FPMA1064

MATHEMETICS
BUSINESS
Centre For
Pre-University Studies

TEACHING NOTES

FOUNDATION IN BUSINESS

PREPARED BY:
MS. CHOW WEI LI

Foundation
STICTLY FOR INTERNAL CIRCULATION ONLY

TAR UC
TAR UC – CPUS Foundation in Business – Business Mathematics (FPMA1064)

Chapter 1 Basic Mathematics 1

At the end of chapter, students should be able to

• solve question according to order of operation;
• write answer in fractions, decimals and significant figures;
• solve situations involving percentage;
• solve situations involving ratio.

1.1 Order of Operation

The operations are addition, subtraction, multiplication, division, exponentiation, and grouping; the order of these
operations states which operations take precedence (are taken care of) before which other operations.

The order of operation is as following:

B Brackets first
O Orders (i.e. Powers and Square Roots, etc.)
DM Division and Multiplication (left-to-right)
AS Addition and Subtraction (left-to-right)

Example 1
Simplify 16 – 3(8 – 3)2 ÷ 5.

Example 2
Simplify 14x + 5[6 – (2x + 3)].

Example 3
Simplify –{2x – [3 – (4 – 3x)] + 6x}.

1.2 Law of Indices

Indices or powers are numbers that tell us how often a number is to be multiplied by itself in a mathematical expression.
They appear quite frequently, in numerical and algebraic expressions. The laws are very important when multiplying and
diving powers as well as when using them in algebraic expressions.

1) a0 = 1 2) am × an = am + n 3) am ÷ an = am – n
4) (am)n = amn 5) n√a = a1/n 6) n√am = am/n
7) 1/am = a–m 8) (ab)m = ambm 9) (a/b)m = am/bm

Remarks: (a + b)m ≠ (am + bm) and (a – b)m ≠ (am – bm).

(a + b)2 = (a + b)(a + b)
= a2 + ab + ab + b2
= a2 + 2ab + b2

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TAR UC – CPUS Foundation in Business – Business Mathematics (FPMA1064)

Example 4
Express the following in simplest form.
a) √(4x2) + √(2x + 3)4 – (3x)2

b) (5x2)2 + (2x)0 + ((2x)4)0.5 – (4x2)0.5 + √(x2 + 2)4

c) (3x–2)2 ÷ 6x–6 – (–2x2 – 2x) + 2x–2(4x3)

d) (4x)0.5 ÷ 2x1.5 × 0.5x3 – 5x(–2x–4 + x) + (–3x–5)(2x)2

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1.3 Transposition of Formula

A formula is a type of equation which shows the relationship between different variables. Subject of the formula is a
variable which is expressed in terms of other variables involved in the formula.

Formulas are written so that a single variable, the subject of the formula is on the L.H.S. of the equation. Everything else
goes on the right side of the equation.

Example 5
a) In the formula, I = s + (n – 1)d, make d as the subject.

b) Make y the subject of the formula x√y + 2u = 3x – 2s.

c) Make y the subject of the formula x = (y + z)/(y – z).

1.4 Introduction to Fractions, Decimals and Significant Figures

If a value cannot be written in whole number, we can choose to write the value in fraction, decimals or significant figure
following the instruction given.

Example 6
Compute 0.5(1 – 2(– 0.05)) – 0.3(0.2) and write the answer in
a) fraction,
b) one decimal place,
c) three significant figures.

Example 7
Compute 20(1 – (–2)2)2 – 52(–0.35) and write the answer in
a) fraction,
b) one decimal place,
c) two significant figures.

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1.5 Percentage
➢ a rate, number, or amount in each hundred
• 25% can be expressed as 25/100 or 1/4 or 0.25
➢ any proportion or share in relation to a whole
➢ any increase or decrease in percentage is based on the change of the new value to the original value

Example 8
a) The government imposes a 15% tax on the price of a good. How much does the consumer pay for a good priced by a
firm at $ 1 360?

b) Investment fall during the course of a year by 7%. Find the value of an investment at the end of the year if it was
worth $ 9 500 at the beginning of the year.

c) After a 15% reduction in a sale, the price of a good is RM 39.95. What was the price before the sales began?

d) A coat originally costing RM 150 is reduced by 25% in a sale and, since nobody bought the coat, a further reduction of
20% of the sale is applied. Find the final cost of the coat after both reductions.

e) During 2014 the price of a good increased by 8%. In the sale on 1 st January 2015 all items are reduced by 25%. If the
sale of the good is RM 688.50, find the original price at the beginning of 2014.

f) A share price rises by 32% during the first half of the year and rise by a further 10% during the second half. What is
the overall percentage change?

g) Find the overall percentage change in the price of a good if it rises by 5% in a year but is then reduced by 30% in a
sale.

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TAR UC – CPUS Foundation in Business – Business Mathematics (FPMA1064)

1.6 Ratio
➢ a relationship between two numbers indicating how many times the first number contains the second
➢ the numbers in a ratio may be quantities of any kind
➢ a ratio may be considered as an ordered pair of numbers, as a fraction with the first number in the numerator and the
second as denominator
• a ratio written as a to b or a : b also can be written in fraction form a/b

Example 9
Jeff’s parents share a prize of RM 1 600 between them in the ratio 5 : 3. The woman shares her part between herself, her
mother and her daughter in the ratio 5 : 3 : 2. How much the difference between her mother and her daughter receive?

Example 10
When RM 250 is divided in the ratio 3 : 4 : 3 among Shawn, Jeff and Michael, and Jeff decides to give away 30% of his
portion equally to Shawn and Michael. Write the ratio of the money they have now among Shawn, Jeff and Michael.

Example 11
Amanda, Kelly and Sharon share a sum of money in the ratio 3 : 2 : 5. If the sum of money is doubled, in what ratio should
they divide it so that the Amanda still receives the same amount while Kelly and Sharon will have equal amount?

Example 12
When RM x is divided in the ratio 2 : 4 : 1 among Will, Sam and Jason, and Sam uses half of his money to spend on
investments and one-eighth of the remaining money on entertainment and saves the rest of money. If his savings is
RM 560, find the value of x.

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Chapter 2 Basic Mathematics 2

At the end of chapter, students should be able to

• express situation in algebraic form;
• formulate problem into linear equation;
• formulate problem into quadratic equation.

2.1 Algebraic Expression

An algebraic expression is a mathematical expression that consists of variables, numbers and operations (addition,
subtraction, multiplication, division and exponentiation by an exponent that is a rational number). The value of this
expression can change based on the change of variable. Algebraic expressions, however, don't have an equal (=) sign.
• A variable is a symbol used to represent a number in an expression or an equation.
• Exponentiation is a mathematical operation, written as bn, involving two numbers, the base b and the exponent or
power n.

Example 1
Tony is at a car rental service to rent a car. There is an administration fee of $50 to rent a car and then it costs $20 for each
day he has the car. Write an expression for the total cost of renting a car at this particular car rental service.

Example 2
A house owner needs to pay a gardener $8 per square foot for gardening job at his square garden and a meal allowance
$20. How much will he pay to the gardener?

Example 3
The expenses of a party that costs $350 will be shared among Katie and her friends. How much will Katie pay for her share
of the party if the club owes her $9?

Example 4
Sam works as a promoter in a supermarket for 4 weeks. He will receive a pay included 3 times square of the number of
days he works, RM 20 meal allowance each day he works and transport allowance RM 100 per week. How much he will
receive after 4 weeks?

Example 5
Find the difference in area between a square and a rectangle with its length and width are shorter by 2 cm and 3 cm than
the length of the side of square respectively.

Example 6
All students in class FBU 1308 volunteered to join charity event but the teacher in charge said only selected students will
be able to join this event. She said one-eighth of the students will be crowd controller, half of the students will be food
seller and three students are in-charge of traffic control during that event. State the number of students will not be selected
for this event.

Example 7
A city centre tour guide currently charges $34 for a full day’s tour. The average number of customers is 48. Market
research suggests that for every $1 increase in tour price, the guide can expect to lose two customers per tour. Write the
expected revenue from each tour.

