Unit 1 - msm192

Business Mathematics
Mr Bupe Kolosa
Course code(MSM 192)

School of Natural and Applied Sciences (SNAS)
Mulungushi University (MU)
February 4, 2024
Mr Bupe Kolosa (MU) Business Math February 4, 2024 1 / 45

Overview
1 Introduction
Motivation
Objectives
2 Mathematical Progression
Arithmetic Progression
Geometric Progression
Application of Arithmetic and Geometric Series
3 Interests, Annual Percentage Rate
Business Terminologies
Simple Interest
Compound Interest
4 Depreciation
Straight line depreciation
Reducing balance depreciation
5 Investments Appraisal
Present value and Future value
Capital Investments
Introduction Motivation
What is Business Mathematics ?
Business mathematics is a type of mathematics used by commercial

organizations in accounting, marketing, inventory management, sales
forecasting and financial analysis to record and manage business
operations.
This unit provides an introduction to the Mathematical progression and
describes simple and compound interest and common depreciation
techniques found in business.
Investment Appraisal techniques based on discounted cash flows, and
finally, we discuss the Annuities which are used as methods of loan
repayment and asset depreciation.

Introduction Objectives
Objectives
Apply the theory of series in simple and compound calculations.

Calculate simple and compound interests.
Calculate common depreciation.
Appraise projects.
Calculate annuities used for loan repayments

Mathematical Progression Arithmetic Progression
Arithmetic Progression
A sequence is a list of numbers which follow a definite pattern or rule.
A series is the sum of the terms of a sequence.
An Arithmetic Progression(AP) is a sequence of numbers such that the
difference between every two consecutive terms is constant, this constant
is known as the Common Difference.
Consider the following sequence 2, 6, 10, 14, · · ·
The nth term of the above sequence is given by 4n − 2
In general the arithmetic sequence can be written as

a, a + d, a + 2d, a + 3d, ..., a + (n − 2)d, a + (n − 1)d where
a - first term
d - common difference
n - number of terms = 1, 2, 3, · · ·
The general term of an AP whose first term is a and the common

difference id d is found by the formula
an = a + (n − 1)d.
Example 1
1. Find the general term of the following sequence 6, 13, 20, 27, 34, ...
2. Find the 100th term of the above sequence.

AP
Solution.
(1) Knowing that the nth term of the arithmetic sequence is given by
an = a + (n − 1)d, and
a = 6, d = 7, n =?
an = a + (n − 1)d
= 6 + (n − 1)7
= 7n − 1
(2) From the general term obtained in (1), It follows that

a = 6, d = 7, n = 100
a100 = 7n − 1
a100 = 7(100) − 1 = 699

Sum of Arithmetic Progression

Consider an AP whose first term is a and the common difference id d.
The sum of the first n terms of an AP when the nth term is NOT known is
n
Sn = [2a + (n − 1)d].
2
The sum of the first n terms of an AP when the nth term is known is
n
Sn = [a + an ].
2
Example 2
1 Find the sum of the first 15 terms of the series: 20 + 18 + 16 + 14 + ...
2 In an arithmetical progression the 8th term is 23 and the 11th term is
4 times the 3rd term. Find the 1st term, the common difference and
the sum of the first 10 terms.
3 The sum of terms of an arithmetic progression is 48. If the first term
is 3 and the common difference is 2, find the number of terms.

Mathematical Progression Geometric Progression
Geometric Progression
A Geometric Progression(GP) is a sequence of numbers such that any

number after the first term is obtained by multiplying the preceding term
an
by a constant called the common ratio(r), written as r = an−1 .
Consider the following geometric sequence 1, 3, 9, 27, 81, ...
The nth term is given by 3n−1
In general the geometric sequence can be written like

a, ar , ar 2 , ar 3 , ..., ar n−2 , ar n−1 where
a - first term
r - common ratio
n - number of terms = 1, 2, 3, · · ·

Sum of Geometric Progression

Consider a GP whose first term is a and the common ratio is r.
The sum of the first n terms of a GP is given by
1 − rn

