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LT 1. Business Mathematics
LT 1. Business Mathematics
LT 1. Business Mathematics
TOTAL ECTS: 20
August 2012
Financial Management in Value Chain: Business Mathematics and its Application
(ABVM 322)
(20 ECTS)
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Financial Management in Value Chain: Business Mathematics and its Application
AUGUST 2012
1. General information
The learning tasks under this educational unit contain examples and learning
activities. Some also contains self-test questions at the end of each learning tasks
and or sections under learning tasks. The learning activities and self test
questions are designed to assist you analyze and grasp the ideas and issues
discussed in the learning task/sections. You are strongly advised to attempt these
activities and questions by yourself to check your level of understanding before
moving ahead to the next topics or section within the learning tasks.
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Financial Management in Value Chain: Business Mathematics and its Application
This educational unit is designed to introduce and equip Agribusiness and Value chain
Management (ABVM) graduates with technical capacity and knowledge of basic accounting
principles, mathematics of finance, financial management, and cost and management
accounting. It enables graduates to provide information used to make reasoned choice among
alternative uses of scarce resources in the business and economic activities.
It also gives students an opportunity to evaluate how earning an income or having access to
credit can serve to bring benefits for women. Students need to ask critical questions about
how increased access to resources can be translated into changes in the strategic choices that
women are able to make – at the level of the household and community, as well as at work.
Students will learn to be conscious of continuous financing mechanism, dynamism of
financial rules, regulations and principles, and financing risks to contribute to the
agribusiness and value chain management on continual basis.
2. Module objectives
The aim of this educational unit is to introduce and equip ABVM graduates with technical
capacity and knowledge of basics for managing finance in value chains. After completing
this educational unit, the learner will:
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Financial Management in Value Chain: Business Mathematics and its Application
o Apply basic concepts and principles of accounting and cost and management
accounting for business decisions,
o Prepare and Analyze financial Statements of agribusinesses,
o Analyze costing system in the value chain development,
o Evaluate the gender and financial empowerment procedures, and
o Make financial planning and forecast,
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Financial Management in Value Chain: Business Mathematics and its Application
Prepared by:
Adare Assefa (MBA)
Ebisa Deribie (MA)
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Financial Management in Value Chain: Business Mathematics and its Application
AUGUST 2012
Table of Contents
3.1. Business mathematics and its application.......................................................................1
3.1.1. Introduction.............................................................................................................1
3.1.2. Objectives................................................................................................................1
3.1.3. Sections...................................................................................................................1
3.1.3.1. Section I: Linear equations and their interpretative applications.....................1
3.1.3.2. Section II: Matrix algebra and its applications..............................................18
3.1.3.3. Section III: Linear programming...................................................................34
3.1.3.4. Section IV: Mathematics of Finance..............................................................53
3.1.3.5. Section V: Introduction to Calculus...............................................................73
3.1.4. Proof of Ability.....................................................................................................86
Major References.........................................................................................................87
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Financial Management in Value Chain: Business Mathematics and its Application
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Financial Management in Value Chain: Business Mathematics and its Application
3.1.1. Introduction
Dear student, welcome to the learning task Business Mathematics and its
application. This learning task is designed to expose you to the basic concepts and area
of managerial application of mathematics. It is divided into five sections: The first
section deals with the linear equations and its applications; the second section is
about the matrix algebra and its applications; the third section deals with linear
programming, the fourth section is dedicated to mathematics of finance and the fifth section
is about elements and application of calculus. You will find learning activities in
each sections. To successfully accomplish this learning task 140 study hours
is allotted.This learning task is executed both in class room and through students self
learning, students are expected to attend lectures in class rooms, engaged in group and
individual assignment/works and various kinds of assessments/PoA as stated under the
assessment plan.
3.1.2. Objectives
After working through this learning task, you will be able to:
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Financial Management in Value Chain: Business Mathematics and its Application
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Financial Management in Value Chain: Business Mathematics and its Application
3.1.3. Sections
Dear student! What is linear equation? In what way you think is useful in agribusiness
management? -----------------------------------------------------------------------------------------------
Introduction
Cognizant to the above fact, we need to be well acquainted with the fundamentals of linear
equations algebra and geometry as related to its agribusiness application. This section,
therefore, is dedicated to our study of linear equations.
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Financial Management in Value Chain: Business Mathematics and its Application
Linear equations: are equations whose terms1 are a constant times a variable to the first
power. Accordingly, equations that can be transposed to the form,
a1 x1+ a2 x2+ …+ an xn = c
are said to be linear equations. Where,
a1, a2, a3, … an and c are constants
x1, x2, x3, …xn are variables (unknown quantities)
a1 x1, a2x2, … an xn and c are the terms of the equation (terms of a linear
equation represent the parts separated by plus, minus, and equal signs)
As it occurs in many business application cases, a linear equation may involve two variables,
x and y, and constants a, b, and c in which case the equation relating x and y takes the form,
ax+by=c
On the other hand, 4xy + 7x = 8 is not a linear equation because the tem 4x y is a product of
a constant and two variables. Likewise 5x2 + 3y = 25 is not linear because of the term 5x2
which is a constant times one variable to the second – power.
Example: Assume that Ethiopian Electric Power Corporation charges Birr 0.55 per kilowatt-
hour consumed and a fixed monthly charge of Birr 7 for rent of electric meter. If y is the total
monthly charge and x is the amount of kilowatt-hours consumed in a given month, write the
equation for y in terms of x.
Solution: The total monthly charge will be, 0.55 times the number of monthly KWh
consumption plus Birr 7 for meter rent. Thus, using the symbols given,
y = 0.55x + 7
The equation of this example is linear with two variable x and y. In such linear equations, we
need to note that the constants can be positive or negative, and can be fractions when graphs
of these equations is plotted it will be a straight line. This is the reason for the term equation.
1
Terms of a linear equation represent the parts of equation that are separated by plus, minus, and equal signs.
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Financial Management in Value Chain: Business Mathematics and its Application
Linear Functions: functional relationship refers to the case where there is one and only one
corresponding value of the dependent variable for each value of the independent variable.
The relationship between x and y as expressed by
Y = 0.55x + 7
is called a functional relationship since for each value of x (independent variable), there is a
single corresponding value for y (dependent). Thus if we write y as expression involving x
and constants x is called the independent variable, then the value of y depends upon what
value we may assign to x and as a result it is called the dependent variable. Therefore, a
linear function refers to a linear equation, which does have one corresponding value of
dependent variable for each value of the independent variable.
Learning activity 1.1
Suppose that a car rent company charges Birr 65 per hour a car is rented. In addition Birr 150
for insurance premium. Write the equation for the total amount charged by the company in
terms of the hours the car is rented.
Solution: To plot the graph, you may arbitrarily select two values for x and obtain the
corresponding values for y. Therefore, let’s set x = 0. Then the equation becomes 2y – 3(0) =
3.
That is, 2y = 3
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y = 3/2
This means that when x = 0, the value of y is 3/2. So, the point with coordinates (0, 3/2) lies
on the line of 2y – 3x = 3.
This means, when y = 0, the value of x is -1. So, the point with coordinates (-1, 0) lies on the
line of equation 2y – 3x = 3. These two points are plotted on the coordinate plane with
horizontal “x – axis” and vertical “y-axis” as follows.y
4
(0, 3/2)
Fig 1. Linear Equation Graph
(-1, 0) 3
2
-2 -1 0 1 2 3 4 x
Find two coordinate points that satisfy the equation 3x + 4y = 24. Then using the two
coordinate points plot the graph of the given function.
The distance between two points: The distance between two points is the length of a
straight-line segment that joins the points. To determine the length of a given segment in
coordinate geometry, algebraic procedures are applied to the x – and y coordinates of the end
points of the segment. Distance on horizontal and vertical line segments are used in the
computation of the distance. Distance on a vertical segment (also called vertical separation)
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Financial Management in Value Chain: Business Mathematics and its Application
is found by computing the positive difference of the y- coordinates of the end points of the
segment. Distance on the horizontal segment (also called horizontal separation) is found by
computing the positive difference of the x-coordinate of the end points of the segment. Thus,
given two points (x1, y1) and (x2, y2), the quantity / x2 – x1 /, is called the horizontal separation
of the two points. Further, the quantity / y2 – y1 / is the vertical separation of the two points.
Example: Given the points A (-5, 7), B (-3, -9), C (-5, 15), D (12, 6), find the horizontal and
vertical distance of the segment,
a. AB b. AD c. BD
Solution:
a. The horizontal distance (Separation) of the points A (-5, 7) and B (-3, -9) is given by
Horizontal distance = / x 2 - x1 /
= /-3-(-5)/
= /-3+5/ = 2
Vertical distance = / y 2 - y1 /
= / -9 - 7 /
= /-16/ = 16
b. Horizontal distance = / x2 - x1/
= / 12 - (-5)/
= 12+ 5/ = 17
Vertical distance AD = / y2 - y1 / = / 6 – 7 /
= / -1 / = 1
c. Horizontal distance BD = / x2 - x1/ = /12- (-3)/
= / 12+3/ = 15
Vertical distance BD = / y2 - y1/ = / 6- (-9)/
= / 6 + 9/ =15
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Financial Management in Value Chain: Business Mathematics and its Application
Dear student, as you recall all lines in a coordinate plane are not vertical and/or horizontal.
Hence, in case the segment is slant to any direction the actual distance between (x 1, y1) and
(x2, y2) may be calculated from Pythagoras’ Theorem, using their horizontal and vertical
separations.
Fig1. 2. Places
of coordinates
B (x2, y2)
d =
Example: Calculate the distance d between the points (5, -3) and (-11, -7).
Solution :
d=
d=
That is, d= =
d= 16.5
Learning activity 1.4
Developing Equation of a Line: We have three alternative forms of developing the equation
of a straight line. These are, slope-intercept form, slope-point form, and two-point form. Let
us consider these approaches further.