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TAR UC – CPUS Foundation in Business – Business Mathematics (FPMA1064)

2.2 Linear Equation

A linear equation is an algebraic equation in which the highest degree term in the variable or variables is of the first degree.
• The graph with x = a, is a vertical line parallel to y-axis, where a is a constant.
• The graph with y = a, is a horizontal line parallel to x-axis, where a is a constant.
• The graph with two variables of the first degree is written in the general form ay + bx + c = 0, where x and y represent
unknowns or variables, and a, b, and c represent known numbers, with a ≠ 0 and b ≠ 0. Usually, straight line with two
variables is written in gradient form y = mx + c, where m is the gradient of the line and c is the y-intercept.

The gradient of a line is defined as the ratio of (different in y-coordinate)  (different in x-coordinate). Gradient of a line is
represented with m.

Consider the following diagram,

y − y1 3 − 1
m AB = 2 = = −1
x2 − x1 1 − 3
If the straight line is inclined If the straight line is inclined
y upwards from left to right, downwards from left to right,
then it has a positive then it has a negative
4 gradient. gradient.

3
A m>0 m<0
2

1
B

1 2 3 4 x

Example 8
Given that the cost of operating a restaurant daily (in RM) is given by y = 1 000 + 5x, where x is the number of customers
visiting the restaurant at a particular day.
a) Interpret both values of gradient and y-intercept.
b) Find the number of customers visiting to the restaurant if the cost at a particular day is RM 2 400.

Example 9
Total revenue from daily ticket sales to a theme park is RM 1 352 400. A total of 12 000 tickets were sold and 65% of
these were child tickets with a 30% discount off the adult price. Work out the cost of an adult ticket.

Example 10
Katie receives pocket money RM 200 more than her sister, Jenny from their mother monthly. Katie plans to give Jenny
RM 60 this month and the ratio of pocket money Jenny to Katie is 9 : 11 this month. Find the ratio of pocket money Jenny
to Katie received from their mother monthly and the money they have in this month.

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TAR UC – CPUS Foundation in Business – Business Mathematics (FPMA1064)

2.3 Quadratic Equation

A quadratic equation is any equation having the form ax2 + bx + c = 0, where x represents an unknown or variable, and a, b,
and c represent known numbers, with a ≠ 0.
A quadratic equation can be solved easily by using quadratic formula, x = −b  b − 4ac .
2

2a

when a is positive

b2 – 4ac > 0 b2 – 4ac = 0 b2 – 4ac < 0

i) ax2 + bx + c = 0 has two solutions. ii) ax2 + bx + c = 0 has one solution. iii) ax2 + bx + c = 0 has no solutions.

when a is negative

b2 – 4ac > 0 b2 – 4ac = 0 b2 – 4ac < 0

i) ax2 + bx + c = 0 has two solutions. ii) ax2 + bx + c = 0 has one solution. iii) ax2 + bx + c = 0 has no solutions

Since you only know how to take square roots of positive numbers, the quadratic formula only gives real solutions if
b2 – 4ac is greater or equal to 0. The expression b2 – 4ac is therefore important and is known as the discriminant.

Nature of the roots:

i) if b2 – 4ac > 0, f(x) has 2 REAL distinct roots
ii) if b2 – 4ac = 0, f(x) has EQUAL roots
iii) if b2 – 4ac < 0, f(x) has NO REAL roots

Example 11
Find the roots for x2 = 3x + 4. Hence, sketch the graph y = x2 – 3x – 4.

Example 12
A company sells packs of printer ink cartridges for RM 24. If a customer orders more than 100 packs, the company is
prepared to reduce the unit rice by 4 cents for each pack bought above 100 up to a maximum of 300 in a single order.
a) How much does it cost to buy 130 packs?
b) If the cost is RM 5 324, how many packs are ordered?

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Chapter 3 Application of Simultaneous Equation and Derivatives

At the end of chapter, students should be able to

• formulate problem in equation;
• solve problem in simultaneous equation related to business;
• understand the rules of differentiation;
• use application of derivatives in problem related to business.

3.1 Simultaneous Equation

On occasions we will come across two or more unknown quantities, and two or more equations relating them. These are
called simultaneous equations and when asked to solve them we must find values of the unknowns which satisfy all the
given equations at the same time.

a) Simultaneous Sets of Two Linear Equations

Both elimination method and substitution method are suitable when solving two linear equations simultaneously.

Example 1
Solve the simultaneous equations 3x + y = 36 and 5x + 4y = 67.

Example 2
Solve the simultaneous equations 5x − 3y = 26 and 4x = 34 – 2y.

b) Simultaneous Sets with Quadratic Equation

Solve by using quadratic formula when substitution take place and turn into quadratic equation form ax2 + bx + c = 0.
Quadratic Formula, x = −b  b − 4ac
2

2a

Example 3
Solve the simultaneous equations y = –x2 + 6x and y = –2x + 12.

Example 4
A firm’s monthly cost for paying cleaners’ wages is RM 47 250. Under a new pay deal, each cleaner earns RM 375 more
each month. If the new pay deal goes through, the firm realizes that it will need to reduce the number of cleaners by 3 if it
is to cover its costs with that existing budget. What is the monthly salary of a cleaner before the pay rise?

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3.2 Application of Simultaneous in Problem Related to Business

Simultaneous equation is useful to form the functions of demand and supply if they are modelled linearly. This method is
also used to find intersection of two functions for equilibrium of demand and supply and also breakeven point.

3.2.1 Linear Equation of Supply and Demand

In a supply and demand chart there are two curves, one represents supply and the other represents demand. These curves
are plotted against price (the y-axis) and quantity (the x-axis).

If looking from left to right, the supply curve slopes upwards. This is because there is a direct relationship between price
and supply. The producer has a greater incentive to supply an item if the price is higher. Therefore, as the price of a
product increases, so does the quantity supplied.

The demand curve, representing buyers, slopes downwards. This is because there is an inverse relationship between the
price and quantity demanded. Consumers are more willing to purchase goods if they are inexpensive; therefore, as the price
increases, the quantity demanded decreases.

If both supply and demand curves are linear functions and relate the variables between price and quantity, so that both
functions can be written by using a common linear form P = aQ + b.

Example 5
A furniture factory produces and sells chairs. It is observed that when the price is RM 32 only, 9 chairs are sold in a week
but when the price reduces to RM 10, weekly sales rise to 20. Find the demand function for the weekly sales of the chairs if
it can be modelled by a linear function.

Example 6
A company manager has modelled the demand function for the product of his company as linear function with the
following information.
At the price of RM 78, 30 units are sold.
At the price of RM 58, 50 units are sold.
a) Explain the coefficient of gradient for linear demand function.
b) Find the price of product buyers will pay if the quantity demand is 42.

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TAR UC – CPUS Foundation in Business – Business Mathematics (FPMA1064)

3.2.2 Equilibrium of Supply and Demand

Market equilibrium occurs when the desires of buyers and sellers align exactly so that neither group has reason to change
its behaviour. The market equilibrium price, P0 and equilibrium quantity, Q0 are determined by where the demand curve of
the buyers, PD intersects the supply curve of the sellers, PS. At that price, the quantity that the buyers demanded matches
the quantity that the sellers supplied.

P0 At equilibrium, PD = PS.

Q0 Q

Example 7
The demand and supply functions of a good are given by PD = –3QD + 60 and PS = 2QS + 40, where QD and QS denote the
quantity demanded and quantity supplied respectively. Find the equilibrium price and quantity.

Example 8
Given the supply and demand functions are PS = QS2 + 14QS + 22 and PD = –QD2 – 10QD + 150. Sketch both graphs. Hence,
calculate the equilibrium price and quantity.

Example 9
The demand and supply functions of a good are given by PD = –2QD + 50 and PS = 0.5QS + 25, where QD and QS denote the
quantity demanded and quantity supplied respectively. Sketch both graphs.
a) Determine the equilibrium price and quantity.
b) Determine the effect on the market equilibrium if the government decides to impose a fixed tax of RM 5 on each good.

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3.2.3 Breakeven Point

The breakeven point in economics, business and specifically in cost accounting is the point at which total cost and total
revenue are equal. There is no net loss or gain, and one has “broken even”, though opportunity costs have been paid and
capital has received the risk adjusted, expected return.

A company may have gain or loss, given that profit function, P(x) = R(x) – C(x). If R(x) > C(x) or R(x) – C(x) > 0, the
company has gain. On other side, if R(x) < C(x) or R(x) – C(x) < 0, the company has loss.