Sn = a .
1−r
Example 3
1 Decide which of the following sequences are geometric progressions.
For those sequences that are of this type, write down their geometric
ratios.
(a) 1000, −100, 10, −1, ... (b) 2, 4, 6, 8, ... (c) a, ar , ar 2 , ar 3 , ...
2 Find the sum of the first 12 terms of the series: 4 + 2 + 1 + 12 + 14 ...
3 In a geometrical progression the sum of the 3rd and 4th terms is 60
and the sum of the 4th and 5th terms is 120. Find the 1st term and
the common ratio.
4 What is the smallest number of terms of the geometrical progression
2 + 6 + 18 + 54 + 162... that will give a total greater than 1000?
Sum to Infinity
The Sum to infinity GP is the sum of an infinite number of terms of a

geometric progression.
This concerns geometrical progressions that as the number of terms

increases, the value of the sum approaches one specific number. This
number is called the sum to infinity.
The sum of an infinite number of terms is not always infinite.
1 1 1
Consider the following sum 1 + 2 + 4 + 8 + ...
Geometric Progression with the common ratio less than 1 have finite sums.

Mathematical Progression Application of Arithmetic and Geometric Series
AP and GP
Example 4
Example (Application of Arithmetic and Geometric Series)
A manufacturer produces 1,200 computers each week. After week 1, he
increases production by:
A : 80 computers each week.
B : 5% each week.
1 1 Find the output in week 20 under each scheme.
2 Find the total output over the first 20 weeks under each week.
2 Calculate for schemes A and B the week in which production first
exceeds 8000.

AP and GP
Solution.
Scheme A forms an arithmetic series; a = 1200, d = 80
Scheme B is a geometric series; a = 1200, r = 1.05
(1)The output in week 20 is the value of term number 20 .
(2) The total output over 20 weeks is the sum of the first 20 weekly
outputs.
(1) Output in week n is [a + (n − 1)d]. output in week 20
= [1200 + (20 − 1)80]

= 2720
(2) Total output in 20 weeks is

n
Sn = [2a + (n − 1)d]
2
20
S20
Mr Bupe Kolosa (MU)
= [2(1200)Business
+ (20 − 1)80] = 39, 200
Math February 4, 2024 13 / 45
AP and GP
Solution Cont..
Scheme II: (i) Output in week n is ar n−1 , output in week 20
= 1200(1.05)19
= 3032.34 = 3032
(2) Total output in 20 weeks is
a (r n − 1)
Sn =
r −1
1200 1.0520 − 1

S20 =
1.05 − 1
1200(1.6533)
=
(0.05)
1983.96
= = 39679.2
Mr Bupe Kolosa (MU)
0.05
Business Math February 4, 2024 14 / 45
AP and GP
Solution Cont...
Each term number in the series represents the corresponding week. The
value of each term represents the output for that week, that is, So, solve
for the value of n (week n ) for which Tn = 8000 :
Tn = a + (n − 1)d
8000 = 1200 + (n − 1)(80)
8000 − 1200 = (n − 1)(80)
6800
=n−1
80
86 = n
The output for week 86 is 8000 .

AP and GP
Solution Cont...
So, solve for the value of n (week n ) for which Tn = 8000 :
Tn = ar n−1
8000 = 1200(1.05)n−1
8000 n−1
1200 = (1.05)
log(6.6667) = log(1.05)n−1
log(6.6667) = (n − 1) log(1.05)
log(6.6667)
log(1.05) =n−1
38.8833 = n − 1
39.8833 = n
During week 39 , output reaches 8000 units.

AP and GP
Example 5
Example (Application of Arithmetic and Geometric Series)
A TV manufacturer plans to increase his output by 5% each month. If he
is now producing 300 TVs per month, calculate, using series,
1 His monthly output in 15 months from now.
2 His total output in 15 months, starting with the present month.
3 The month in which his output reaches 500. each week.