The Slope – Intercept Form: Dear student, before considering slope intercept form of
developing equation of a line let’s have a brief look at the concept of slope or gradient. Slope
is a measure of steepness or inclination of a line and it is represented by the letter m. the
slope of a non-vertical line is defined in several ways. It is the rise over the run. It is the
change in y over the change in x. Thus, given coordinates of two points (x1, y1) and (x2, y2)
Rise y 2 y1
Slope = m = = , Where, x1 ≠ x2
Run x 2 x1
If the value of the slope is positive, the line raises form left to right. If the slope is negative,
the line falls from left to right. If the slope is zero, the line is horizontal. If the slope is
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Financial Management in Value Chain: Business Mathematics and its Application
undefined then the line is vertical. Dear student, please consider equally ranged graph and try
to find slope of any coordinates on the graph before reading the next example.
Example (a): Obtain the slope of the straight-line segment joining the two points (8, -13) and
(-2, 5).
Solution:
Therefore, the line that passes through these two points falls downwards from left to right.
On the other hand, if the equation of a line is given, then the slope can be determined more
simply. Thus, if a liner equation is written in the form y = m x + b, “m” is the slope and “b”
is often referred as the intercept term and it is the value at which the straight line intercepts
the Y-axis.
Example (b): An agent rents cars for one day and charges Birr 22 plus 20 cents per mile
driven.
a. Write the equation for one day’s rental (y) in terms of the number of miles driven (x).
b. Interpret the slope and the y – intercept.
c. What is the renter’s total cost if a car is driven 100 miles? What is the renter’s cost
per mile?
Solution:
a. The equation
y=mx+b
y = 0.2x + 22
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b. Interpretation
The slope, m = 20 cents (Birr 0.2) means that each additional mile driven adds 20
cents to total cost. b = Birr 22 is the fixed cost (the amount to be paid irrespective
of the mile driven). Hence, it will be the total cost when no mile is driven.
Cost per mile when x = 100 miles is given by total cost of driving 100 miles divided
by 100 miles. Putting it in equation form,
Learners form a small group and attempt and discuss on the question that follows
It costs Birr 2500 to set up the presses and machinery needed to print and bind a paperback
book. After setup, it costs Birr 2 per book printed and bound.
a. Write the equation for the total cost of making a number of books
b. State the slope of the line and interpret it.
c. State the y-intercept of the line and interpret it.
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The Slope – Point Form: In this form, we will be provided with the slope and points on the
line say (x1, y1). Then, we determine the intercept from the slope and the given point and
develop the equation. Accordingly, the expression we need further is the equation that is true
not only for the point (x1, y1) but also for all other points say (x, y) on the line. Therefore, we
have points (x1, y1) and (x, y) with slope m. The slope of the line is y - y 1 / x - x1 and this is
equal for all pair of points on the line. Thus, we have the following formula for slope-point
form:
Alternatively,
y – y1 = m (x – x 1)
Example: Find the equation of a line that has a slope of 3 and that passes through the point
(3, 4).
Solution: Given m = 3 and (x1, y1) = (3, 4). By substituting these values in the formula
y – y 1 = m (x – x 1)
We will obtain y – 4 = 3 (x – 3).
Then, y–4=3x–9
y=3x–9+4
y = 3 x – 5.
In another approach, y = m x + b where (x, y) = (3, 4)
y = 3x + b
4 = 3(3) + b
4=9+b
4 – 9 = b = - 5 is the y-intercept.
Thus, y = 3x – 5 is the equation of the line.
If the relationship between total cost (y) and the number of units made (x) is linear and if cost
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increases by Birr 3 for each additional unit made and if the total cost of making 10 units is
Birr 40 find the equation of the relationship between cost and number of units made.
The Two – Point Form: In this case, two points that are on the line are given and
completely used to determine equation of a straight line. In doing so, we first compute the
slope and then use this value with either points to generate the equation. Taking two points
designated by (x1 – y1) and (x2 – y2) and another point (x, y), we can develop the expression
for the equation of the line as follows.
Therefore, (y – y 1) (x 2 – x 1) = (y 2 – y 1) (x – x 1)
is the expression for the two-point form of generating equation of a straight line.
Example: A publisher asks a printer for quotations on the cost of printing 1000 and 2000
copies of a book. The printer quotes Birr 4500 for 1000 copies and Birr 7500 birr for 2000
copies. Assume that cost (y) is linearly related to the number of books printed (x).
a. Write the coordinates of the given points
b. Write the equation of the line
Solution:
b. To develop the equation of the line, first let’s compute the slope.
m = y2 – y1
x2 – x1
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= 7500 – 4500
2000 – 1000
= 3000 ÷ 1000 = 3
Then, consider the formula of two-point form of developing equation of a line as given by,
y – y1 = y2 – y1
x – x1 x2 – x1
Subsequently, by substitution this value in the above formula will result in;
In continuation, substitute the value (1000, 4500) in place of x1 and y2 in the equation
y – y1 = 3 (x – x1). As a result, you will obtain,
y – 4500 = 3 (x – 1000)
y – 4500 = 3x – 3000
y = 3x – 3000 + 4500
y = 3x + 1500 ……………………… is the equation of the line.
Dear student form a small group and attempt the following question:
As the number of units manufactured increases from 100 to 200 manufacturing cost increases
form 350 birr to 650 birr. Assume that the given data establishes relationship between cost
(y) and the number of units made (x) and assume that the relationship is linear. Find the
equation of this relationship.
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Linear Cost – Output Relations Analysis: In order to grasp the concept of linear cost
output relations, let us consider the relationship among different types of cost on the
following a coordinate plane.
H
Variable
cost (VC)
Total cost (TC)
F
E
D FC FC
Fixed cost (FC)
D A
B C Number of units (Q)
Definitions: Cost is resource sacrificed to produce a given good or render service. Different
classification of costs based on different basis for classification is possible but for our
purpose here let’s define fixed cost, Variable cost and the sum of the two totals cost as
hereunder.
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Fixed cost is a cost component that does not change with the number of units produced
whereas variable cost is a cost component that varies with change in number of units
produced. Then at each level of production, total cost is the summation of fixed cost and
variable cost. Marginal cost is the additional cost incurred in producing one more unit of
output.
Illustration: Assume that total manufacturing cost and the number of units produced are
linearly related. The total cost originates from the fixed cost line because of zero level of
production the total cost will be equal to the fixed cost (see the above figure (Fig 1.2.1)).
Accordingly,
- Fixed costs (FC) = AD = BE = CF
- The segment BG is the Total Cost (TC) of producing AB units of outputs.
- The segment CI is the TC of producing AC units of outputs.
- The segment AD is the TC of producing zero units of outputs.
- The ratio
- Therefore, marginal cost and VC/unit are the considered as the slope of TC line and
they are constant as long as total cost and quantity produced are linear.
- When TC ÷ Q = Average cost per unit (AC).
- Unlike MC and VC per units, AC per unit is not constant although cost and quantity,
produced are linearly related.
Break – Even Analysis: Definition: Breakeven point is the level of sales at which profit is
zero. According to this definition, at breakeven point sales are equal to fixed cost plus
variable cost. This concept is further explained by the following equation:
[Break even sales (BS) = fixed cost (FC) + variable cost (VC)]
Breakeven sales= Selling price (SP)*Quantity (Q)
VC= VC per unit*Quantity (Q)
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SP*Q=FC+ VC/unit*Q
SP*Q-VC/unit*Q=FC
Q(SP/unit-VC/unit)=FC
Q=FC/Sp/unit-Vc/unit- is quantity to be produced or sold at
breakeven point
To further our understanding of break-even analysis, let us consider the following break-even
Revenue/ cost
chart.
Profit (R > C)
Revenue
BEP
Variable cost
FC
R= PQe and
C = VQe + FC
Loss Fixed cost (FC)
(R < C)
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iii. To the left of the break – even point the revenue line is found below the cost line
and hence any vertical separation indicates a loss while to the right the opposite is
true.
iv. The total variable cost, which is the gap between the total cost and the fixed cost
line increases as more units are produced.
v. Important linear cost – output expressions (equations):
Total cost (TC) =VC+ FC
Revenue (R) = SPQ
Average Revenue (AR) = R ÷ Q = PQ ÷ Q = SP
Average Variable Cost (AVC) = VQ ÷ Q = VC = Slope (m)
Average Fixed Cost (AFC) = FC ÷ Q
Average Cost = C ÷ Q = AVC + AFC
Profit ( ) = R – TC
Example: A book company produces children’s books. One time fixed costs for Little Home
are $12,838 that includes fees to the author, the printer, and for the building. Variable costs
amount to $14.50 per book the books are then sold to bookstores around the country at
$39.00 each. How many books must be printed and sold to break-even?
Solution:
Given, V = $14.50
FC = $12,838
Sp = $39
Let Q = the number of books printed and sold
Thus, C = VQ + FC
TC = 14.5Q + 12,838 is the cost equation.
The revenue (R) is also given by,
R = SP Q
= 39Q
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Then to obtain the quantity of books to be printed and sold to break-even, you need to equate
the R and C equations.
39Q = 14.5Q + 12,838
39Q – 14.5Q = 12838
24.5Q = 12838
Q = 12838/24.5
Q = 524 books must be printed and sold to break – even.
Learning activity-1.8
Dear learners form a small group and attempt the following question
A manufacture has a fixed cost of Birr 60,000 and a variable cost of Birr 2 per unit made and
sold at selling price of Birr 5 per unit. Required:
a. Write the revenue and cost equations
b. Computer the profit, if 25,000 units are made and sold
c. Compute the profit, if 10,000 units are made and sold
d. Find the breakeven quantity
e. Find the break-even birr volume of sales
f. Construct the break-even chart
Market Equilibrium Analysis: Market equilibrium analysis is concerned with the supply
and demand of a product in a case they are linearly related.