The breakeven level of production is given by R(x) = C(x) or P(x) = 0, where R(x) is total revenue function, C(x) is total
cost function and P(x) is total profit function.

y
R(x)

C(x) At breakeven point, R(xB) = C(xB).

x is quantity, y is value yB

xB x

y
P(x)
At breakeven point, P(xB) = 0.
x is quantity, y is value
xB x

1) Total Revenue(TR)
- refers to the total receipts from sales of a given quantity of goods or services for a given period of time.
- is calculated by multiplying the quantity of goods sold by the price of the goods.
- is distinct from earnings or profits, which takes expenses into account.

Total Revenue = Unit Price × Quantity

TR = p × x

2) Total Cost(TC)
- refers to the total expenses for producing a given quantity of goods or services for a given period of time.
- usually consists of two main components which area fixed cost(FC) and variable cost(VC).
a) Fixed costs are business expenses that are independent on the quantity of goods or services. They tend to be time
related, such as salaries or rents being paid per month. They also refer to all fixed expenses incurred in selling
products such as licenses, copyrights and other overhead costs.
b) Variable costs are expenses that change proportionally to the quantity of goods or services. All costs that change
according to the number of units produced or sold (and are paid per quantity) are considered as variable costs. For
example, the cost of raw materials, labour costs, commission and others.

Total Cost = Fixed Cost + Total Variable Cost

Total Cost = Fixed Cost + Variable Cost per Unit × Quantity
TC = FC + VC × x

3) Total Profit(TP)
- is a positive gain (the opposite of loss) from an investment or business operation after subtracting for all expenses.
- is considered as financial benefit that is realized when the amount of revenue gained exceeds the expenses, costs and
taxes needed to sustain the activity.
- is also called net income or earnings.

Total Profit = Total Revenue – Total Cost

TP = px – (FC + VC. x)

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Example 10
Babyku Sdn. Bhd. produces products for babies. The total variable cost per unit is RM 10. The fixed cost is RM 8 500 in a
year and the selling price is RM 20.
a) Derived a profit function for Babyku Sdn. Bhd. for a year’s production in terms of x, given that x is the number of
production.
b) Find the number of units of the products to be sold in a year if the company wishes to gain a profit of RM 5 000.
c) Find the breakeven quantity and value for Babyku Sdn. Bhd. in a year.

Example 11
The following data is obtained from a factory in Penang.
Price per unit : RM 2.50
Variable cost of 100 units : RM 80
Fixed cost : RM 34
Based on the data provided above,
a) find the total cost function, C(x) of the company;
b) find the total profit function, P(x) of the company;
c) sketch the graphs of total cost, total revenue and total profit on a single diagram;
d) estimate the breakeven point.

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TAR UC – CPUS Foundation in Business – Business Mathematics (FPMA1064)

Example 12
A company produces product A and the demand function for the product A is linear with the following information:
At the price of RM 88, 30 units are sold.
At the price of RM 48, 50 units are sold.
The variable cost of producing product A is given by 28x when x units are produced and the fixed cost is RM 1 000.
a) Sketch the graphs of total cost and total revenue on a single diagram.
b) State the range of production level the company will gain profit.
c) Find the production level the company will lose RM 168.

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TAR UC – CPUS Foundation in Business – Business Mathematics (FPMA1064)

3.3 Differentiation
There are a number of ways of writing the derivative. They are all essentially the same,
dy
1. If y = x2, = 2x. This means that if y = x2, the derivative of y, with respect to x is 2x.
dx
d 2
2. (x ) = 2x. This says that the derivative of x2 with respect to x is 2x.
dx

3. If f(x) = x2, f’(x) = 2x. This says that if f(x) = x2, the derivative of f(x) is 2x.

If y = some function of x (in other words if y is equal to an expression containing numbers and x's), then the derivative of y
dy
(with respect to x) is written , pronounced "dee y by dee x".
dx

Differentiating xn with respect to x:

dy
1. If y = k, = 0.
dx
dy
2. If y = xn, = nxn–1.
dx
dy
3. If y = kxn, = nkx n–1 (where k is a constant- in other words a number).
dx

For example,
dy
If y = x4, = 4x3.
dx
dy
If y = 2x4, = 8x3.
dx
dy
If y = x5 + 2x–3, = 5x4 – 6x–4.
dx

Example 13
Differentiate with respect to x.
4
a) (2x)–3 b)
2 x5

x x2
c) + d) 1
(2 − x)
x2 x x2

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3.4 Application of First Derivative

First derivative is used to find the rate of change of a variable respect to the change of another variable.

3.4.1 Gradient of a curve

A formula for the gradient of a curve can be found by differentiating the equation of the curve. If you differentiate the
equation of a curve, you will get a formula for the gradient of the curve. We can use the formula for the gradient of the
curve to find the rate of change of y based on rate of change of x for any point on the curve.

Example 14
What is the gradient of the curve y = 2x3 at the point (3, 54)?

Example 15
Given y = (x2 + h)2 and its gradient is 8 at x =2. Find the value of h which h is a constant.

3.4.2 Stationary Points

Stationary points are points on a graph where the gradient is zero. There are three types of stationary points: maximums,
minimums and points of inflection (inflexion). The two out of three are illustrated here:

Maximum Point and Minimum Point

dy
At stationary points, = 0.
dx

y y
minimum point maximum point.

0 x 0 x

zero
–ve +ve
+ve –ve
zero

Example 16
Find the stationary point on the graph of y = 2x2 – 4x.

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3.5 Application of Second Derivative

The second derivative is what you get when you differentiate the derivative. Remember that the derivative of y with respect
dy d2 y
to x is written . The second derivative is written as .
dx dx 2
If y = x 3, f(x) = x3;
dy
= 3x2, f ’(x) = 3x2; (1st derivative)
dx
d2 y
= 6x, f ’’(x) = 6x. (2nd derivative)
dx 2

The second derivative can be used as an easier way of determining the nature of stationary points (whether they are
maximum points or minimum points).
dy
A stationary point on a curve occurs when = 0. Once you have established where there is a stationary point, the type of
dx
stationary point (maximum or minimum) can be determined using the second derivative.
d2 y
If is positive, then it is a minimum point.
dx 2
d2 y
If 2 is negative, then it is a maximum point.
dx

Example 17
Find the stationary points on the curve y = x3 – 7.5x2 + 18x + 6 and determine the nature of the points.

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3.6 Application of Derivatives in Problem Related to Business

3.6.1 Marginal Functions

The first derivatives produce the marginal functions of total revenue, cost, profit, etc. The marginal function is given by the
first derivative of the corresponding function.

If C(x) is total cost function and R(x) is total revenue function,

dC
MC = is defined as the marginal cost function and can be interpreted as the extra cost incurred of producing another
dx
quantity at activity level (demand) level, x;
dR
MR = is defined as the marginal revenue function and can be interpreted as the extra revenue obtained from producing
dx
another quantity at activity level (demand) level, x.

Example 18
If the total revenue per month in ringgit, R(x) is given by 20x – 0.03x2 where x is the number of units produced and sold per
month.
a) Find the total revenue when 30 units are produced and sold.
b) Find the average revenue when 30 units are produced and sold.
c) Find the marginal revenue when 30 units are produced and sold.
d) Find the actual revenue from the sale of 31 st unit.

Example 19
A firm produces x units of a product per month and the total cost per month in ringgit is given by C(x) = 150 + 0.02x2.
a) Find the total cost when 20 units are produced.
b) Find the marginal cost when 20 units are produced. Hence, interpret the answer.

Example 20
The demand for an item produced by Weelux is given by p = 100 – 0.2x where p is the price per unit and x is the quantity
demanded. The total cost, C(x) of producing x units of the item is given by C(x) = 800 + 30x.
a) Find the total revenue function.
b) Find the total profit function.
c) Sketch total revenue, total cost and total profit functions.
d) Find the marginal profit when (i) 90 units are sold, (ii) 300 units are sold. Hence, interpret the answers.

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3.6.2 Optimization of Functions

The first derivative of a function and letting it equal to 0 will allow to find the maximum or minimum or inflexion point.