Interests, Annual Percentage Rate Business Terminologies
Interests
Principal amount(P): This is the amount of money that is initially

borrowed from the bank or invested.
Rate of interest(i or r): This is the rate of interest at which the principal
amount is given to someone for a certain period.
Time(n or t): This is the duration for which the principal amount is given
to someone
Accrued amount(A): This is the principal amount plus the interest

amount the person returns to the bank.

Interests, Annual Percentage Rate Simple Interest
Simple Interest
Simple Interest(S.I): Simple interest is the method to calculate the

amount of interest charged on the principal amount at a given rate and for
a given period of time.
The interest earned is NOT added back to the principal amount invested.
Simple interest is calculated with the following formula;
S.I = P × R × T

Interests, Annual Percentage Rate Simple Interest
Amount accrued on Simple Interest
The accrued amount on simple interest is calculated with the following

formula;
A = P(1 + RT )
Example 6
1 Chanda had borrowed K 1, 000 from Mwape and the rate of interest
was at 5%. What would the simple interest be if the amount
borrowed for 3 year?. Calculate the amount to be returned?
2 A savings account of K10,000 earns simple interest at 5% per annum.
Calculate the value of the account (future value) after six years.
3 How many days does it take for K1,450 to accumulate to K1,500
under 4% p.a. simple interest?

Interests, Annual Percentage Rate Compound Interest
Compound Interest
Compound Interest(C.I): Compound interest is interest calculated on the
principal amount and the interest accumulated over the previous period.
Pt = P0 (1 + R)t
The interest earned is added back to the previous amount accrued.
Compound interest is calculated by multiplying the initial principal amount

by one plus the annual rate of interest raised to the number of compound
periods minus one, i.e;
C .I = P0 [(1 + R)t − 1]
With compound interest, you work out the interest for the first period, add
it to the total, and then calculate the interest for the next period, and so
on.
Compound Interest
Example 7:
1 Find the value, in 4 years’ time, of K10,000 invested at 5% interest
compounded annually.
2 Find the compound interest rate required for K10, 000 to double in
six years.
3 A bank pays 7.5% interest, compounded annually. How long will it
take for K10,000 to grow to K20,000?
4 Calculate the present value of K10,000 due in five years if interest is
compounded annually at 4.5%.

Compound Period
Compounding Period is the period at which the interest is compounded
in a year. Compounding may be six-monthly, quarterly, monthly,
fortnightly, weekly or daily. Therefore, the accrued amount can be
calculated by r tm
Pt = P0 1 +
m
Where m is the compounding period. With continuous compounding,
the total value is given by the formula
Pt = P0 e rt .
The actual annual rate of interest, called the effective rate or annual
percentage rate (APR), will always be greater than the nominal rate.
r m
APR = 1 + −1
m

Example 8
1 An amount of K2,000 is invested at an annual rate of 8% p.a.
compounded continuously. Find out amount at the end of 5 year.
2 Miss Fatima wants to make an investment of K500,000 for six years.
He has two alternatives. First alternative provide her a return of 8%
Compounded annually and second alternative provides her a return of
7.5% compounded semi-annually. Which alternative should she
select?
3 Find the annual percentage rate on a loan corresponding to 6.0%
compounded monthly.
4 Mr Zulu took a loan of K2,000 for 6 months. Lender deducts K200 as
interest while lending. Find the effective rate of interest charged by
lender.
5 A firm decides to increase output at a constant rate from its current
level of 50, 000 to 60, 000 during the next 5 years. Calculate the
annual rate of increase required to achieve this growth.
Depreciation
Depreciation
Depreciation is an accounting practice to depreciate the values of certain

assets. There are several different methods available for calculating
depreciation.
Depreciation Related terms:

Original Cost/cost:
Useful life of Assest
Salvage Value
Instead of adding value to some original principal amount, value is taken
away in order to reduce the original amount.

