed Cost is 5010 TK. How much
the number of Product but the fixed cost is always same and it is = 5000 TK
High-Low Method
Variable cost =
Highest = 8000
Activity Level
Lowest = 5000
9800
Cost
7400
Y=a+bX
We will get different types of value for different types of data. For this problem, usually
regression analysis used generally
Regression Analysis
∑ (∑ )(∑ )
b= (∑ ) (∑ )
∑ (∑ )
a=
X Y XY
b= $0.76
a= 3430.94 = $3431
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:Lecture 5:
:Chapter 6:
:CVP (Cost, Volume, Profit) Analysis:
Relations between C, V, P depends on 5 basic points:-
o Price of product
o Per unit variable cost
o Volume / level of activity
o Total fixed cost
o Mixed of products sold
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Total Sales
Profit
Total Expenses
Q Loss
Fixed Expenses
% Sales
,
So, CM ratio = = = 40%
So, from this upper relation we can say that: if $1 increases in sales then CM will increase 40%. We can
observe the effect of sales increment and decrement over the CM by CM ratio.
Say, sales increased $30,000. Then income will be increased 40% that means (30,000 x 40%) = $ 12,000
Previously they produce 400 units. Now they will increase 520 units more. Advertisement cost
will increase 10,000 (fixed cost will increase $10,000)
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Alternative Solution:
Expected total CM = 130000 x 40%
= 52,000
Present total CM = 10000 x 40%
= 40,000
12000
Change in F.E. 10000
2000
Say selling price will decrease $20 and fixed cost (for advertisement purpose) will increase
15000 and volume also increase 50%
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Previously $150
Now, (150+15)=$165
Per unit
Sales $250
$165
$85
Expected total CM (400 + 400 x 0.15) x 85 = 39,100
Present total CM 400 x 100 = 40,000
900
(-) Fixed Expenses (F.E.) 6000
(5100)
Difference
15000 (115000 - 100000)
15900 (75900 - 60000)
(900)
6000
$5100
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
:Lecture 6:
Contribution Margin Method:
BEP points in units sold = = = $350 ( )
( . .)
BEP points in units sold =
( . .)
BEP points in total sales dollars =
250 Q = 150 Q + 35000 + 4000
So, Q = 390
Or, units sold = = 390
Margin of safety:
Actual Sales ($) --- total sales ($) at BEP
100000 – 875000
12500
If it is high then it is much better
Quantity for MOS 390 – 350 = 40
Operating Leverage:
Degree of operating leverage =
$
Farm A = =4
$
Farm B = =7
<it makes relation or determine relation in between Sales and NOI>
If Sales increases 1 times then NOI will increases 4 times (for A).
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DOF 0.L after BEP, if sales increases profit will increase too at the same rate but DOF 0.L. will
decrease. In this rate of profit is not as varied as Sales rate varied. So, after reaching quite close to the
BEP, sales select nearby BEP otherwise profit will not vary so much.
A B
Selling Price $ 100 $ 150
(-) V.E. 75 132
CM $ 25 $ 18
If it is mentioned that sales commission will be based on the highest price products sales maximum,
then seller will try to sell product B maximum. But CM of product B is low so factory profit is less. So,
intelligent approach would be providing sales commission over CM. Then everyone wants to sell product
A.
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
:Lecture 7:
:Chapter 7
:Variable Costing + Absorption Costing:
Direct Material
Product Cost Direct Labor Product Cost
Variable M.OH
Fixed M.OH
Period Cost Variable Selling & Admin Expenses Period Cost
Fixed Selling & Admin Expenses
Example:
Variable costs per unit:
DM $2
DL $4
V.MOH $1
Variable Selling & Admin $3
Fixed cost per year
Fixed MOH 30,000
Fixed Selling & Admin 10,000
No. of units produced each year 6000
Determine unit cost for both costing & income statement with respect of two costing
Absorption Costing:
2+4+1+ (30000/6000) = $12
Variable Costing:
2+4+1 =$7
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Absorption Costing:
Sales (5000 x $20) $100000
Less costs of goods sold
Beginning Inventory 0
Add costs of goods manufactured (6000 x 12) 72000
(-) Ending Inventory (1000 x 12) 12000
Cost of goods sold 60000
Gross Margin 40000
(-) Selling & Admin(5000 x $3 + $10000) 25000
Net Operating Income (NOI) 15000
Variable Costing:
Those problems we should use variable costing where we can’t use absorption costing because fixed
cost and variable cost cannot be shown simultaneously in a table. So we should follow contribution
margin.
In two cases we found two values. Cost differences = ($12-$7)=$5 (unit cost)
1000 unit will be placed for sales. (1000 x $5)=$5000 is the total difference in between two income
methods.