If P(x) is total profit function, C(x) is total cost function and R(x) is total revenue function,
dC d 2C
= 0, and > 0 at a point x = a, x = a is the point minimize the cost of production at activity level (demand level), x.
dx dx 2
dR d 2R
= 0, and < 0 at a point x = a, x = a is the point maximize the revenue of production at activity level (demand
dx dx 2
level), x.

dP dR dC dP dR dC
As P(x) = R(x) – C(x), = − . To obtain maximum profit, = 0, therefore − = 0.
dx dx dx dx dx dx
dR dC
The maximum profit point is found by using = .
dx dx

Example 21
The revenue and cost functions in ringgit of a product at company X are given as R(x) = 1 000x – x2 and C(x) = 60 000 +
100x + 2x2, where x is the level of output produced and sold.
a) Find the profit function and sketch the graph of profit function.
b) Find the marginal profit function and explain whether company X should produce 180 units of the product.
c) Find the maximum profit of company X.

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Example 22
In marketing an item, a business has discovered that demand of the item is represented by p = –x + 200 where p is the price
per unit and x is the quantity demanded. The cost of producing x items in ringgit is given by C(x) = 3 000 + 70x.
a) Find the price per unit and output level that yields maximum revenue.
b) Sketch the graphs of revenue and cost functions and state the range of output level when revenue is greater than cost.
c) Explain why the business should not produce at output level that yields maximum revenue.
d) Find the profit function and hence, find the maximum profit.
e) Sketch the graph of profit function.

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Chapter 4 Linear Programming

At the end of chapter, students should be able to

• understand the use of inequality in linear programming;
• identify a linear programming problem;
• identify the feasible region;
• determine the optimal solution by considering values at the vertices of the feasible region using graphical method.

4.1 Inequalities
In mathematics, an inequality is a relation which makes a non-equal comparison between two numbers or other
mathematical expressions. It is used most often to compare two numbers on the number line by their size.
Inequality Symbols Meaning Example
> Greater than x>2 x must be more than 2
≥ Greater than or equal to x≥2 x starts from 2 and increases
< Less than x<2 x must be less than 2
≤ Less than or equal to x≤2 x starts from 2 and decreases

4.1.1 Solving Inequality

Solving inequalities is very like solving equations, do most of the same things but we must also pay attention to the
direction of the inequality.

Note:
These things do not affect the direction of the inequality:
• Add (or subtract) a number from both sides
• Multiply (or divide) both sides by a positive number
• Simplify a side

But these things do change the direction of the inequality ("<" becomes ">" for example):
• Multiply (or divide) both sides by a negative number
• Swapping left and right hand sides

Example 1
a) Solve 2y + 7 < 13.

b) Solve –2y – 6 < 14.

c) Solve 2(y – 4) < 7.

d) Solve 2(y – 4) + 6 > 7 – 3y.

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When there are two inequalities at once, number line are useful to determine the solutions of two inequalities.

If x > a and x < b, given that b > a.

a b

Solution: any value in between a and b but not included a and b, a < x < b.

Example 2
6 − 2x
a) Solve –2 < < 4.
3

b) Solve 1 – 4x ≤ 21 and 5x + 2 ≥ 22.

c) Solve –5x + 16 < 3x < 10 + 2x, and lists out all the integers for this inequality.

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4.1.2 Draw Inequality

Rules in drawing inequality:
1) < and > draw with a dash line, but ≤ and ≥ draw with a solid line
2) > and ≥ shaded area above, < and ≤ shaded area below (read from y side)

Draw a linear equation y + 2x = 6.

i) y + 2x ≥ 6 (Shaded)
ii) y + 2x ≤ 6 (Unshaded)

Draw a linear equation y + 2x = 6.

i) y + 2x > 6 (Shaded)
ii) y + 2x < 6 (Unshaded)

Avoid the Mistake

Draw a linear equation x = 3 + y.

Shade x ≥ 3 + y. (read from y side)

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4.2 Feasible Region

➢ Every point which lies within the shaded region (including points located on the boundaries of the region) is known as
a feasible solution to the set of inequalities and the area is called the feasible region.
➢ The use of feasible solution of linear programming in practical is the outcome of two variables that can have in the
condition that all the constraints are being satisfied.

Find the feasible region for the following system of inequalities.

a)
y + 2x ≤ 6, y ≥ 2x – 4, y ≥ 0, x ≥ 0

b)
y + 2x ≤ 6, –3x + 6 ≥ y, y ≥ 0, x ≥ 0

c)
y – x ≤ 5, x + 6 ≥ y, 2x ≤ y, y ≥ 0, x ≥ 0

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Identify the region fulfills the constraint below:

a) y + x ≤ 10, y ≥ 2x

b) y + x ≤ 10, y ≥ x, y ≤ 2x

c) y + x ≤ 10, y ≥ x, y ≥ 2x

d) y ≥ 10 – x, y ≥ x, y ≤ 2x

e) y ≥ 10 – x, 2x ≥ y, x ≥ y

f) y ≤ 10 – x, y – x ≤ 0

Identify the region fulfills the constraint below:

a) y + x ≤ 8, y ≥ x + 2

b) y + x ≤ 8, y ≥ x + 2, y ≥ –0.5x + 5

c) x + 2 ≤ y, y + x ≥ 8

d) y + x ≥ 8, y ≤ x + 2, y ≥ –0.5x + 5

e) y + x ≥ 8, y ≤ x + 2, y ≤ –0.5x + 5

f) y ≤ 8 – x, y ≥ –0.5x + 5, y – x ≤ 2

g) y ≤ 8 – x, y + 0.5x ≤ 5, y – x ≤ 2

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4.3 Identify Linear Programming Problem

Always find out these three for identifying linear programming problem:
1. Unknown quantities (decision variable) are values which have to be determined, x and y.
2. Linear functions (objective function) are to be optimized (maximized or minimized), z.
3. Linear inequalities (constraints) which represent the physical or resource limitations on the objective.

Example 3
a) A factory manufactures two types of toys, X and Y, which are made of wood and rubber are needed. To make one
unit of X, 1 unit of wood and 2 units of rubber are needed. For one unit of Y, 1 unit of wood and 1 unit of
rubber are needed. The daily amount of wood and rubber available for production are 800 an d 1000 units
respectively. The daily production capacity of the factory for toys X and Y are 350 and 700 respectively. The net
profit obtained from the sales of toys X and Y are RM 4 and RM 3 per unit respectively. Write down all the
constraints in order to obtain the maximum profit.

b) P&F is a food manufacturing factory producing two types of snacks, A and B. The total daily production packs of
both snacks must be at least 150 packs. The packs of snacks A and B produced daily is at least 70 packs and at least
60 packs respectively. The cost per pack of snack A and B are RM 2.50 and RM 2 respectively. Capital available
per day for production is at most RM 500. The selling price per pack of snack A and B are RM 6 and RM 5
respectively. Write down all the constraints in order to maximize profits.

c) H&C is a beverage manufacturing factory producing two types of beverage, A and B. The total production volume
of both beverages must be at least 80 litres. The volume of beverage B produced is at least 3 times the volume of
beverage A. The cost per litre of beverage A and B are RM 20 and RM 10 respectively. Modal available for
production is at most RM 1 000. The profits per litre of beverage A and B are RM 40 and RM 16 respectively.
Write down all the constraints in order to maximize profits.

d) Madam Lim has a few cats which consume at least 6 units of special diet per month. The special diet is prepared
by mixing two types of ingredients U1 and U2. Each ingredient contains three types of nutrients A, B and C which
are needed by the cats. One unit of ingredient U1 contains 3 units of A, 1 unit of B and 1 unit of C, while one unit
of ingredient U2 contains 1 units of A, 2 unit of B and 4 unit of C. To keep her cats healthy, Madam Lim consults a
veterinarian expert who advised that her cats need at least 8 units of A, 8 units of B and 10 units of C in the special
diet. One unit of U1 costs RM 5 while one unit of U2 costs RM 6. Madam Lim wants to prepare the special diet
with the lowest cost while at the same time satisfying her cats’ nutritional requirements.

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4.4 Solving Linear Programming Problems by Graphical Method

Graphical method is used to solve linear programming problems whether for maximization or minimization for two
variables involved.
➢ This method can be used to solve linear programming problems involving only two variables.
➢ Step:
1. Draw x-axis and y-axis with appropriate scales.
2. Insert constraints (inequalities) by drawing straight lines of the equations, label it.
(Must be at least two pairs of coordinates to draw each line, x and y must be in the range of scales.)
(Encouraged both x-intercept and y-intercept to be used when they are possible.)
3. Shade the feasible region.
4. Objective Line Method
Draw an arbitrary member of the family of the objective line (z = ax + by), ax + by = k.
Since k is unknown, hard to draw a complete straight line as two pair of coordinates needed to draw it.
Therefore, use gradient ratio to draw the complete straight line.

ax + by = k
by = k – ax
y = –(a/b)x + k/b

By using ratio a/b, draw ‘a’ on y-axis and ‘b’ on x-axis. (can be multiply of ‘a’ and ‘b’ also.)
Concept of gradient : (y2 – y1)/ (x2 – x1)

Get k value by substituting any pair of coordinates of line ax + by = k.