Demand of a product: is the amount of a product consumers are willing and able to buy
at a given price per unit. The linear demand function has a negative slope (falls
downward from left to right see the figure below) since demand for a product decreases
as price increases.
Supply of a product: is the amount Q, of a product the producer is willing and able to
supply (make available for sell) at a given price per unit P. A linear supply curve or
function has a positive slope (rises upward from left to right t see the figure below) and
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Financial Management in Value Chain: Business Mathematics and its Application
the price and the amount of product supplied are directly related. This is because of the
fact that suppliers are more interested to supply their product when the selling price
increases.
Market equilibrium: shows a market price that will equate the quantity consumers are
willing and able to buy with the quantity suppliers are willing and able to supply. Thus, at
the equilibrium,
Graphically,
Price (p)
DD
Market equilibrium point
SS
Quantity (q)
Example: Suppose the supply and demand equation for a given product on a given day
reveal the following.
Demand (DD): P = 300 – 15Q
Supply (SS): P = 500 + Q
a. Find the market equilibrium price and quantity.
b. Plot the demand and supply equation on a graph.
Solution:
a. First, let us compute the equilibrium quantity for the given supply and demand
functions. Hence, at equilibrium: DD = SS
3000 – 15Q = 500 + 5Q
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Financial Management in Value Chain: Business Mathematics and its Application
Now, we progress to find the equilibrium price for the supply and demand function of
the given product. In the same manner with the above one, we can obtain the market
equilibrium price by simply substituting the market equilibrium quantity in either of
the supply or demand equations. Thus, let us take the supply function of P = 500 + 5
Q.
You will obtain the same result (i.e. Birr 1125), if you take the demand function of
P = 3000 – 15 Q and substitute Q = 125.
a. Graph of demand and supply function: In plotting the graph, first we need to get the x
and y intercept for both the supply and demand equations. The Y – intercept for
demand equation is obtained by setting Q = 0 in the equation P = 3000 – 15Q.
Thus, P = 3000 – 15(0) = 3000
Therefore, (0, 3000) is the y-intercept. Likewise, the X intercept is obtained by setting
P = 0 in the equation P = 3000 – 15Q. Consequently,
0 = 3000 – 15Q
15Q = 3000 = 3000 ÷ 15
Q = 200
The point (200, 0) is the x-intercept of the demand function. The same procedure is to
be followed in computing the Y and y intercept for the supply function of P = 500 +
5Q. The Y – intercept is the value of P when Q = 0.
Therefore, P = 500 + 5(0)
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Financial Management in Value Chain: Business Mathematics and its Application
P = 500
The y – intercept is the point with coordinate of (0, 500). In the same manner, the
X – intercept is the value of q at P = 0.
Thus, 0 = 500 + 5Q
-5Q = 500 = 500 ÷ - 5
Q = -100
Hence, the X – intercept is given by the point (-100, 0). Off course, the graph (the
straight line) of the supply function is also passes through the equilibrium point of
(125 units, 1125 birr). Thus, we do not need to extend the line to the negative
direction.
Price (P)
3000 SS: P = 500 + 5q
2000
1125
DD: P = 8000 – 15q
Quantity (q)
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Financial Management in Value Chain: Business Mathematics and its Application
Kalifa Plc. is a national distributor of Dell Computers. The selling price and quantity of
computers distributed are linearly related. Further, the company’s market analyst found out
the following demand and supply functions for a particular year.
Demand (DD): P = 3500 – 2q
Supply (SS): - q = 950 – p
a. Find the excess demand for computers at a price of Birr 1400.
b. Find the excess supply of computers at a price of Birr 2100.
c. Find the market equilibrium quantity.
d. Find the market equilibrium price.
e. Sketch the demand and supply functions.
Continuous Assessment
The assessment methods for this criterion include tests, quiz, exam, assignments, case
analysis and group works
Summary
Dear student, with confidence, you have already acquired knowledge about the concepts and
the interpretative applications of linear equations, functions, and graphs in business. In this
unit, we have considered the managerial applications of linear algebra and geometry so far.
In so, we have considered that linear equations are mathematical expressions written in the
form of
The graph of such equation on coordinate plane is a straight line. As a result, the slope of the
line is constant for any given points on the line. The slope of a straight-line m, given two
points on the line with coordinates of (x1, y1) and (x2, y2) is expressed by the equation
Further, we have considered how to compute the distance between two points on a coordinate
plane. Subsequently, approaches of developing equation of a line are discussed in the present
unit. Above all, we have seen the interpretive applications of linear equations: analysis of
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linear cost-output relations, break-even analysis, and market supply and demand equilibrium
analysis. In the next section, we will advance with the study of the matrix algebra and its
application in solving business problems and backing management decisions that further
organizational interests.
Dear student! What do you know about matrix algebra? Why we learn matrix?
___________________________________________________________________________
___________________________________________________________________________
Introduction
It is evident that managerial problems are amenable to quantification thereby calling up for
the application of mathematical models. Of the various quantitative techniques, this section
tries to introduce students of business stream about major topics in matrix algebra. The
section deals with basic concepts of matrix algebra, dimension and types of matrices, matrix
operations and techniques, inverse of a matrix and major applications including solving
system of linear equations. In total, this part of the learning task introduces students of
business stream about matrix algebra principles and ways of applying them in handling real
life business problems at individual or organizational level scientifically.
Matrix concepts:
Why we learn matrix? There are three major reasons for learning matrix:
1. Matrices are used to handle large linear systems
2. Matrices are used to solve complex linear equations
3. Matrices are an effective means for summarizing voluminous business data.
called rows; the numbers in a vertical line are called columns. It is customary to enclose the
elements of a matrix in parentheses, brackets, or braces to signify that they must be
considered as a whole and not individually. A matrix is often denoted by a single letter in
bold face type. The first subscript in a matrix refers to the row and the second subscript refers
to the column.
Matrix X above has m rows and n columns or it is said to be a matrix of order (size) m x n
(read as m by n).
Example:
A= a11 a12 a13
a 21 a22 a 23
3x3
a 31 a 32 a33
Here A is a general matrix composed of 3x3 = 9 elements, arranged in three rows and three
columns. The elements all have double subscripts which give the address or placement of the
element in the matrix; the first subscript identifies the row in which the element appears and
the second identifies the column. For instance, a23 is the element which appears in the second
row and the third column and a32 is the element which appears in the third row and the
second column.
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A. A row matrix: is a matrix that has only one row and can have many columns.
B.A column matrix: is a matrix with one column and can have many rows.
E.g. B = 1
C.A square matrix: is a matrix with equal number of rows and columns.
1 4 3
E.g. C = 6 ; D= 2 6 E= 2 2 5
3 8 ; 8 6 9
D. A diagonal matrix: is a square matrix where its all non- diagonal elements are zero.
E.g. x = 2 0 0
0 6 0 is a diagonal matrix of order 3x3.
0 0 11
E. A scalar matrix: a square matrix is called a scalar matrix if all its non- diagonal elements
are zero and all diagonal elements are equal.
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6 0 0
E.g. Y = 2 0 Z= 0 6 0
0 2 0 0 6
F. A unit matrix (Identity matrix): is a type of diagonal matrix where its main diagonal
elements are equal to one.
1 0 0
E.g. B = 0 1 0
0 0 1
G. A null matrix (zero matrix): a matrix is called a null matrix if all its elements are zero.
0 0 0
E.g. A= 0 0 0
0 0 0
E.g. A = 8 2 1
2 3 4
1 4 5
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Dear student, as we have seen above there are various dimensions and types of matrices. In
line with this, what do you conclude about the relationship of scalar matrix and diagonal
matrix? And about unit matrix and scalar matrix?
Remark: It is seen above that every scalar matrix is a diagonal matrix; whereas a diagonal
matrix need not be a scalar matrix. Every unit matrix is a scalar matrix; whereas a scalar
matrix need not be a unit matrix.
1. Matrix equality: two matrices are said to be equal if and only if they have the same
dimension and corresponding elements of each matrix are equal.
3 0 3 -4 3 0
E.g. A= B= C=
1 -4 1 0 1 -4
A ≠ B; A = C; B ≠ C.
2. Transpose of a matrix: If the rows and columns of a matrix are interchanged the new
matrix is known as the transpose of the original matrix. If the original matrix is denoted by
E.g B= 3 5 6 9
0 11 13 8
6 8 3 4
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3 0 6
Bt = 5 11 8
6 13 3
9 8 4
A= 1 3 = 1 0 2 (2 X 3)
0 4 (3x2) 3 4 8
2 8
2+3 0+6 5 6
A+B = -5+4 6+1 = -1 7
1 5 10 2
If A= 6 7 B= 8 6
8 9
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A+B is not defined, since orders of A and B are not the same.
2 3 4 3 2-4 3-3 -2 0
A-B= 1 0 - 2 1 = 1-2 0-1 = -1 -1
4. Matrix Multiplication
Two matrices A and B can be multiplied together to get AB if the number of columns in A is
equal to the number of rows in B.
E.g. 1 2 2 1 4
A= 3 4 B= 3 0 5
0 1 (3x2) (2x3)
8 1 14
= 15 3 32
3 0 5 (3x3)
Solved problems: Finfine Furniture Factory (3F) produces three types of executive chairs
namely A, B and C. The following matrix shows the sale of executive chairs in two different
cities.
Executive chairs
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A B C
C1 400 300 200
Cities C2 300 200 100 (2x3)
If the cost of each chair (A, B and C) is Birr 1000, 2000 and 3000 respectively, and the
selling price is Birr 2500, 3000 and 4000 respectively;
a) Find the total cost of the factory for the total sale made.
b) Find the total profit of the factory.
Solution:
Dear student, having seen the properties of matrix, we will now turn our face to some
activity. Interest at the rates of 0.06, 0.07 and 0.08 is earned on respective investments of
$3000, $2000 and $4000.
a) Express the total amount of interest earned as the product of a row vector by a column
vector.
b) Compute the total interest by matrix multiplication.