Depreciation Straight line depreciation
Straight line depreciation

Straight line depreciation is the converse of simple interest

Depreciation Reducing balance depreciation
Reducing balance depreciation
Reducing balance method is the converse of compound interest.
If book value B is subject to reducing balance depreciation at rate 100r %

over n time periods, the depreciated value at the end of the nth time
period is given by:
Dt = B(1 − r )t
where;
D = depreciated value
B = original book value
r = depreciated rate
t = number of time periods ( normally years)
Same percentage causes a larger depreciation expense amount in earlier

years, declining each year.

Depreciation
Example 9
1 An asset costing K4,500 will depreciate to a scrap value of K500 in 10
years. Find the rate of depreciate.
2 A Cru Cru whose cost is K1, 000,000 will depreciate to a scrap value
of K100,000 in 5 years. What is the book value of Cru Cru at the end
of 4th year?
1 If the reducing balance method of depreciation is used.
2 If the straight-line method of depreciation is used.
3 A mainframe computer whose cost is K220,000 will depreciate to a
scrap value of K12000 in 5 years.
1 If the reducing balance method of depreciation is used, find the
depreciation rate.
2 What is the book value of the computer at the end of the third year?
3 how much more would the book value be at the end of the third year if
the straight line method of depreciation had been used?

Quiz
1 What is the main difference between Simple interest and Compound

interest?
2 A firm borrows K6000 from the bank at 13% compounded semi
annually. If no repayments are made, how much is owed after 4 years?
3 Derive the sum of the arithmetic progression for the nth term.
4 Explain the 2 methods of depreciation in relation to the types of
interests.

Investments Appraisal
Time-Value of Money
The time value of money concept plays a vital role in investment

decisions because a $1 today is different from a $1 in one year’s time.
We shall describe the method of present value and how it can be applied to
future cash flows in order to find their worth in today’s money values. This
in turn enables discounted cash flows to be calculated for investments,
leading to descriptions of the main methods of investment appraisal.

Investments Appraisal Present value and Future value
Present value and Future value

Present value is the amount of money that must be invested in order to
achieve a specific future value.
Future value is the amount available at a specific date in the future or

the amount available after an investment has earned interest. Consider the
compound interest formula, which expresses the accumulated amount at

the end of n periods when interest at the rate of r is compounded m times
a year. The principal p in the formula is often referred to as the Present
value, and the accumulated value A is called the Future Value.
The present value is the amount you must invest in order to realize the
future value. This is given by;
F .V
P.V =
(1 + r )t
Investments Appraisal Capital Investments
Capital Investments
A capital investment is a project which consists of:

1 An initial outlay of capital
2 A set of estimated cash flows and outflows over the life of the project.
3 Optionally, a resettlement figure, which might be caused by resale of
plant or shares, or a cash settlement to clear any liabilities incurred.
Two methods of appraising and comparing capital investments.
1 Discounted cash flow and net present value(NPV)
2 Internal rate of return (IRR)

Discount cash flow/ Net Present Value
The discount cash flow method of investment appraisal involves

calculating the sum of the present values of all cash flows associated with
a project. This sum is known as the net present value(NPV) of the
project.
Interpretation of NPV
1 NPV >0 implies the project is in profit ( i.e. it is worth taking)
2 NPV = 0 implies the project break even
3 NPV <0 implies the project makes a loss ( i.e. not worth taking)
Note that the discount rate is that rate which is used to discount the cash
flows.

Cont...
Example 10
It is estimated that an investment in a new process will cause the following
cash flow ( in K)
End year 0 1 2 3 4 5 6
Cash outflow 60000 10000
Cash inflow 15000 20000 20000 20000 20000
The firm wishes to earn at least 15% per annum on projects of this type.
Calculate the Net Present Value of the project and comment on the course
of action to be taken

Cont...
year inflow outflow Net cashflow Discount factor P.V

0 60000 (60000) 1.000 (60000.00)
1 10000 (10000) 0.8696 (8696.00)
2 15000 15000 0.7561 11341.50
3 20000 20000 06575 13150.00
4 20000 20000 05718 11436.00
5 20000 20000 04972 9944.00
6 20000 20000 04323 864600
Net Present Value = (14178.50) . since the NPV is negative and
comparatively large, the project clearly earns much less than 15% and
hence would not be considered.