For maximization (minimization) problem, move a line parallel to the objective line in an upward (downward) direction
until it touches the feasible region at only one point, it is the extreme point.

Extreme point method

Identify the optimum points. Substituting the points into the objective function f(x) = ax + by. Identify the optimal solution
as the extreme point with the highest value (maximization) or lowest value (minimization) for the objective functions.

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4.4.1 Problem Maximisation

❖ Moves a line parallel to the objective line in an upward direction until it touches the feasible region at only one
point, it is the optimal solution which produces the highest value for the objective function.

Maximise z = 4x + 3y objective function

Subject to x + y ≤ 800
2x + y ≤ 1000
x ≤ 350 constraints
y ≤ 700
x≥0,y≥0

4.4.2 Problem Minimization

❖ Moves a line parallel to the objective line in an downward direction until it touches the feasible region at only one
point, it is the optimal solution which produces the lowest value for the objective function.

Minimise z = 5x + 7y objective function

Subjectto x+y≥6
4x + y ≥ 8
x + 2y ≥ 8 constraints
x + 5y ≥ 10
x≥0,y≥0

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Example 4
a) A hawker makes 2 types of cake for sale. Cake A requires 50 g sugar, 150 g flour and 50 g butter, while cake B uses
100 g sugar, 100 g flour and 50 g butter. The hawker uses 4 kg sugar, 6 kg flour and 3 kg butter a day. Using a
graphical method, find the number of cakes of type A and type B he should make to obtain maximum income and also
the maximum income that is expected in each case if:
(i) Cake A and cake B are sold at a price of 30 cents per piece.
(ii) Cake A is sold at 40 cents per piece and cake B is sold at 20 cents per piece.
(iii) Cake A is sold at 30 cents per piece and cake B is sold at 20 cents per piece.

b) In order to ensure optimal health (and thus accurate test results), a lab technician needs to feed the rabbits a daily diet
containing a minimum of 24 g of fat, 36 g of carbohydrates, and 4 g of protein. But the rabbits should be fed no more
than five ounces of food a day. Rather than order rabbit food that is custom-blended, it is cheaper to order Food X and
Food Y, and blend them for an optimal mix. Food X contains 8 g of fat, 12 g of carbohydrates, and 2 g of protein per
ounce, and costs $0.20 per ounce. Food Y contains 12 g of fat, 12 g of carbohydrates, and 1 g of protein per ounce, at a
cost of $0.30 per ounce. Write down all the constraints in order to minimize the cost. Hence, find the minimum cost
for the problem above.

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Example 5
A food manufacturing factory produces two types of snacks, A and B. The total production weightage of both snacks is at
most 7 000 kilograms. The weightage of snack B exceeds snack A by at least 1 000 kilograms. The weightage of snack B
produced is at most 4 times the weightage of snack A. Let x represents the weightage of snack A in kilograms and y
represents the weightage of snack B in kilograms.
a) Write this problem as a linear programming problem for maximization.

b) By using the graphical method, shade the feasible region which satisfy the constraints above and label it by R.
** Using a scale of 2 cm as 1 000 kg for both axes.

c) (i) If the snack A produced is 2 000 kg, find the range of weightage snack B can be produced.
(ii) If the snack B produced is 4 000 kg, find the maximum weightage snack A can be produced.

d) Given that the profits per kilograms of snacks A and B are RM 4 and RM 2 respectively,
(i) find the optimum solution for this linear programming problem and maximum profit,
(ii) find the optimum solution for this linear programming problem and maximum profit if snack A produced is at
most 2 000 kg.

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Chapter 5 Network Planning

At the end of chapter, students should be able to

• understand the concepts of activities, events and networks;
• construct and interpret networks;
• identify the critical activities and critical paths;
• calculate the minimum completion times.

Methodology which assists in project management and planning projects such as report preparation, furnishing of an
office, housing project and highway construction.

Network
➢ A network is a sequence of activities and events, which are illustrated graphically to show the interrelation among the
activities and projects.

Activity
➢ An activity is an operation or work which consumes resources and times that a project must be completed.
➢ It is represented by an arrow.
➢ Activities are labeled with alphabets or numbers.

Example:
A

Event
➢ An event is a point in time that shows the start, the end or a group of activities.
➢ It is represented by a circle or node.
➢ Each activity must have preceding event (tail event) and a succeeding event (head event).

Tail event Head event

Activity A
Beginning of activity A Ending of activity A

Rules
Rule 1: A network has single starting node and single ending node.

No matter how many activities in

between, only can start with one starting
event and end with one ending event.

Rule 2: An activity has only one precedent (tail) node and one subsequent (head) node.
Tail Node Head Node

Activity

Rule 3: Before an activity begins, all preceding activities must be completed.

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Rule 4: Two or even more activities cannot have the same tail event and head event.
Tail Node Head Node

Solving using dummy

Rule 5: ‘Loop’ is not allowed in a network.

A

C B

* Activities cannot begin and end at the same event.

Rule 6: No hanging activity in a network.

Start Node
A End Node
3

C B
F
D

* All nodes in a network must(except start node and end node) must have at least one entering activity and at
least one leaving activity.
* Node 3 (neither a start node nor end node) does not have a leaving activity. Activity A is hanging activity.
* Node 3 should be taken away and activity A will link to end node.

Rule 7: Events labelled in unique and correct order.

a. Start node labelled with “1”
b. End node labelled with the maximum number of node in a network
c. Numbers for tail and head node of an activity must be unique & no repeated
d. Number of the head node of an activity must be greater than its tail node.

A A
5 7 5 6

B B
6 C 7 C

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Dummy activity
An activity has zero duration and does not consume resources. It is represented by a broken arrow.

Example:

a. Two activities have the same head and tail event.

A C
A
B D C

B D
b. Illustrate logical dependencies of activities in a network

Activity Preceding Activity

D A
C A, B
Activity C depends on both activities A and B, and activity D only depends on A.

Correct A D

dummy activity

B C

Incorrect A C

dummy activity
B D

Incorrect D
A
C
dummy activity
B

Example:

Activity Preceding activity Duration (minutes)

Brush Teeth – 2
Boil Water – 8
Take Shower Brush Teeth 5
Robot Vacuum Cleaning Boil Water 10
Sing Songs Take Shower 8
Breakfast Take Shower 12
Watch TV Robot Vacuum Cleaning & Breakfast 15
Go School Watch TV & Sing Songs 10

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5.1 Network Construction

Example 1
The following tables give a list of the activities involved in certain projects. Draw the networks for the projects

a) b)

Activity Preceding activity Activity Preceding activity

A - A -
B - B A
C A C A
D A, B D C
E A, B E B
F C F B, D
G C, D G E, F

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Example 2
Construct a preceding table based on the information given. Hence, draw a network for the project.
a) Activity A and B do not depend on any other activities.
Activity C can only start after activities A and B are completed.
Activity D can only start when activity A is completed.
Activity E can only start after activity D is completed.
The final activity, F requires activities C and E to be completed before it can start.

b) Activity A and B are independent of other activities.

Activities C and D can only start after activity A is completed.
Activity B must be completed before activity E can begin.
Activity F can only begin after activities D and C are completed.
The final activity, G requires activities E and F to be completed before it can start.

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5.2 Critical Path

Path
➢ A continuous line starts from the first event until the last event.

Critical Path
➢ The longest path between the start and the end of a project.
➢ A delay in any critical activity will increase the project duration.
➢ A network may have more than 1 critical path.
➢ It can pass through dummy activities.

Minimum Complete Time

➢ Shortest time required to complete the project.