Determinant of a Matrix:
Let A = a11 a12
a21 a22 ( 2x2)
= a11 a12
a21 a22 is known as a determinant of order two
E.g. A= 6 4 = 6 4 = 6(9)-7(4)=26
7 9 ; 7 9
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= a11 (a22 a33 - a32 a23) – a12 (a21 a33-a31a23) + a13 (a21a32-a31a22)
E.g. Let A= 1 2 4
0 -1 0
-2 0 3 ; Find .
= 1 2 4 -1 0 0 0 0 -1
0 -1 0 = +1 0 3 -2 -2 3 + 4 -2 0
-2 0 3
Inverse of a Matrix: In scalar algebra, the inverse of a number is that number which, when
multiplied by the original number, gives a product of 1. Hence, the inverse of x is simply 1/x;
or in slightly different notation, x-1. In matrix algebra, the inverse of a matrix is that which,
when multiplied by the original matrix, gives an identity matrix. The inverse of a matrix is
denoted by the superscript “-1”. Hence, AA-1 = A-1A = I.
Note that: A matrix must be square to have an inverse, but not all square matrices have an
inverse. The necessary and sufficient condition for a square matrix to possess its inverse is
that /A/ ≠ 0. Finding the inverse of a matrix requires the concept of row operations to be
performed. The row operations are the following:
If A = 2 3
6 9
Then, B = -4 -6
6 9
C = 2 3
2 3
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Matrix X = 1 2
5 8
C. Interchanging of rows;
If A = 1 0 Interchange R1 and R2 ( R1 ↔ R2 ) ; to
2 4 get matrix D.
D= 2 4
1 0
Note: The first row elements in the original matrix become second row elements in the new
matrix and vice versa. The most important methods to find inverse of a given matrix is
Gauss- Jordan Inversion method. This method was developed by a mathematician called
Gauss and it was named so by the founder. Example: Find the inverse of the following matrix
using the Gauss- Jordan method.
A= 3 2
1 1
Solution
Steps:
First: write the given matrix at the left and the corresponding identity matrix at the right;
3 2 1 0
A/I = 1 1 0 1
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3 2 1 0 1 1 0 1
1 1 0 1 3 2 1 0
1 1 0 1
0 -1 1 -3
1 0 1 -2
0 -1 1 -3
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1 0 1 -2
0 1 -1 3
Matrix Applications: A system of linear equations can be solved by the following method
using matrix algebra: Cramer’s rule (the determinant method): works according to this
formula:
Xi = /Ai/
/A/
Where, xi = indicates the variables we want to solve for.
/Ai/ = is the determinant obtained by putting the right-hand side of the system in place
of the column of coefficients of the variable whose solution is needed; and
/A/ = is the determinant of the system.
The above system of equations can also be rewritten in expanded matrix form as follows:
a11 a12 x b1
a21 a22 * y = b2
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Then, x= 1 -1
2 1
= 1 -1
2 1 =3/2
1 -1
1 1
y= 1 1 1 1
1 2 = 1 2 =1/2
1 -1
1 1
Expanded form:
a11 a12 a13 x b1
a21 a22 a23 . y = b2
a31 a32 a33 z b3
A X B
z= a11 a12 b1
a21 a22 b2
a31 a32 b3
a11 a22 a13
a21 a22 a23
a31 a32 a33
A X B
= +2 1 1 -1 1 1 + (-1) 1 1
1 -1 0 -1 0 1 = -4
Thus; x = 0 1 -1
0 1 1 = 2/-4 = -1/2
1 1 -1
Y= 2 0 -1
1 0 1 = -3/-4 = 3/4
0 1 -1
Z= 2 1 0
1 1 0
0 1 1 = -1/4
Continuous Assessment
The assessment methods for this criterion include tests, quiz, exam, assignments, case
analysis and group works
Summary
Dear learner! We have seen about types of matrices, matrix operations, inverse of a matrix,
ways of finding an inverse and applications of matrix algebra. The following gives the
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Exercises
1. Find the inverse of the following matrices using the Gauss – Jordan method.
A= 3 3
2 2
5. If A = 1 -1 2 and B = -2 0 1
2 3 4 2 -1 4
0 1 3 1 1 2
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1 -2
A= 0 3 1 3 0
0 4 B= 2 0 -1 ; Determine where possible:
a) AB
b) BA
c) 2A
8. Verify whether AB = BA for matrices:
A= 2 1 0 1 2 -1
1 -1 2 and B = 1 -1 2
0 1 3 1 1 2
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Introduction
Requirements to Apply Linear Programming: To apply LP, the following conditions must
be satisfied.
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d. The relationship representing the objective and the resource limitation considerations
represented by the objective function and the constraint equations or inequalities,
respectively, must be linear in nature.
e. There should be a series of feasible alternative courses of actions available to the
decision-maker that is determined by the resource constraints.
When these stated conditions are satisfied in a given solution, the problem can be expressed
in algebraic form called linear programming problem (LPP), and then solved for optimal
decision.
Diagrammatically Linear Programming (LP) model can be presented as shown below.
Scares
To be allocated to:
Resource
Resource
constraints
Objectives Constraints
Non-negativity
Constraints
Optimization
Maximization Minimization
Dear learner! Let’s first illustrate the formulation of linear programming problems and then
consider the method of their solution.
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The Maximization Case: A firm is engaged in producing two products, A and B. Each unit
of product A requires two kgs of raw material and four labor hours for processing whereas
each unit of product B requires three kg of raw material and three hours of labor of the same
type. Every week the firm has an availability of 60 kgs of raw material and 96 labor hours.
One unit of product A sold yields Birr 40 and one unit of product B sold yields Birr 35 as
profit. Formulate this problem as a linear programming problem to determine as to how
many units of each of the products should be produced per week so that the firm can
maximum the profit. Assume that there is no marketing constraint so that all that is produced
can be sold.
The objective function: the first major requirement of linear programming problem (LPP) is
that we should be able to identify the goal in terms of the objective function. This function
relates mathematically the variables with which we are dealing in the problem. For our
problem, the goal is the maximization of profit, which would be obtained by producing (and
selling) the products A and B. If we let x 1 and x2 represent the number of units produced per
week of the products A and B respectively, the total profit, Z, would be equal to 40 x 1 +35x2
is then, the objective function, relating the profit and the output level of each of the two
items. Notice that the function is a linear one. Further, since the problem calls for a decision
about the optimal values of x1 and x2, these are known as the decision variables.
The constraints: As has been laid, another requirement of linear programming is that the
resources must be in limited supply. The mathematical relationship which is used to explain
this limitation is inequality. The limitation itself is known as a constraint. Each unit of
product A requires 2 kg of raw material while each unit of product B needs 3 kg. The total
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consumption would be 2x2 and 3x2, which cannot be the total the availability of 60 kg every
week. We can express this constraint as 2x1 and 3x2 < 60. Similarly, it is given that a unit of A
requires 4 labor hours for its production and one unit of B requires 3 hours. With an
availability of 96 hours a week, we have 4 x1 and 3x2 < 96 as the labor hour's constraint. It is
important to note that for each of the constraint, inequality rather than equation has been
used. This is because the profit maximizing output might not use all the resources to the full
leaving some unused, hence the < sign. However, it may be noticed that all the constraints
are also linear in nature.
Non-negativity Condition: Quite obviously, x1 and x2, being the number of units produced,
cannot have negative values. Thus both of them can assume values only greater than or equal
to zero. This is the non-negativity condition, expressed symbolically as x1 > 0 and x2, > 0.
Now we can write the problem in complete form as follows.
The Minimization Case: The agricultural Research institute has suggested to a farmer to
spread out at least 4800 kg of a special phosphate fertilizer and no less than 7200 kg of a
special nitrogen fertilizer to raise productivity of crops in his fields. There are two resources
for obtaining these mixtures A and B. Both of these are available in bags weighing 100 kg
each and they cost Birr 40 and Birr 24 respectively. Mixture A contains phosphate and
nitrogen equivalent of 20 kg and 80 respectively, while mixture B contains these ingredients
equivalent of 50 kg each. Write this as a linear programming problem and determine how
many bags of each type the farmer should buy in order to obtain the required fertilizer at
minimum cost.
The Objective Function: In the given problem, such a combination of mixtures A and B is
sought to be purchased as would minimize the total cost. If x1 and x2 are taken to represent
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the number of bags of mixtures A and B respectively, the objective function can be expressed
as follows:
The constraints: In this problem, there are two constrains, namely, a minimum of 4800 kg
of phosphate and 7200 kg of nitrogen ingredients are required. It is known that each bag of
mixture A contains 20 kg and each bag of mixture B contains 50 kg of phosphate. The
phosphate requirement can be expressed as 20x 1 + 50x2 > 4800. Similarly, with the given
information on the contents, the nitrogen requirement would be written as 80 x 1 + 50x2 >
7200.
Non-negativity condition: As before, it lays that the decision variables, representing the
number of bags of mixtures A and B, would be non-negative. Thus x1 > 0 and x2 > 0. The
linear programming problem can now be expressed as follows:
Subject to
a11x11 + a22 x2 +………………………..+ ain x n < b1
a21x1 + a22 x2 + ………………………..+ ain x n < b2
am1 x1 + am2 x2 + ............................+ amn < xn bm
x1, x2, ……………………….., xn > 0
Note:
Although, generally, the constraints in the maximization problems are of the < type, and the
constraints in the minimization problems are of > type , a given problem might contain a mix
of the constraints, involving the signs <, >, and /or =
\
Assumptions Underlying Linear Programming: A linear programming model is based on
the assumptions detailed hereunder.
2. Additively: Another assumption underlying the linear programming model is that in the
objective function and constraint inequalities both, the total of all the activities is given
by the sum total of each activity conducted separately. Thus, the total profit in the
objective function is determined by the sum of the profit contributed by each of the
products separately. Similarly, the total amount of a resource used is equal to the sum of
the resource values used by various activities.