Internal Rate of Return (IRR)
The internal rate of return ( some times called the yield) is an alternative
method of investment appraisal to Net Present Value.
The IRR of a project is the value of the discount rate that gives an NPV of
zero.
There is no precise formula for calculating the IRR of a given project.

However, it can be estimated

Graphical estimation of IRR

Estimation of IRR by formula
The exact formula equivalent of the graphical linear interpolation method

is now given:
N1 r2 − N2 r1
IRR =
N1 − N2
Where:
discount rate r1 gives NPV N2 and discount rate r2 gives N2 .
Using the example above

Discount rate 15% yield an NPV of K 14000(i.e.R1 = 0.15, N1 = 14000)
Discount rate 17% yield an NPV of
–K 7000(i.e.R2 = 0.17, N2 = −K 7000)
An estimate of the IRR is 16.33%.

Example 11
A project requiring an initial outlay of K15, 000 is guaranteed to produce a

return of K20, 000 in 3 year’s time. Use the
1 net present value
2 internal rate of return
methods to decide whether this investment is worthwhile if the prevailing
market rate is 5% compounded annually. Would your decision be affected
if the interest rate were 12%?

Annuities
Annuities
An annuity is a series of equal deposits (or withdrawals) made at equal

intervals of time; for example, a deposit of k2500 made each year for 20
years towards a pension fund.
Classification of Annuities
1 time of payments
2 term of annuity
3 timing of the compounding process
The total amount of the annuity at the end of t years is
(1 + r )t − 1
VANUt = A0
r

Annuities
Present Value of an Ordinary Annuity
The present value of an annuity is the sum of the present values of its
installments. In calculating the present value of an annuity it is always
customary to reckon compound interest.
We can obtain the formula for the discounted future value of an ordinary
annuity by reversing the amounts of the quarterly payments in the example
to derive the present value of annuity. The discounted values of each
annuity payment, according to the formula PV = FV/(1 + r )t , would be
A [1 − (1 + r )−t ]
PV = (1)
r

Annuities
Example 12
1 A man wants to cash in his trust fund, which pays him $500 a month
for the next 10 years. The interest on the fund is 6 21 % compounded
monthly. How much would he receive?
2 How much should you pay for an annuity of K1,000 a year payable in
arrears for 20 years, assuming an interest rate of 6%, if you are to
break even?
3 At age 25 Adam started to contribute to his retirement account by
making monthly contributions of $100. If his IRA pays 6 41 % interest
compounded semiannually, how much will he collect when he retires
at age 65 , and how much will he make on his investment?
4 A machine costs the company K98,000 and its effective life is
estimated to be 12 years. If the scrap realizes K3,000 only, what
amount should be retained out of profits at the end of each year to
accumulate at compound interest at 5% per annum?

Annuities Debt Repayments
Debt Repayments-Amortization method

At the end of t years, loan is repaid, therefore FV = 0.
PV = −L since the loan is a debt. hence
(1 + r )t − 1
0 = −L(1 + r )t + A
r
We can solve the above equation for
1 the size of the loan, L, given A, r and t:

A 1
L= 1−
r (1 + r )t
2 the size of the repayments, A, given L, r and t:
Lr r
A= =L
1− 1 1 − (1 + r )− t
(1+r )t
r
where 1−(1+r )− t
is called the capital recovery factor.
Annuities Sinking Funds
Sinking Funds
A sinking fund is created by putting aside a fixed sum each year for the
purpose of paying debts, replacing equipment, etc. In other words, an
annuity is set up to repay the debt. If a fixed sum, is set aside at the start
of each year and interest in compounded annually at the value of the
sinking fund at the end of year t is;
(1 + r )t − 1
VSFt = A0 (1 + r )
r