Earliest Start Time (EST)

- The earliest start time that the next activity follows it can start.
- EST for first event is 0.
- EST of the head event = EST of the tail event + duration
- If there are 2 or more tail events, the EST is the duration of the longest path (maximum).

e3 + 2 D(2)
e6 = max e4 + 4 3
e5 + 3 E(4)
6
4 F(3)

5
Latest Start Time (LST)
- The latest time of an event this is computed from last event to the start event.
- At the start and last event, LST = EST
Start Node End Node

1
0 0 a a

- LST of the tail event = LST of the head event – duration

- If there are 2 or more head events, the LST is the duration of the shortest path (minimum).

D(2)
l5 – 2 5
l4 = min l6 – 4 E(4)
4
l7 – 3
F(3) 6

7
➢ The earliest start time that the next activity follows it can start.
➢ EST for first event is 0.
➢ EST of the head event = EST of the tail event + duration
➢ If there are 2 or more tail events, the EST is the duration of the longest path (maximum).
* The critical path is the path that passes through the events where their EST = LST.
* Each node has a pair of same figures on of EST and LST.

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Example 3
Find the earliest start times and latest start times for the data given below. Hence, obtain the critical path.

Activity Preceding activity Duration (weeks)

A - 3
B - 1
C B 2
D A 3
E A 4
F C, D 7
G E 5
H F, G 2

Example 4
Find the earliest start times and latest start times for each of the event in the following network and deduce the critical path.
The duration for each activity is in weeks.

2
A E
3 5
B F H I
1 4 3 3 5 2 6 3 7

C D 2 G
5 7

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Example 5
Construct a network diagram for the following project:
Activity Preceding activity Duration (days)
A - 8
B - 6
C - 10
D A 5
E A, B 2
F B, C 6
G D, E 4
H F, G 5

a) Find the EST and LST for each of the event.

b) Determine the critical path and duration for the project.

Example 6
PCK Enterprise was awarded a project. The following table shows the activities, durations and the preceding activities for
the project.
Activity Preceding activity Duration (days)
A - 5
B - 6
C - 4
D C 8
E B, D 5
F A, E 4
G A, E 7
H F 3
I G 5

a) Draw the network diagram.

b) Determine the critical path.
c) If the project begins on 2 January 2009, when should the project is completed?
d) If activity F is delayed for 3 days, will it affect the completion of the project?

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Example 7
A company intends to build a factory. The activities, with the durations and preceding activities involved in building of the
factory are given in the following table:
Activity Preceding activity Duration (days)
A E 5
B A 1
C B 2
D C, G, H 14
E - 16
F E 1
G F 2
H F 3
I F 2
J D 3

a) Construct the network diagram and determine the critical path. In how many days can the factory be completed?
b) If activity C is delayed for a day and activity G is delayed for 3 days, what is the effect on the completion time of the
factory?
c) If activity F is delayed for 4 days, can activity G begin on the 17th day?
d) If the duration to complete activity H is lengthened to 10 days, will the critical path and the project duration change?
State the effect on both critical path and the project duration.

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Example 8
Construct the network diagram. Hence, state the critical path and minimum completion time.
Activity Preceding Activity Durations (hours)
C - 3
D - 2
E C 4
F C, D 3
G C 4
H G 6
I F 6
J F 7
K H, I 5
L E, J, K 6

a) If activity F is delayed for 5 hours and activity G is delayed for 2 hours, will the critical path and the project duration
change? State the effect on both critical path and the project duration.
b) If the duration to complete activity E is lengthened to 16 hours, will the critical path and the project duration change?
State the effect on both critical path and the project duration.

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Chapter 6 Financial Mathematics 1

At the end of chapter, students should be able to

• understand the difference between arithmetric and geometric progression and their general terms and sum of the first n
terms
• carry out the calculation involving simple interest and compound interest;
• understand the relationship between norminal rate and effective rate of interest.

6.1 Arithmetic Progression (AP)

An arithmetic progression is a sequence in which each term is produced by adding a fixed number (it is called the common
difference). The first term is usually denoted by a and the common different by d. The d may be positive or negative.
a) The nth term of an AP is Un = a + (n – 1)d.
b) The sum of value from first term till last term (U1 ,--- , Un) of an AP can be derived as Sn = n [2a + (n – 1)d].
2
c) The common difference, d = u2 – u1 = u3 – u2 = … = un – un – 1.

Example 1
The 8th term of an AP is 11 and the 15th term is 21. Find the common difference and the first term of the series.

Example 2
Find the number of terms in the arithmetic progression 7, 13, 19, …, 307.

Example 3
Find the sum of the following: 2 + 5 + 8 + 11 + … + 47.

Example 4
In an AP, the sum of the first ten terms is 50 and the 5 th term is three times of the 2nd term. Find the first term and the sum
of the first 20 terms.

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6.2 Geometric Progression (GP)

A geometric progression is a sequence in which each term is produced from the preceding term by multiplying a fixed
number (it is called the common ratio). The first term is usually denoted by a and the common ratio by r. The r may be
positive or negative.

Examples:
1. 3, 6, 12, 24, … common ratio is 2
2. 1, – 1 , 1 , – 1 , 1 , … common ratio is – 1
2 4 8 16 2

A GP can be written as a, ar, ar2, ar3, …

a) The nth term of a GP is un = arn – 1.
b) The sum of value from first term till last term (u1 ,--- , un) of a GP can be derived as Sn = a[ r − 1] .
n

r −1
u u
c) The common ratio, r = 2 = 3 = …= n . u
u1 u2 un −1

Example 5
Find the sixth term of the following geometric progressions:
a) 4, –8, 16, –32, … b) 2, 2 , 2 , 2 , …
3 9 27

Example 6
The third term of a geometric progression is 15 and the sixth term is 120. Find the first term and the common ratio.

Example 7
If x + 2, 2, 2x – 3 are three consecutive terms of a geometric progression, find the possible values of x.

Example 8
A geometric series has first term 8 and common ratio 1.4. Find the sum of the first 10 terms.

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6.3 Problems involving A.P. and G.P

Example 9
Find the number of months it takes to repay a debt of RM 39 750 by monthly instalments, the first instalment being RM 60
and the amount increases by RM 30 each month after the first payment. What is the final instalment?

Example 10
Each year the price of an article depreciates by 5%. If the original price of the article was RM 500 at the 1st January of year
2005, find its price at the end of 10 years in nearest cent.

Example 11
A college agrees a sponsorship deal in which grants will be received each year for sports equipment. This grant will be
RM 4 000 in the beginning of year 2012 and will increase by 5% at the beginning of each year. Calculate
a) the value of the grant in the beginning of year 2022 in nearest RM,
b) the total amount the college will receive in the years 2012 to 2022 inclusive.

Example 12
A television quiz show takes place every day. On day 1 the prize money is $1000. If this is not won the prize money is
increased for day 2. The prize money is increased in a similar way every day until it is won. The television company
considered the following two different models for increasing the prize money.
Model 1: Increase the prize money by $1000 each day.
Model 2: Increase the prize money by 10% each day.
On each day that the prize money is not won the television company makes a donation to charity. The amount donated is
5% of the value of the prize on that day. After 40 days the prize money has still not been won. Calculate the total amount
donated to charity
a) if Model 1 is used,
b) if Model 2 is used.

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6.4 Interest
Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate. Interest can also
refer to the amount of money earned of investing, usually expressed as a percentage. The amount of interest is based on
three factors: the principal, the rate of interest, and the period.

6.4.1 Simple Interest

One of the most basic uses of mathematics in finance concerns calculations of interest, the most fundamental of which is
simple interest. Simple interest is the interest calculated on the original principal for the entire period it is borrowed or
invested. For simple interest, the formula for computing the interest on principal P for t years at annual rate r is given by:

Interest = Principal x rate x time

I = Prt

The accrued amount, A is given by

Accrued amount = Principal + Interest
A=P+I
= P + Prt
= P(1+ rt)

Although the time span maybe given in days, months or years, the rate of interest is an annual rate. Therefore, the time
must be converted to years.

Example 13
Calculate the accrued amount and interest earned of the following, assuming that the simple interest is added:
a) RM 20 000 invested for 5 years at 5% per annum,
b) RM 50 000 invested for 3 years 5 months at 6% per annum,
c) RM 30 000 invested for 6 years at 1% interest per quarter,

Example 14
RM 2 000 is saved by Mr. Sam at simple interest rate of 8.21% per annum. He receives 2.25% of the amount he saves at
the beginning as interest after a period. Find the number of days that he saves for RM 2 000.