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5. Finite Choices: A linear programming model also assumes that a limited number of
choices are available to a decision maker and the decision variables do not assume
negative values. Thus, only non-negative levels of activity are considered feasible. This
assumption is indeed a realistic one. For instance, in the production problems, the output
cannot obviously be negative, because a negative production implies that we should be
above to reverse the production process and convert the finished output back in to the raw
materials!
Solution approaches to LPPS: Now we shall consider the solution to the linear
programming problems. They can be solved by using graphic method or by applying
algebraic method, called the Simplex Method. The graphic method is restricted in application
– it can only be used when two variables are involved. Nevertheless, it provides an intuitive
grasp of the concepts that are used in the simplex technique. The Simplex method, is the
mathematical technique of solving linear programming problems with two or more variables.
Graphial Solution to Linear Programming Problems: To use the graphic method, the
following steps are needed:
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i. Identify the problem – determine the decision variables, the objective function,
and the constraints.
ii. Draw a graph including all the constraints and identify the feasible region.
iii. Obtain a point on the feasible region that optimizes the objective function –
optimal solution.
iv. Interpret the results.
How many sets of each model will be produced each day so that the total profit will be as
large as possible?
Labor Hours 2 1 40
Machine Hours 1 3 45
Marketing Hours 1 0 12
Solution:
St:
2X1 +X2< 40
X1 +3X2< 45 LP Model
X1 < 12
X1, X2 >0
2. Convert constraints inequalities into equalities
2X1 + X2 = 40
X1 + 3X2 = 45
X1 = 12
3. Draw the graph by finding out the x– and y–intercepts
2X1 +X2 = 40 ==> (0, 40) and (20, 0)
X1 +3X2 = 45 ==> (0, 15) and (45, 0)
X1 = 12 ==> (12, 0)
X1 , X2 = 0
2X1 +X2 = 40
X2
X1=0
40
X1 +X2 = 45
X1=12
B
15
C(12, 11)
Feasible
Region X2=0
D X1
A 12 20 45
4. Identify the feasible area of the solution which satisfies all constrains. The shaded region
in the above graph satisfies all the constraints and it is called Feasible Region.
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5. Identify the corner points in the feasible region. Referring to the above graph, the corner
points are in this case are:
A (0, 0), B (0, 15), C (12, 11) and D (12, 0)
A (0, 0) $0
D (12, 0) $3600
7. Interpret the result. Accordingly, the highlighted result in the table above implies that 12
units of Model A and 11 units of Model B TV sets should be produced so that the total
profit will be $6350.
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Solution:
1. The LP Model:
LP Model
Dear student, can you graph the above constraints? See step 2 below.
X2
X1 =0
A (0, 20/3)
Feasible Region
B (2.5, 3.33)
X2 =0
X1
5 C (7.5, 0)
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Since our objective is to minimize cost, the minimum amount (162.5) will be selected.
X1 = 2.5
X2 = 3.33 and
Min Z= 162.5
Note:
- In maximization problems, our point of interest is looking the furthest point from the
origin (Maximum value of Z).
- In minimization problems, our point of interest is looking the point nearest to the origin
(Minimum value of Z).
A company owns two flourmills (A and B) which have different production capacities for
HIGH, MEDIUM and LOW grade flour. This company has entered contract supply flour to a
firm every week with 12, 8, and 24 quintals of HIGH, MEDIUM and LOW grade
respectively. It costs the Co. $1000 and $800 per day to run mill A and mill B respectively.
On a day, mill A produces 6, 2, and 4 quintals of HIGH, MEDIUM and LOW grade flour
respectively. Mill B produces 2, 2 and 12 quintals of HIGH, MEDIUM and LOW grade flour
respectively. How many days per week should each mill be operated in order to meet the
contract order most economically. Solve the problem graphically.
Algebraic Simplex Method: The graphical method to solving LPPs provides fundamental
concepts for fully understanding the LP process. However, the graphical method can handle
problems involving only two decision variables (say X1 and X2). In 19940’s George
B.Dantzig developed an algebraic approach called the Simplex Method, which is an
efficient approach to solve applied problems containing numerous constraints and involving
many variables that cannot be solved by the graphical method. The simplex method is an
ITERATIVE or “step by step” method or repetitive algebraic approach that moves
automatically from one basic feasible solution to another basic feasible solution improving
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the situation each time until the optimal solution is reached at. The simplex method starts
with a corner that is in the solution space or feasible region and moves to another corner
improving the value of the objective function each time until optimal solution is reached at
the optimal corner.
a) Maximization Problems
Maximize Z with inequalities of constraints in ‘<’ form
Solve the problem using the simplex approach
Max. Z = 300x1 +250x2
Subject to:
2x1 + x2 < 40 (Labor)
x1 + 3x2 < 45 (Machine)
x1 < 12 (Marketing)
x1, x2 > 0
Solution:
Step 1 Formulate LP Model: It is already given in the form of linear programming model.
Step 2 Standardize the problem: Convert constraint inequality into equality form by
introducing a variable called Slack variable. A slack variable(s) is added to the left hand side
of a < constraint to covert the constraint inequality in to equality. The value of the slack
variable shows unused resource. A slack variable emerges when the LPP is a maximization
problem. Slack variables represent unused resource or idle capacity. Thus, they do not
produce any profit and their contribution to profit is zero. Slack variables are added to the
objective function with zero coefficients. Let that s1, s2, and s3 are unused labor, machine,
and marketing hrs respectively.
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Step 3 Obtain the initial simplex tableau: To represent the data, the simplex method uses a
table called the simplex table or the simplex matrix. In constructing the initial simplex
tableau, the search of the optimal solution begins at the origin indicating that nothing can be
produced. Thus, first assumption, No production implies that x1 =0 and x2=0
==>2 x1+x2 + s1 +0 s2+ 0 s3= 40 ==> x1+3x2 +0 s1 + s2+ 0 s3= 45
2(0) +0 + s1 +0 s2+ 0 s3= 40 0 +3(0) + 0s1 + s2+ 0 s3= 45
s1= 40 – Unused labor hrs. s2= 45 – Unused machine hrs.
In general, whenever there are n variables and m constraints (excluding the non-negativity),
where m is less than n (m < n), n – m variables must be set equal to zero before the solution
can be solved algebraically.
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Therefore, n – m = 5 – 3 = 2 variables (x1 and x2) are set equal to zero in the 1 st simplex
tableau. These are non-basic variables. Three Variables (s1, s2, and s3) are basic variables (in
the 1st simplex tableau) because they have non-zero solution values.
Step 4 Construct the initial simplex tableau: To set up the tableau, we first list horizontally
all the variables contained in the problem. Here, there are five variables: x1, x2, s1, s2 and s3.
Next, the coefficients in the constraint equations are written listing vertically the coefficients
under their respective variables. It may be noted that each of the slack variables appear only
in one equation. Therefore, the coefficient of each of the slack viable is taken to be zero in all
the equations except the one in which it appears. After putting the coefficients, the constraint
values are mentioned on the right hand side against the rows. Finally, the row titled indicates
the coefficients of the various variables in the objective function, mentioned respectively in
the various columns representing the variables.
decision
variables
quantity
variables column
Solution
variable column
or
columns
Solution
column
or
column
Slack
Real
Basic
SV X1 X2 S1 S2 S3 Q
0 S1 2 1 1 0 0 40 R1=20
R2= 45 Constraint
0 S2 1 3 0 1 0 45
equation rows
Zj 0 0 0 0 0 0
C j - Zj 300 250 0 0 0
Step 5 Choose the “incoming” or “entering” variables:: The entering variable is the
variable that has the highest positive value in the Cj - Zj row also called as indicator row.
Alternatively, the entering variable is the variable that has the highest contribution to profit
per unit.
a. X1 in our case is the entering variable because it has the highest positive c-z value.
b. The column associated with the entering variable is called key or pivot column ( X1
column in our case )
Step 6 Choose the “leaving “or “outgoing” variable: In this step, we determine the
variable that will leave the solution for X1 (or entering variable)
Note:
The row with the minimum or lowest positive (non-negative) replacement ratio shows
the variable to leave the solution.
Note: RR > 0
- The variable leaving the solution is called leaving variable or outgoing variable.
- The row associated with the leaving variable is called key or pivot row (s3 column in our
case)
- The element that lies at the intersection of the pivot column and pivot row is called pivot
element(No 1 in our case)
Step 7 Derive the revised tableau: For improved solution using the information obtained
earlier, another tableau is derived where in the various elements are obtained as given here. a.
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Divide each element of the pivot row (including bi) by the pivot element to get the
corresponding values in the new tableau. The row of values so derived is called the
replacement raw.
Cj 300 250 0 0 0
SV X1 X2 S1 S2 S3 Q
0 S1 0 1 1 0 -2 16
R’1=16
0 S2 0 3 0 1 -1 33
R’2=11
300 X1 1 0 0 0 1 12 R’3=Undefined
Zj 300 0 0 0 300 3600
Cj - Zj 0 250 0 0 -300
Cj 300 250 0 0 0
3 rd
simplex
SV X1 X2 S1 S2 S3 Q
table
0 S1 0 0 1 -1/3 -5/3 5
R’’1=R’1-R’2
R’’2=R2/3
R’’3=R’3
Since all the Cj - Zj < 0, optimal solution is reached at and this tableau is the final one.
Therefore, X1=12, X2=11, S1=5 and Max Z=6350
The solution procedure for the linear programming problems that have the objective function
of the minimization type is similar to the one for the maximization problems, except for some
differences. To illustrate, let us again consider the examples.