Annuities Sinking Funds
Example 13
1 Mambwe is planning for her retirement. She is 45 years old today, and
would like to have K300, 000 when she attains 60 years. She intends
to deposit a constant amount of money at 12% each year in the
public pension fund in the Zambian commercial bank to achieve her
objective.
2 A taxi service must replace cars every 5 years at a cost of k450 000.
At an 8% rate of interest, calculate the size of each quarterly
payment necessary to meet this target
3 Suppose that Bupe received information on the mortgage loan that
her late father signed. The information revealed a remaining balance
of K36,188.09 on the loan which was obtained at 8%, and monthly
payments of K733.76. She wants to know how many payments are
left.
4 A mortgage of K200,000 is to be repaid over a 25 year period at a
fixed interest rate of 4.5 %. Calculate the monthly repayments.

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Business Mathematics

Course code(MSM 192)

Mr Bupe Kolosa (MU) Business Math February 4, 2024 1 / 45

What is Business Mathematics ?

Business mathematics is a type of mathematics used by commercial

Mr Bupe Kolosa (MU) Business Math February 4, 2024 3 / 45

Apply the theory of series in simple and compound calculations.

Mr Bupe Kolosa (MU) Business Math February 4, 2024 4 / 45

Consider the following sequence 2, 6, 10, 14, · · ·

The nth term of the above sequence is given by 4n − 2

In general the arithmetic sequence can be written as

The general term of an AP whose first term is a and the common

2. Find the 100th term of the above sequence.

Mr Bupe Kolosa (MU) Business Math February 4, 2024 6 / 45

(2) From the general term obtained in (1), It follows that

Mr Bupe Kolosa (MU) Business Math February 4, 2024 7 / 45

Sum of Arithmetic Progression

2 In an arithmetical progression the 8th term is 23 and the 11th term is

is 3 and the common difference is 2, find the number of terms.

A Geometric Progression(GP) is a sequence of numbers such that any

Consider the following geometric sequence 1, 3, 9, 27, 81, ...

The nth term is given by 3n−1

In general the geometric sequence can be written like

Mr Bupe Kolosa (MU) Business Math February 4, 2024 9 / 45

Sum of Geometric Progression

The Sum to infinity GP is the sum of an infinite number of terms of a

This concerns geometrical progressions that as the number of terms

The sum of an infinite number of terms is not always infinite.

Mr Bupe Kolosa (MU) Business Math February 4, 2024 11 / 45

Mr Bupe Kolosa (MU) Business Math February 4, 2024 12 / 45

= [1200 + (20 − 1)80]

(2) Total output in 20 weeks is

(2) Total output in 20 weeks is

The output for week 86 is 8000 .

Mr Bupe Kolosa (MU) Business Math February 4, 2024 15 / 45

During week 39 , output reaches 8000 units.

Mr Bupe Kolosa (MU) Business Math February 4, 2024 16 / 45

Mr Bupe Kolosa (MU) Business Math February 4, 2024 17 / 45

Principal amount(P): This is the amount of money that is initially

Accrued amount(A): This is the principal amount plus the interest

Mr Bupe Kolosa (MU) Business Math February 4, 2024 18 / 45

Simple Interest(S.I): Simple interest is the method to calculate the

Simple interest is calculated with the following formula;

Mr Bupe Kolosa (MU) Business Math February 4, 2024 19 / 45

Amount accrued on Simple Interest

The accrued amount on simple interest is calculated with the following

Mr Bupe Kolosa (MU) Business Math February 4, 2024 20 / 45

The interest earned is added back to the previous amount accrued.

Compound interest is calculated by multiplying the initial principal amount

Mr Bupe Kolosa (MU) Business Math February 4, 2024 22 / 45

Mr Bupe Kolosa (MU) Business Math February 4, 2024 23 / 45

Depreciation is an accounting practice to depreciate the values of certain

Depreciation Related terms:

Mr Bupe Kolosa (MU) Business Math February 4, 2024 25 / 45

Straight line depreciation

Mr Bupe Kolosa (MU) Business Math February 4, 2024 26 / 45

Reducing balance depreciation