Example 15
Miss Sandy borrowed RM 20 000 from two money lenders. First lender charged RM 5 000 at simple interest rate of r% per
annum and second lender charged RM 15 000 at simple interest rate of 2.5 times of r% per annum. She paid a total
RM 3 825 as interest after 9 months. Find the value of r.

Example 16
Leslie deposited RM S in an account, which guaranteed the return at simple interest of 4% per annum. He received
RM 1 470 as interest after 3 years and 9 months. Find the amount S.

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6.4.2 Compound Interest

In practice, simple interest is not used as often as compound interest. Suppose principal P is invested at a fixed rate of
interest of r per annum and that interest is added at the end of each year, that is, it is compounded annually. After 1 year,
the value of the investment will be the initial investment P, plus the interest accrued, rP, and so will be
A1 = P + rP
= P(1 + r)
During the end of second year, the interest accrued will be r times the amount at the end of the first year (A1), and so will
be rA1. The value at the end of the second year will be
A2 = A1 + rA1
= P(1 + r) + rP(1 + r)
= P(1 + r)(1 + r)
= P(1 + r)2

Proceeding in this way, the value after t years, accrued amount, At will be given by
At = P(1 + r)t

A comparison between simple interest and compound interest

End of Simple Interest Compound Interest

1st year Interest earned =
Principal = RM 1 000 Accumulated =
Interest rate = 10% 2nd year Interest earned =
Period = 3 years
Accumulated =
3rd year Interest earned =
Accumulated =

Example 17
Calculate the accrued amount of the following, assuming that the yearly compound interest is added:
a) RM 20 000 invested for 5 years at 5% per annum,
b) RM 50 000 invested for 3 years at 6% per annum.

Example 18
An amount of RM 5 000 is invested at a fixed rate of 8% per annum. What amount will be the value of the investment in 5
years’ time, if the interest is compounded yearly.

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Suppose now that we have an annual interest rate r and that we would like to compound (or pay) interest m periods per
year. Then a year is divided into m equal compounding periods and the interest rate in each period is i = r
m.
The accrued amount at the end of m-th compounding period for one year, Am:

Am = P(1 + i)m

While at the end of t years, interest has been compounded mt times, therefore the accrued amount after t years is given by:

An = P(1 + i)n, where n = mt,

= P(1 + i)mt

which is the formula for accrued amount of investment that compound m times per year in t years at i which is the interest
rate for the compound period.

Example 19
Find the account balance if RM 1 000 is invested for 5 years at an annual rate of 3% compounded monthly. How long will
it takes for the account to be doubled?

Example 20
How much money must be deposited so that the future value of an account worth RM 3 000, if the annual rate of interest is
5% and the compound period is monthly for a term of 5 years? Hence, find the interest earned.

Example 21
Celine deposited RM 20 000 in an account with interest rate of r% compounded semiannually at 5 years ago. The interest
earned in the account now is RM 5 131. Find the value of r.

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Example 22
Find the principal amount, P(in nearest RM) and annual interest rate, r% if given that the accrued amounts for
1 year and 3 years are RM 1 036.49 and RM 1 113.51 respectively when the compound period is quarterly.

Example 23
Find the principal amount, P (in nearest RM) and annual interest rate, r% if given that the accrued amount for 2 year and 3
years are RM 634.87 and RM 715.38 respectively when compounded monthly.

Example 24
Find the principal amount, P(in nearest RM) and number of year, t if given that the accrued amount for t years and 2t years
are RM 2 165.71 and RM 2 345.16 when the compound period is quarterly at 4% per annum.

Example 25
RM 5 500 was deposited in a saving account at 4.0% annum interest compounded quarterly. After two years, RM 2 600
was withdrawn from the account and the balance was remained in the account and compounded monthly for another two
years. Find the amount in the account at the end of 4 years.

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6.4.3 Effective Rate

An annual effective rate or effective rate in short is the actual rate that is earned in a year. It can also be defined as the
simple interest rate earned in a year. The effective rate is useful when an investor wants to compare investments with
different compounding periods, but he needs to put them on a common basis.

The relationship between the nominal rate and effective rate is derived as follows. Assume a sum of RM P is invested for
one year. Then the future value after one year
(a) at k% effective = P(1 + k);
(b) at r% compounded m times per year = P(1 + r/m)m.

Equating the future values in (a) and (b), we can obtain

m
 r
P(1 + k ) = P 1 +  ,
 m 
m
 r
1 + k = 1 +  .
 m

Example 26
Find the effective rate which is equivalent to 16% compounded semi-annually.

Example 27
Find the nominal rate, compounded monthly which is equivalent to 9% effective rate.

Example 28
Kang wishes to borrow some money to finance some business expansion. He has received three different quotes:
Bank A: charges 15.2% compounded annually,
Bank B: charges 14.5% compounded monthly,
Bank C: charges 14.4% compounded weekly.
Which bank provides a better deal?

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Chapter 7 Financial Mathematics 2

At the end of chapter, students should be able to

• understand the difference between annuity due and ordinary annuity;
• carry out computation on ordinary annuity;
• calculate sinking fund;
• calculate amortization.

7.1 Annuities
➢ An annuity is a sequence of fixed equal payments made at regular intervals.
➢ Some common examples of annuities are weekly wages or monthly salaries, insurance premiums, house purchase
mortgage payment, hire purchase payments etc.
➢ The time between the intervals is called the payment interval or conversion period, and the time over which the money
is to be paid is called the term of the annuity.
➢ When payments are made at the end of each payment interval, the annuity is called an ordinary annuity. An annuity
due is an annuity whose payments are made at the beginning of the payment interval.

In particular, there are two formulae which it is essential to remember. These are:
a) Accrued amount (compound interest):

b) Sum of the first n terms of geometric progression:

7.2 Sinking Fund

➢ An account that is set up for accumulating periodic deposits or payments to meet future obligations or debts.
➢ Therefore, a periodic payment’s amount needs to be calculated accurately for every period to meet the future
obligations or debts.
➢ A sinking fund can be defined as an annuity invested in order to meet a known commitment at some future date.
Sinking funds are commonly used for the following purpose:
a. to save for an amount of money for future retirement plan, education expenses, etc,
b. to provide funds to purchase a new asset when the existing one is fully depreciated.
(The concept is same as ordinary annuity.)

Example: Deposit R at the end of every month with interest i% per month for six months.

Amount Deposited Accumulated amount at the end of month

End of 1st month R1 R1
End of 2nd month R2 R2 + R1(1 + i)
End of 3rd month R3 R3 + R2(1 + i) + R1(1 + i)2
End of 4th month R4 R4 + R3(1 + i) + R2(1 + i)2 + R1(1 + i)3
End of 5th month R5 R5 + R4(1 + i) + R3(1 + i)2 + R2(1 + i)3 + R1(1 + i)4
End of 6th month R6 R6 + R5(1 + i) + R4(1 + i)2 + R3(1 + i)3 + R2(1 + i)4 + R1(1 + i)5

0 1 2 3 4 5 6
R1 R2 R3 R4 R5 R6
R6
R5(1 + i)
R4(1 + i)2
R3(1 + i)3
R2(1 + i)4
R1(1 + i)5

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Therefore, the total in end of 6 months:

= R6 + R5(1 + i) + R4(1 + i)2 + R3(1 + i)3 + R2(1 + i)4 + R1(1 + i)5

Since R is same for every month, R1 = R2 = R3 = R4 = R5 =R6 = R, summarized the total:

= R + R(1 + i) + R(1 + i)2 + R(1 + i)3 + R(1 + i)4 + R(1 + i)5
a+ ar1 + ar2 + ar3 + ar4 + ar5
* is a geometric progression where a = R, r = (1 + i).

Sinking Fund, A formulae:

Sinking Fund Periodic Payment, R formulae:

Interest earned on sinking fund:

Accrued amount in sinking fund – nR

R is the payment needed to reach the accumulated amount, A. Payments, R are made m times per year, for t years, into a
sinking fund with annual interest rate r, compounded m times per year.

Checking:
Given R = 100 paid at the end of every half year into an account, annum interest rate = 4%, calculate the future value of
annuity after 3 years.