Following the approach already discussed, we first introduce some new variables to convert
inequalities of the system in to equations. The variable required for converting a greater than
type of inequality in to an equation is called surplus variable and it represents the excess of
what is generated (given by the LHS of the inequality) over the requirement (shown by the
RHS value bi). With surplus variables, S1 and S2 respectively for the first and the second
constraints, the augmented problem shall be:
Subject to:
20x1+ 50 x2- S1= 4800
80 x1+ 50 x2- S2 =7200
X1, X2, S1 ,S2 > 0
Now, as soon as we proceed to the next step we experience a problem, which is like this. We
know that the simplex method needs an initial solution to get the process started. In this case,
it is easy to visualize that an initial solution does not exist because, if we let x 1 and x2 each
equal to zero, we get S1 = -4800 and S2 = -7200, which is not feasible as it violates the non
negativity restriction. In terms of the simplex tableau, when we write all the information, we
observe that we do not get identity because unlike in case of slack variables, the co-efficient
values of surplus variables S1 and S2 appear as minus one (-1).
To provide an initial solution, we add artificial variables in to the model. Unlike slack or
surplus variables, artificial variables have no tangible relationship with the decision problem.
Their sole purpose is to provide an initial solution to the given problem. When artificial
variables are introduced in our example, it appears as follows,
Before we set up the initial tableau, a few words on the artificial variables follow. The
artificial variables are introduced for the limited purpose of obtaining an initial solution and
are required for the constraints with > type, or the constraints “=” sign. It is not relevant
whether the objective function is of the minimization or the maximization type. Obviously,
since artificial variables do not represent any quantity relating to the decision problem, they
must be driven out of the systems and must not show in the final solution (and if at all they
do, it represents a situation of infeasibility). This can be ensured by assigning an extremely
high cost to them. Generally, a value M is assigned to each artificial variable, where M
represents a number higher than any finite number. For this reason, the method of solving the
problems where artificial variable are involved is termed as the Big M Method. When the
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It is significant to note that the initial solution obtained using the artificial variable is not a
feasible solution to the given problem. It only gives the starting point and the artificial
variables are driven out in the normal course of applying the simplex algorithm. A solution to
the problem which does not include an artificial variable in the basis represents a feasible
solution to the problem. The initial simplex tableau giving the initial solution to our problem
is given in the following table.
Cj 40 24 0 0 M M
Basis X1 X2 S1 S2 A 1 A 2 Qty RR
A1 M 20 50 -1 0 1 0 4800 96
A2 M 80 50 0 -1 0 1 7200 144
Zj 40 24 0 0 M M
Cj - Zj M M 0 0
For the minimization problem, the optimal solution is indicated when the values in the Zj-Cj
row are zero or positive. The presence of the negative Zj- Cj value and the column headed by
this variable is called, as before, the pivot column. The selection of the pivot row (and the
outgoing variable) is done exactly the same way as for the maximization problems- the row
that has the least (non-negative) quotient is our row of interest. Finally, the revised simplex
tableau is derived in the same way as discussed earlier. We proceed in this manner until
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optimal solution is obtained. In respect of our problem, the initial solution is not optimal.
Here the incoming variable is x2 while A1 is the outgoing variable. The revised tableau is
given in the following table. In a similar way we proceed until the optimal solution is found.
The optimal tableau for minimization problem is a tableau that consists in its C-Z row all
zeros and positive values. (i.e. C-Z values > 0). Conduct elementary row operations (ERO) to
arrive at optimal solution before going to the next solution part.
Cj 40 24 0 0 M M
Basis X1 X2 S1 S2 A 1 A 2 Q RR
X2 24 2/5 1 -1/50 0 1/50 0 96 240
A2 M 60* 0 1 -1 -1 1 2400 40
Zj 40 24 0 0 M M 2400
Cj –Zj 152/5- 0 12 -M 12 0
60M 25- M 2M- 25
Cj 40 24 0 0 M M
Basis X1 X2 S1 S2 A 1 A 2 Q RR
X2 24 0 1 -2/75 1/150 2/75 -1/150 80 -3000
x2 40 1 0 1/60* -1/60 -1/60 1/60 40 2400
Zj 40 24 0 0 M M 3520
Cj – Zj 0 0 -2 38 M+ 38 M+ 38
75 75 75 75
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Cj 40 24 0 0 M M
Basis X1 X2 S1 S2 A 1 A 2 Q
X2 24 8/5 1 0 -1/150 0 1/50 144
x2 0 60 0 1 -1 -1 1 2400
Zj 40 24 0 0 M M 3456
Cj – ZJ 8/5 0 0 12/25 M M-12/5
The value of S1 = 2400 indicates the surplus phosphate ingredient obtained by buying the
least cost mix.
Continuous Assessment
The assessment methods for this criterion include tests, quiz, exam, assignments, case
analysis and group works
Summary
The standard form of LP problem should have the characteristics of(1)All the constraints
should be expressed as equations by slack or surplus and/or artificial variables (2)The right
hand side of each constraint should be made non-negative; if it is not, this should be done by
multiplying both sides of the resulting constraint by -1 and (3) Three types of additional
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variables, namely (1) Slack Variable(S)(2) Surplus variable (-S), and (3) Artificial
variables (A) are added in the given LP problem to convert it into standard form for two
reasons: the extra variables needed to add in the given LP problem to convert it into standard
form is given below:
2. Test of optimality
- If all Cj - Zj < 0, then the basic feasible solution is optimal (Maximization
case).
- If all Cj - Zj > 0, then the basic feasible solution is optimal (Minimization
case).
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i.e: RR > 0
Dear student! What do you know about mathematics of finance? Why we need to learn
mathematics of finance?
___________________________________________________________________________
___________________________________________________________________________
Introduction
Simple Interest: Interest that is paid solely on the amount of the principal P is called simple
interest. Simple interest formula:
I = pin
Where, I = Simple interest (in dollars or birr)
P = Principal (in dollar, or birr) and it is the amount
i = Rate of interest per period (the annual simple interest rate)
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In computing simple interest, any stated time period such as months, weeks or days should be
expressed in terms of years. Accordingly, if the time period is given in terms of,
i. Months, then
n= Number of months
12
ii. Weeks, then
n= Number of Weeks
52
iii. Days, then
a. Exact interest
n= Number of days
365
b. Ordinary simple interest
n= Number of days
360
Maturity value (future value) represents the accumulated amount or value at the end of the
time periods given. Thus,
Future value (F) = Principal (P) + Interest (I)
Example: A credit union has issued a 3 year loan of Birr 5000. Simple interest is charged at
a rate of 10% per year. The principal plus interest is to be repaid at the end of the third year.
a. Compute the interest for the 3-year period.
b. What amount will be repaid at the end of the third year?
Solution:
a. I=pin
I = 5000 x 0.1 x 3
I = Birr 1500
b. The amount to be repaid at the end of the third year is the maturity (future) value of
the specified money (Birr 5000). Accordingly, F = P + I
F = 5000 + 1500
F = Birr 6500
Or, using alternative approach,
F=P+I
Then, substitute I = P i n in the expression to obtain
F = P + Pin
F = P (1 + in)
In computing simple interest, the number of years or time, n, can be measured in days. In
such case, there are two ways of computing the interest.
i. The Exact Method: if a year is considered as 365 days, the interest is called exact
simple interest. If the exact method is used to calculate interest, then the time is
n = number of days / 365
ii. The Ordinary Method (Banker’s Rule): if a year is considered as 360 days, the
interest is called ordinary simple interest. The time n, is calculated as
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Example: Find the interest on Birr 1460 for 72 days at 10% interest using,
a. The exact method
b. The ordinary method
Solution:
The principal that must be invested at a given rate for a given time in order to produce a
definite amount or accumulated value is called present value. The present value is analogous
to a principal P. It involves discounting the maturity or future value of a sum of money to a
present time. Hence, the simple present value formula is derived from the future value (F)
formula as follows.
Future Value = Principal + Interest
F=P+I but I = Pin
Thus, F = P + Pin
F = P (1+ in)
Then from this, solve for P.
PF
1 in
If P is found by the above formula, we say that F has been discounted. The difference
between F and P is called the simple discount and is the same as the simple interest on P.
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Example: 90 days after borrowing money a person repaid exactly Birr 870.19. How much
money was borrowed if the payment includes principal and arch nary simple interest at 9 ½
%?
Solution:
Required:
The amount borrowed which is the same as simple present value, P.
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A bank discount is the amount of money received or collected after discounting a note before
its due date. It is not unusual when borrowing money from a bank that one is required to pay
a charge based on the total amount that is to be repaid (maturity value), instead of the
principal used. If the maturity value is used in determining the charge for use of money, we
say that the promissory note (or simply the note) is discounted. Consequently, a charge of
loan computed in this manner is called ‘Bank Discount’ and it is always computed based on
the maturity value. Bank discount is the amount that is charged on maturity value. Hence, the
amount of money payable to the debtor or the amount that the borrower receives is called
‘Proceed.’ The amount that the borrower is going to pay to the creditor (lender) is called
‘maturity value.’ To further our understanding of this concept, let’s develop mathematical
expressions (formula) for computation of the variables at stake.
Proceed = Maturity Value – Bank Discount
Symbolically,
P = F – D , and D = Fdt
Where, P = Proceed
F = Maturity value
D = Bank discount
d = Rate of discount
t = Time of discount
Now we can further elaborate the above formula for proceed. To begin with,
P = F – D, but D = Fdt
Therefore, P = F – Fdt = F (1 – d t)
For example, if Birr 1000 is borrowed at 12% for 6 months, the borrower receives the
proceeds, P, and pays back F = Birr 1000. The proceeds will be Birr 1000 minus the
interest on Birr 1000. This will be:
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i. Proceeds are an amount received now for payment in the future. Therefore, they are
analogous to present value. Yet, proceeds are not equal to present value because the
proceeds from a futures obligation to pay are always less than the present value of
that obligation if, of course, the same rate of interest is used in both adulations.
ii. Proceeds should be completed when the interest rate is stated by the qualifier word as
discount rate or a bank discount or interest deducted – in – advance, and present value
should be computed where the interest is given without such qualifiers, discount.
iii. The computation of simple interest and bank discount is the same except in the
former case principal and in the later case the maturity values are used for between
trimmings the amount discount.