Example:
Selling price per unit sold $20
Variable manufacturing cost $7
(per unit based)
Fixed manufacturing cost (per year) $150000
Variable Selling & admin per unit $1
Fixed selling & admin per year $ 90000
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Absorption Costing:
Year 1 Year 2 Year 3
sales 500000 400000 600000
(-)costs of goods sold
Beginning inventory 0 0 65000
(+) cost of goods 325000 325000 325000
manufacturing
Cost of goods sold 325000 260000 390000
Gross Margin 175000 140000 210000
(-) selling & admin
NOI
Year 2:
Absorption NOI > variable NOI
Year 3:
Absorption NOI < Variable NOI
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:Lecture 8:
:Chapter 8:
:Activity Based Costing:
No change is found in direct material and direct labor
MOH can be divided into several groups
Activity unit and activity costing: by multiplying these two we can find product cost
Example: Ferris Company
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Solution:
(1)
Activity Cost Level
AU PO SC Other
Assembly units Processing units Supporting
customers
MOH 250000 175000 25000 50000
Sell & Admin OH 300000 135000 75000 60000
Total 280000 310000 100000 110000
(2)
Activity cost pool Old cost Activity measure Activity rate
Assembly units 280000 (/) 1000 280
Processing units 310000 (/) 250 1240
Supporting customers 100000 (/) 100 1000
(3)
- Order of 80 file cabinets in 4 steps
- It is not mention which help is provided to customer. Supporting customers are not available.
Activity cost pool Activity measure Activity rate Activity based costing
Processing order 4 (x) 1240
Assembly unit 80 (x) 280
Supporting customer Not applicable 1000
(4)
- Find product margin and customer margin
- NOI should be find out by Income Statement
Income Statement
Sale ($595 x 80) $47600
Less cost
Direct material ($180 x 80) 14400
Direct labor ($150 x 80) 4000
Assembly unit ($ 280 x 80) 22400
Processing order ($1240 x 4) 4960 45760
Product margin 1840
Less supporting customer 1000
Customer margin 840
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
:Lecture 9:
:Chapter 9:
:Profit Planning:
Final budget of a company always fixed at first.
Budgetary Control: after determining budget, resource is allotted among different department and then
control it
MASTER BUDGET
Selling &
Budget Income
Sales budget Administrative
Statement
Budget
Cash Budget
Budgeted Balance
Sheet
Problem:
Budgeted sales for the next 5 months are 20000 units april
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
<we should have to determine schedule of expected cas collection with sales budget>
Given:
Production Budget:
<in April 4000 units at hand. For which month we will produce product, we also should produce 20%
product for next month>
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
In here, information needed for june but july is necessary in case of some calculation. But it is not
mandatory to show july result in table. Beginning inventory is the desired inventory of last month.
:Lecture 10:
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:Lecture 11:
Ending Finished Goods Inventory Budget:
( )
Pre-determined overhead rate = = = 50
( )
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Cash Budget:
Company wants after every month goes they should poses $30000
No need to return money to bank in april so as interest. But in case of returning money in June they
should have to pay interest too. ($2000)
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
1. Earning value: if we store some money in bank it will increase after certain period
2. Purchasing value: what we buy today at a certain price, we have to buy the same product at a
higher value in near future
# Interest:
1. Simple Interest: I = P x n x i
I = 1000 x 1 x 0.16
Or, I = 1000 x (81/365) x 0.16 from bank march to may money will be taken
2. Compound Interest:
1000 1000
1 2 3 4 1 2 3 4
160 1160
1 2 3
n
P
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
F=1811
n=4
i=16%
P= ?
n n n n
A = P (1 + ) ( )
( )
=P ( )
Or, A = P (A/P,i,n)
6. Equal payment series present worth factor (P/A,i, n)
( )
P=A ( )
Or, P =A(P/A,i,n)
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Problem:
1000 i=?
Solution:
P=1000 n=3 A=400
A/P = 400/1000 = 0.4
%
= 0.38803
% From chart
= 0.40211
Problem:
1500 i=12%
Solution:
P=1500 n=? A=200 i=12%
A/P = 200/1500 = 0.133
Table A.16 n=20.375
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
If in this way increment happened then it will not called “A” then it will called as “G” factor and
express in this way.
F=G(F/A,I,n-1)+…………..+G(F/A,I,1)
A=G/I – , ,
A=G(A/G,I,n)
, ,
P=Fx
0 1 2 3 n
= −1
1 2 3 4 n
Problem:
One pays the bank $1500 at 1st year.
2nd year $1700, 3rd year $1900, 4th year $2100, 5th year $2300, 6th year $ 2500
I=12% G=200 n=6
Table A.16 A/G = 2.1721
A = 2.1721 x 200 = $ 434.42
If G present then: A = A1 + A2
A2
A1
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
:Lecture 14:
Geometric-gradient series factor:
# Problem :
1st year base $360000, It increases at a rate of 7%. The present worth of 10 years of such receipts at an
interest rate of 15%, would be what?