End of Period Payment Made Interest Earned Addition to Fund Accumulated Amount in Fund
(a) (b) (c) (d)
1 R 0 R R
2 R [previous (d)] x i (a) + (b) (c) + (d)

End of Period Payment Made Interest Earned Addition to Fund Accumulated Amount in Fund
(a) (b) (c) (d)
1 100
2 100
3 100
4 100
5 100
6 100

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Example 1
Find the maturity value of a sinking fund at the end of 5 years paying 9.5% per annum into which 5 annual payments of
RM 2 400 are made. Hence, find the interest earned.

Example 2
What is the maturity value of an annuity due at the end of 4 years paying 6% per annum which RM 400 payments are paid
quarterly? Hence, find the interest earned.

Example 3
A sinking fund which RM 500 payment paid quarterly for t years at annum interest 6.5% has a maturity value
RM 11 705.22. Find the value of t.

Example 4
Annual payments, R with 5% annual interest compounded annually for 10 years to accumulate RM 35 000. Use the sinking
fund formulae to determine the payment needed to reach the accumulated amount. Then, build a table to show the
accumulated amounts at the end of every year (to ensure that enough fund is invested each period, round each answer up to
the next cent).

End of period Payment Made Interest Earned Addition to Fund Accumulated Amount in Fund

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7.3 Amortisation
An interest-bearing debt is said to be amortized when all the principal and interest are discharged by a sequence of equal
payments at equal intervals of time.

7.3.1 Present Value and Discounting

Suppose money can be invested at 10%. Then RM 100 could be invested and be worth RM 110 in one year’s time. Put
another way, the value of RM 110 in one year’s time is exactly the same as RM 100 now (if the investment rate is 10%).
Similarly, RM 100 now has the same value as RM 100(1.1)2 = RM 121 in two years’ time, assuming the investment rate is
10%. This demonstrates the concept of present value of a future sum. To state the above ideas more precisely, if the
current investment rate is 10%, then:
RM 110
The present value of RM 110 in one year’s time is = RM 100.
1.1
RM 121
The present value of RM 121 in two years’ time is = RM 100 and so on.
1.12
The investment rate, used in this context, is sometimes referred to as the discount rate.

A
The present value of amount RM A, payable in n years’ time, subject to a discount rate of r, is given by P = .
(1 + r ) n

Example 5
Find the present value of RM 1 500 in 6 years’ time, subject to a discount rate of 19%.

7.3.2 Net Present Value of an Annuity

If an annuity consists of payments RM R over n years subject to a discount rate of r (assuming an ordinary annuity), then
the present value of each payment is given by
R R R R
, , ,......, .
1 + r (1 + r ) 2 (1 + r )3 (1 + r ) n

Thus, the net present value of the annuity (adding all the above terms) is:
R R R R
P= , , ,......, .
1 + r (1 + r ) (1 + r )
2 3
(1 + r ) n

Example: Pay R at the end of every month with interest i% per month.

0 1 2 3 4 5 6
R1 R2 R3 R4 R5 R6
R1/(1 + i)
R2/(1 + i)2
R3/(1 + i)3
R4/(1 + i)4
R5/(1 + i)5
R6/(1 + i)6

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Therefore, the total at the end of 6 months:

R R2 R3 R4 R5 R6
P= 1 + + + + + .
1 + i (1 + i ) 2 (1 + i )3 (1 + i )4 (1 + i )5 (1 + i )6

Since R is same for every month, R1 = R2 = R3 = R4 = R5 = R6 = R, summarized the total:

R R2 R3 R4 R5 R6
P= 1 + + + + + .
1 + i (1 + i ) 2 (1 + i )3 (1 + i )4 (1 + i )5 (1 + i )6
a + ar1 + ar2 + ar3 + ar4 + ar5
R 1
* is a geometric progression where a = ,r= or (1 + i)–1.
1+ i 1+ i

Net Present Value of an Annuity, P formulae:

Interest paid on a loan:

nR – Net present value of an annuity

Example 6
A department store advertises goods at RM 700 deposit and three further equal annual payments of RM 500. If the
discount rate is 7.5%, calculate the present value of the goods.

Example 7
Find the net present value of RM 125, payable at the end of each year for a term of five years and subject to a discount rate
of 8%.

Example 8
Raymond has to pay RM 300 every month for 24 months to settle a loan at 12% compounded monthly.
a) Calculate the original value of the loan.
b) Calculate the total interest that he has to pay.

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Example 9
A company negotiates a loan of RM 200 000 over 15 years at 10.5% per annum. Calculate the annual payment necessary
to amortize the debt.

Example 10
A debt of RM 5 000 with interest 5% per annum compounded semiannually is amortized by equal semi-annual payments
over the next three years.
a) Find the value of each payment.
b) Construct an amortization schedule.

End of Period Semi-annual Payment Interest Paid Principal Repaid Outstanding Principal
0

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Chapter 8 Depreciation

At the end of chapter, students should be able to

• understand straight line method;
• understand declining balance method.

8.1 Introduction to Depreciation

Although the use life of equipment (a fixed asset) may be long, it is nonetheless limited. Eventually the equipment will lose
all productive worth and will possess only salvage value (scrap value). Accounting demands a period-by-period matching
of costs against income. Hence, the cost of a fixed asset is distributed over the asset’s estimated lifetime. This spreading of
the cost over the periods which receive benefits is known as depreciation.
➢ Some of the assets are worth less than their initial purchase value as they become older.
➢ Such decrease in value of these assets is called depreciation.

The depreciable amount may be written off in different ways. The amount may be spread evenly over the years affected, as
in the straight-line method. Another depreciation method is called as reducing balance method, which the depreciation
will fall by r % at the end of each year.

8.2 Flat Rate Depreciation Method

This is the simplest and most widely used depreciation method.
➢ The value of the asset decreases in a constant amount annually.
➢ When goes on yearly, the value of asset decreases constantly and this will form a straight line relationship.
➢ Flat rate depreciation is also called as Straight Line Depreciation or Linear Depreciation.

annual depreciation = cost – scrap value

useful life

❖ Scarp value is an estimate of the value of the asset when it is sold or disposed of.
❖ Asset will depreciate until the book value equals scrap value.
➢ Book value is depreciated value of an asset after a period.
❖ Book value at the end of a year is the book value at the beginning of next year.
❖ Book value equals cost minus accumulated depreciation at any year.

Scrap Value = 0 Scrap Value = some certain value

B(book value) B(book value)

B0 B0

T t(year) T t(year)
B(book value) B(book value)

1 500 1500

500

5 t(year) 5 t(year)
B2 = B2 =

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Flat Rate Depreciation Method:

To form a straight line equation if the scrap value is 0 at the end of T years.
y – y1 = m(x – x1)
B
B – 0 = – 0 (t – T), line pass through points (t, B) and (T, 0) or (0, B0)
T
B 
Bt = B0 –  0  t
T 
t
Bt = B0(1 – )
T

8.3 Reducing Balance Depreciation Method

➢ Also known as declining balance depreciation method.
➢ Decrease of book value of an asset is not constant in value but by a constant percentage, r% per year.

annual depreciation = constant depreciation rate x book value at beginning of a year

➢ Book value at the end of a year is the book value at the beginning of next year.
❖ book value at end of a year =
book value at beginning of that year – annual depreciation of a year

At end of 1st year : B1 = B0 – B0 × r

= B0(1 – r)
At end of 2nd year : B2 = B1 – B1 r
= B1(1 – r)
= B0(1 – r)(1 – r), as B1 = B0(1 – r)
= B0(1 – r)2
At end of tth year : Bt = B0(1 – r)t

Reducing Balance Depreciation Method:

Bt = B0(1 – r)t

Example 1
If the cost of a machine is RM 17 000, its scrap value RM 2 000, and its estimated useful life 5 years, how much is the
depreciation per year if the machine depreciates constantly.

Example 2
An asset worth RM 17 000 is to be depreciated by annual depreciation rate 18% over 5 years. What is the book value at the
end of the period by using reducing balance method?

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Example 3
A HTC Z10 hand phone is bought from now at price RM 2 800 is estimated to depreciate to RM 1 461.62 over 4 years
useful life. By using reducing balance method,
a) find the annual depreciation rate,
b) find the book value of the phone at the end of second year,
c) find the value of depreciation in third year.

Example 4
Cost of a machine is RM 15 000 without scrap value, and its estimated useful life is 8 years.
a) Find the depreciation per year assuming the machine is depreciated using straight line method.
b) Find the book value of the machine at the end of third year.
c) Find the year when the book value of the machine falls at RM 5 625.

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