Having the idea of promissory notes and bank discounts, we may now progress to consider
some illustrative problems.
Example: Find the bank discount and proceeds on a note whose maturity value is Birr 480
which is discounted at 4% ninety days before it is due.
To find the value of the bank discount, we use the formula D = Fdt. Accordingly,
D = 480 x 0.04 x 3/12
D = Birr 4.8 is the amount of bank discount.
P = F–D or P = F (1 – d t)
P = 480 – 4.8 or P = 480 (1 – (0.04 x 0.25)
P = Birr 475.2 or P = 480(0.99) = Birr 475.2
Dear learner, we have seen above the concepts of promissory notes and bank discount
with examples now, would you try to do this question. A borrower signed a note
promising to pay a bank Birr 5000 ten months from now.
a. How much will the borrower receive if the discount rate is 6%?
b. How much would the borrower have to repay in order to receive Birr 5000
now?
If an amount of money, P, earns interest compounded at a rate of I percent per period it will
grow after n periods to the compound amount F, and it is computed by the formula:
A period, for this purpose, can be any unit of time. If interest is compounded annually, a year
is the appropriate compounding or conversion or interest period. If it is compounded
monthly, a month is the appropriate period. It is important to know that the number of
compounding period/s within a year is/are used in order to find the interest rate per
compounding periods and it is denoted by i in the above formula. Consequently, when the
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interest rate is stated as annual interest rate and is compounded more than once a year, the
interest rate per compounding period is computed by the formula:
Example: Assume that we have deposited Birr 6000 at commercial Bank of Ethiopia which
pays interest of 6% per year compounded yearly. Assume that we want to determine the
amount of money we will have on deposit (our account) at the end of 2 years (the first and
second year) if all interest is left in the savings account.
Solution:
Give values in the problem, P = Birr 6000, j = 6% = 0.06, t = 2 years
m = compounded annually = i.e. only once
n=mxt =1x2 = 2
i = j / m = 0.06 / 1 = 0.06
Example: An individual accumulated Birr 30,000 ten years before his retirement in order to
buy a house after he is retried. If the person invests this money at 12% compounded monthly,
how much will be the balance immediately after his retirement?
Solution:
i = j / m = 0.12 / 12 = 0.01
n = m x t = 12 x 10 = 120 and what is required is the Future Value F.
Then, F = P (1 + i) n
= 30,000 (1.01)120
= 30,000 (1.01)120
F = Birr 99,011.61
Having the understanding of how compound interest works and computation of future value,
in subsequent example, we will consider how to determine the number of periods it will take
for P birr deposited now at i percent to grow to an amount of F birr.
Future (maturity) value is the value of the present sum of money at some future date (time).
Conversely, present value (or simply principal) is the current birr or dollar value equivalent
of the future amount. It is the sum of money that is invested initially and that is expected to
grow to some amount in the future at a specified rate. If we put the present and future
(maturity) values on a continuum as shown below, we can observe that they are inverse to
one another. And, future value is always greater than the present value or the principal since
it adds/earns interest over specified time-period.
0 1 2 3 . . . n
Present Value (P) Future Value (Compound Amount)
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Examples:
Solution:
Thus, P = Fn (1 + i) -n
= 5000 (1 + 0.12)-3
= 5000 (1.12-3)
= 5000 (0.7118)
P = Birr 3559
The present value of Birr 300,000 after 15 years at 4% semi-annual interest rate is equal to
Birr 92,490. Therefore, from the total inheritances received Birr 92,490 needs to be deposited
now.
Amount of compound interest = Future Value – Preset Value = 300,000 – 92,490
Amount of compound interest = Birr 207,510
Annuities:
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Annuities are classified according to the time the payment is made. Accordingly, we have
two basic types of annuities.
It is only for ordinary annuity that we have a formula to compute the present as well as future
values. Yet, for annuity due case, we may drive it from the ordinary annuity formula. To
proceed, let us first consider some important terminologies that we are going to use in
dealing with annuities.
iv. Periodic payment/rent: it is the amount paid at the end or the beginning or each
payment period.
v. Simple annuity: is the one in which the payment period and the conversion periods
coincides each other.
Maturity value of ordinary annuity is the sum of all payments made and all the interest
earned there from. It is an accumulated value of a series of equal payments at some point of
time in the future. Suppose you started to deposit Birr 1000 in to a saving account at the end
of every year for four years. How much will be in the account immediately after the last
deposit if interest is 10% compounded annually?
In attempting this problem, we should understand that the phrase at the end of every year
implies an ordinary annuity case. Likewise, we are required to find out the accumulated
money immediately after the last deposit which also indicates the type of annuity. Further,
the term of the annuity is four years with annual interest rate of 10%. Thus, we can show the
pattern of deposits diagrammatically as follows.
Birr 1000
Birr 1100
Birr 1210
Birr 1331
Total Future Value = Birr 4641
The first payment earns interest for the remaining 3 periods. Therefore, the compound
amount of it at the end of the term of annuity is given by,
F = P (1 + i) n = 1000 (1 + 0.1)3 = Birr 1331
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In the same manner, the second payment earns interest for two periods (years). So,
F= 1000 (1+0.1)2 = 1210
The 3rd payment earns interest for only one period. So,
F=1000(1+0.1)1 = 1100
No interest for the fourth payment since it is made at the end of the term. Thus, its value is
1000 itself. In total, the maturity value amounts to Birr 4641.
This approach of computing future value of ordinary annuity is complex and may be tiresome
in case the term is somewhat longer. Thus, in simple approach we can use the following
formula for sum of ordinary annuity (Future Value).
Example: A person plans to deposit 1000 birr in a savings account at the end of this year and
an equal sum at the end of each following year. If interest is expected to be earned at the rate
of 6% per year compound semi-annually, to what sum will the deposit (investment) grow at
the time of the fourth deposit?
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Solution:
F4 = ? F4 = R
= 1000
= 1000
= 1000 x 4. 183627
F = Birr 4183.63
A 12 year old student wants to begin saving for college. She plans to deposit Birr 50 in a
saving account at the end of each quarter for the next 6 years. Interest is earned at a rate of
6% per year compounded quarterly. What should be her account balance 6 years from now?
How much interest will she earn?
A sinking fund is a fund into which periodic payments or deposits are made at regular
interval to accumulate a specified amount (sum) of money in the future to meet financial
goals and/or obligations. The equal periodic payment to be made constitute an ordinary
annuity and our interest is to determine the equal periodic payments that should be made to
meet future obligations. Accordingly, we will be given the Future Amount, F, in n period and
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our interest is to determine the periodic payment, R. Then we can drive the formula for R as
follows.
Then,
In general, a sinking fund can be established for expanding business, buying a new building,
vehicles, settling mortgage payment, financing educational expenses etc.
Example:
A corporation wants to establish a sinking fund beginning at the end of this year. Annual
deposits will be made at the end of this year and for the following 9 years. If deposits earn
interest at the rate of 8% per year compounded annually, how much money must be
deposited each year in order to have 12 million Birr at the time of the tenth deposit? How
much interest will be earned?
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Solution:
R = the amount to be deposited each year to have 12 million at the end of the 10th year = ?
Then to obtain the value of R, we shall use the formula for sinking fund.
i
R Fn n
(1 i ) 1
R = Birr 828,353.86
On the other hand, the amount of interest, I, is obtained by computing the difference between
the maturity value (Fn = 12,000,000) and the sum of all periodic payments made. Thus,
I = Fn - R (10)
= 12,000,000 – 823,353.86 (10)
= 12,000,000 – 8,283,538.6
= Birr 3,716,461.4
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The present value of annuity is an amount of money today, which is equivalent to a series of
equal payments in the future. It is the value at the beginning of the term of the annuity. The
present value of annuity calculation arise when we wish to determine what lump sum must be
deposited in an account now if this sum and the interest it earns will provide equal periodic
payment over a defined period of time, with the last payment making the balance in account
zero. Present value of ordinary annuity is given by the formula:
Example: A person recently won a state lottery. The term of the lottery is that the winner
will receive annual payments of birr 18,000 at the end of this year and each of the following
4 years. If the winner could invest money today at the rate of 6% per year compounded
annually, what is the present value of the five payments?
Solution:
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P = Birr 75,822.55
Another main area of application of annuities in to real world business situations in general
and financial management practices in particular is mortgage amortization or payment.
Mortgage payment is an arrangement whereby regular payments are made in order to settle
an initial sum of money borrowed from any source of finance. Such payments are made until
the outstanding debt gets down to zero. An individual or a firm, for instance, may borrow a
given sum of money from a bank to construct a building or undertake something else. Then
the borrower (debtor) may repay the loan by effecting (making) a monthly payment to the
lender (creditor) with the last payment settling the debt totally.
In mortgage payment, initial sum of money borrowed and regular payments made to settle
the respective debt relate to the idea of present value of an ordinary annuity. Along this line,
the expression for mortgage payment computation is derived from the present value of
ordinary annuity formula. Our intention in this case is to determine the periodic payments to
be made in order to settle the debt over a specified time – period.
Hence, we know that
1 (1 i ) n
P R
i
Now, we progress to isolate R on one side. It involves solving for R in the above present
value of ordinary annuity formula. Hence, multiply both sides by the interest rate i to
obtain:
P i = R [1 – (1 + i) –n]
Further, we divide both sides by [1 – (1 + i) –n] and the result will be the mathematical
expression or formula for computing mortgage periodic payments as follows.
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Example: Emmanuel purchased a house for Birr 115,000. He made a 20% down payment
with the remaining balance amortized in 30 years mortgage at annual interest rate of 11%
compounded monthly.
a. Find the monthly mortgage payment?
b. Compute the total interest.