7%
15% 10
<after 5 year they want $500000. We should keep a certain amount of money at a rate of interest is 20%
and that is F. but in the mean time after every one year they can withdraw a amount of money that is
known as A. at first what amount of money they left in bank is known as P. after each year if they want
interest at a certain rate then that is g. if they want increment after each year is G>
A A A 500000
P=200000 i=20%
= −1 i=15% g=7%
.
= −1
.
= 0.075
= 7.5%
.
, , , . ,
P= = =
.
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
7.5 % P = 2472066
So, P = = 2310392.52 ( )
.
# Compounding Frequency:
.
= 1+ −1
<if interest rate per month changed or after 1 year it is changed twice in a year then it will be the
desired formula>
l.m=c
problem:
nominal interest rate is 6%, compounding monthly with the time interval of 1 year , find i?
r=6% l=1 year m=12 (in a year how many month is known as compounding monthly)
.
0.6
= + − 1 = 6.17%
12
:Lecture 15:
# Continuous compounding:
= −1
Problem:
Loan interest rate 15%, compounded annually or 14% compounded weekly. Determine which one is
better?
. 0.14
= 1+ −1= 1+ − 1 = 15.005%
52
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Weekly was 14%. But we found out annually 15.005% which is higher than last time 15%. So annually
15% is better option.
# bases for comparison of alternatives
I = 20%, n= 5
Proposal Proposal Proposal
P A B
Annual revenue $50000 $60000 $70000
Annual costs of operation, maintenance , & property $54000 $46000 $39000
taxes
Present investment 0 $50000 $100000
Estimate salvage 5 years from now 0 0 $10000
Salvage value at the end of the line product sell price or money we got
# Cash Flow Diagram:
P
50000 (each)
5400
54000
A
60000
5400
50000 46000
B
70000
10000
5400
100000 39000
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
P, A, B comparison: (1) & (2) should have to use. All those money should be taken to present or to
future so that they will stay at the same level.
A
A
A F
P A B
Annual rev +50000 +60000 +70000
Annual costs of op, -54000 -46000 -39000
maint, prop.taxes
% %
Annual eq. -0
-A=P x -A=P x
present investment (1)
= 50000 x 0.3344 = 10000 x 0.3344
=-16720 =-33440
%
Estimate salvage 5 +0 +0
+A=F x
years from now
= 10000 x 0.1344
=+1344
-4000 -2720 -1096
None of the proposal can be accepted as far each case there occurs loss (-ve) sign.
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Method A Method B
First Cost $100000 $200000
Life 4years 8years
Salvage at Retirement 0 $10000
Operating, maintenance & property tax cost Unknown say K1 per $10000 per year (less than
year for A)
Revenue Unknown say K2 per Unknown but same as for A
year
10000 K1
A
B
F
K2
P
200000 K1 - 10000
If there is a problem exists in present equation method, then we will not consider it as problem.
But using annual equation method if there is any difference in calculated results then small year
should be converted to large year span. In case of here from 4years to 8years.
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
100000 100000
P1= 100000
P2= 100000 (we consider it as F) (if investment happened again after 4 years then it will convert
into P again from F)
Method A Method B
First cost:
A
P1+P2 P2
% %
=[ + ] =
= {100000 = 200000 x 0.2229
% %
= -44580
+[ }
= 157180 0.2229 = −35035.4
A B
Sal. At retirement +0 %
+= =
10000 0.0729 = +729
Op.,main. & property tax cost -k1 -(k1-10000)
Rev. +k2 +k2
-35035.4 –k1+k2 -33851 – k1+k2
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
So method B is preferable. If 6 year in A & 4 year in B then both should be converted into 12year
& so that A will be added by 2 part and B will be added 3 part.
Problem:
10 years ago to today a business man made his first annual deposit of $1000 into a fund paying 3%
interest compounded annually. 2 years ago the interest rate was increased to 4% on all funds. Find P,
the last of the deposit was made today.
:Lecture 16:
Capitalized equivalent method:
CE=?
= =
After each 4 year same thing happened infinite times. Now a days in this way it is determined.
Problem:
9000
9000
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
%
16000 9000
= + = + [0.3153] = 200000 + 35471 = $23547.125 ( )
0.8 0.8
Problem:
G=500
$1000
∞
I=15%
CE=? 200
A1=1000
%
A2=G x
%
A3=F x
A = A1+ A2 – A3
CE = A / i
Problem:
1500
1000
500; CE= 500/0.15
1 2 3 4 5 6 7 8
P=?; i=15%
%
P= + [0.497] = $8323.33
. .
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S. Ehtesham Al Hanif [0510035] BUET-ME (B-05)
Problem:
100 150 200 250
200 200 200
1 2 3 4 5 6 7
P=?; i=15%
Solution:
%
= + +
A1 = $1
A2 = 50 x 1.3263 =$ 66.315
%
200 − 166.35
= +
. .
= + 0.5718 = $ 1237.27
. .
A = A1 +A2
%
P1 =
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