Solution:
i
R P n
1 (1 i )
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= 92,000 (0.009523233)
R = Birr 876.14
b. Total Interest = (R x n) – P
= 876.14 x 360 – 92,000
= Birr 223,409.49
Over the 30 years period Emmanuel is going to pay a total interest of Birr 223,409.49,
which is well more than double of the initial amount of loan. Nonetheless, the high
interest can be justified by the fact that value of a real estate is usually tend to increase
overtime. Therefore, by the end of the term of the loan the value of the real estate (house)
could be well higher than its purchase cost in addition to owning a house to live in for the
30 years and more.
Continuous Assessment
The assessment methods for this criterion include tests, quiz, exam, assignments, case
analysis and group works
Summary
The following are some of important formula that deal with mathematics of finance.
Simple Interest
= Pin
Future Value Of A Simple Interest
= P (1 + i n)
Compound Amount
= P (1 + i) n
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(1 i) n - 1
Fn R
i
Sinking Fund Payment Formula
i
R Fn n
(1 i ) 1
1 (1 i ) n
P R
i
Mortgage Payments and Amortization
i
R P n
1 (1 i )
Exercises
1. Suppose, a small handicraft enterprise has requested a two year loan of Birr 6500
from the commercial Bank of Ethiopia. If the bank approves the loan at an annual
interest rate of 7.5%,
a. What is the simple interest on the loan?
b. What is the maturity value of the loan?
2. A person signs a note promising to pay a bank Birr 1500 eight months from now and
receives Birr 1350. Find the discount rate.
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3. Find the bank discount and proceeds on a 120-day note for Birr 720 bearing 5%
interest if discounted at 4% 90 days before it is due.
6. How long will it take for Birr 4750 to accumulate to Birr 7500 at 51/3% compounded
semi-annually?
7. If, in 11 years, Birr 1200 accumulates to Birr 1482, what is the compound interest rate
provided it is converted annually?
9. Find the accumulated value of an ordinary annuity of Birr 65 per period for 23
periods if money is worth 4% per period.
10. If birr 500 is deposited each quarter in to in account paying 12% compounded
quarterly,
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Introduction
It is a dried fact that the application of concepts of calculus in the business arena specially; in
marginal analysis and optimization problems is paramount. In this part of the module, basic
concepts in calculus to be seen include: concept of limit and continuity, derivatives, definite
and indefinite integration, and their major application areas in business; typically, marginal
analysis, optimization problems and area functions.
Differential Calculus:
It is one aspect of calculus that measures the rate of change in one variables as another
variable changes. It broadens the idea of slope.
A function: if for every value of a variable x, there corresponds exactly one and only one
value of the variable y, we call y is a function of x, written as:
Y = f(x).
Limits:
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and only if the functional value f(x) is close to the single real number ℓ, whenever x is
close to but not equal to c ( on either side of c).
Example-1:
For the function f(x) =x2 + 2, find the limit of f(x) as x approaches 1.
Solution:
f(x) = 3
Example-2:
For the function f(x) = /x/, find;
X
a. f(x) b. f(x)
Solution:
f(x)=/x/ 1 1 1 1 1 1
x
ℓ- = 1 ℓ+ = 1
Thus; f(x) = 1
b.
X -0.999 -0.99 -0.9 0 0.0001 0.001 0.01 0.1
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f(x)=// -1 -1 -1 1 1 1 1
x
ℓ- = -1 ℓ+ = 1
Limit Theorems:
E.g. 10 = 10
c=c
2. kf(x) = k f(x)
E.g. (x2-2+3) = x2 – 2 x+ 3
= a2-2a +3
= [5] [0]
=0
5. [f(x)n] =[ f(x)n]
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c. If m = 0 and L = 0, then f(x) and g(X) have a common factor and the limit can be
evaluated after employing the process of cancellation.
Continuity of a Function:
1. f(x) → exists
2. f(c) is defined
3. f(x) = f(c)
Example:
Using the definition of continuity, discuss the continuity of the function f(x) = x2-4
x-2
at c =1 and c = 2
Solution:
At c =1, f(x)
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1-2
f(x) = 3 = f(1)
f(x) = 4 It exists
Derivatives:
Example-1
Find f′(x) for f(x) = 2x +4
f(x) = lim f(x+ x) –f(x)
x 0 x
1st → find f(x) =
f(x) = f(x+x)-f(x)
= [2(x+x) +4] – (2+4)]
= 2+2x+4-2x-4
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f(x) = 2x
2nd find the limit: f′(x) = lim f(x)
x 0 x
= lim 2x
x 0 X
f′(x) = 2
Example-2
Rule of differentiation:
The derivative of the power function is the power times the function raised the power
minus one.
If f(x) = axn, then f′(x) = anxn-1
E.g. If f(x) = x5, then f′(x) = 5x5-1 = 5x4
If f(x) =3x3, f′(x) =33x3-1 = 9x2
Example-1
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A company manufactures and sells x transistor radios per week. Its weekly cost and demand
equations are:
Solution:
1000
= 10x –x2 - 5000-2x
1000
P(x) = 8x-x2 - 5000
1000
P′(x) 8-2x = 8-x
1000 500
8-x= 0
500
8= x
500
x = 4000 units
P″(x) = -1 P″(x)<0 x = 4000 units is the profit maximizing output level
500
At x = 4000 units P(x) = 8x-x2 - 5000
1000
= 8(4000) - (4000)2-5000
1000
= Birr 11,000
d) x =1000 radios;
Average cost č(x) = C(x)
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x
= 5000 +2x
x
At x = 1000 radios; č(x) = 5000 +2(1000)
1000
= 7 Birr
e) Marginal average cost = č′(x)
MAC = - 5000
x2
č′(x) = - 5000 = -0.005 Birr
(1000)2
Interpretation: At a production level of 1000 units a unit increase in production will decrease
average cost by approximately 0.5 cents or by 0.005 Birr.
A certain manufacturing company has the following information: Average total cost is given
by the equation:
č(q) = 0.5q -500+ 5000 and,
q
The demand function is:
P = 2500-0.5q
A. Find the firm’s: i. Total profit function ii. Marginal cost function iii. Marginal average
cost function
B. Find the quantity level that: i. maximizes total revenue ii. Maximizes total profit iii.
Minimizes total cost
C. Find the firm’s: i. Maximum revenue ii. Maximum profit
D. Find the price level that leads to maximum: i. Revenue ii. Profit
Integral Calculus:
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Indefinite Integral: Given F(x) which is the anti-derivative of f(x), the indefinite integral of
f(x) is defined to be:
Where;
= the integral symbol
f(x) = the integrand (the function to be integrated)
F(x) = the integral (the outcome of integration)
C = the constant of integration
dx = indicates the variable to be integrated
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Example: The function describing the marginal cost of producing a product is given by f(x)
= x+100, where x is the number of units produced, determine the total cost function if the
total cost of producing 100 units is birr 40 000.
Solution:
40,000 -15000 = C
C = 25000 Birr
Therefore; C(x) = ½x2+100x+25,000
Dear student, attempt this question. The marginal revenue function for a company’s product
is given by f(x) = 50,000-x, where x is the number of units produced. Develop the total
revenue function if revenue is zero when no units are produced and sold.
Definite integral:
Definition: If f(x) is a continuous function on the interval [a, b], the definite integral of f(x)
Where
A definite integral has a single numerical value associated with it and can be obtained
through the indefinite integral by using the following steps.
Step-1: get the indefinite integral of the function
Step-2: substitute the value x = a in the indefinite integral
Step-3: substitute x = b in the indefinite integral
Step-4: subtract the numerical value obtained in Step 2 from step 3 and the result gives the
definite integral value of the function between the limits x = a x = b.
Example
If marginal revenue is given by:
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F(q) = 200-6q , what extra total revenue is obtained by increasing sales (q) from 15 to 20?
Solution:
= 200q – 6q1+1 + C
1+1
= [200(20) -3(20)2+ C] - [200(15) -3(15)2+C]
= 2800+C- 2325 – C
= Birr475
Continuous Assessment
The assessment methods for this section include tests, quiz, exam, assignments, case analysis
and group works.
Summary
The major formulas for application of concept of calculus in marginal analysis and
optimization problems include the following.
- Marginal cost is the rate of change in total cost per unit change in production at an
output level of x-units.
- Marginal revenue function→ R′(x)
- Marginal profit function→ P′(x) = R′(x) - C′(x)
- Average cost→ č(x) = C(x)
x
- Marginal average cost→ č′ (x)
- Average revenue → Ř(x) = R(x)
x
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f(x) dx = F(x) +C
Exercises
At the end of this learning task the student will be evaluated through summative exam,
attachment, simulation (50 or 40%). It incorporates all the sections in the learning task.
world agribusiness problems application of matrix algebra and Markov Chain analysis using
hypothetical real world allied cases(Written exam, case study)
Recommended decision using the Formulated linear programming problems in both cases of
systematic approach of the linear minimization and maximization, optimal solution determined
programming to solve practical using systematic techniques/graphical and Simplex methods) on
agribusiness problems real world related(Written exam, case study)
Compile reports that analyze the time Time value of money concepts and its application
value of money applications for demonstrated(Written exam, case study)
financing decision in agribusiness
value chain
Applied the concepts of calculus in the Rules of limits and continuity, rules of differentiation and
agribusiness arena specially; in integration as well as their interpretative applications in the
marginal analysis and optimization agribusiness stream are well understood and applied(Written
problems exam, case study)
Major References
Ann, J. Hughes 1983. Applied Mathematics: For Business, Economics, and the social
Science.
Bowen, K. Earl, Prichett, D. Gordon, and Saber, C. John 1987. Mathematics with
Applications in Management and Economics. 6 th ed., Richard Irwin Inc., USA.
Dexter, J. Booth and John, K. Turner 1996. Business mathematics with Statistics.
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