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Calculating Percentages

Percentages are a type of a fraction and represent part (P ) of a

whole (W ). It can be presented as

number (B) is

number is

Scale Factor

of the original (100%) together with the increase (r%), giving a

total of

Similarly, if the percentage decrease is r% then the final value

consists of the original (100%) together with the increase (r%),

giving the scale factor

to go backwards we divide.

Examples

Ali gave correct answers to 23 of the 25 questions on the

driving test. What percent of the questions did he get correct?

Joe earns a merit raise of 12%, how much is his raise? What is

his new hourly wage?

3In 2013,

a stock was worth $1.25 a share. In 2014, the same stock

was worth $0.85 a share. What was the percent decrease?

Exercises

1Calculate

a) %10 of $2.90

b) %75 of $1250

2Find the single percentage increase or decrease equivalent to

a) an increase of 30% followed by an increase of 40%

b) a decrease of 30% followed by a decrease of 40%

c) an increase of 10% followed by a decrease of .50%

d) an increase of 15% followed by a decrease of .50%

3Find the new quantities when

a) 1600$ is increased by %12

b) the population of a town, currently at 7560, rises by 3%

c) a good priced by a firm at $87.90 is subject to a 9% tax

d) a good priced at 2300 Dhs is reduced by 25% in a sale

e) a car, valued at 90000 Dhs, depreciates by 32%

Exercises

4 A firms annual sales rise from 50,000 to 55,000 from one year to

the next. Express the rise as a percentage of the original.

5 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 $1360?

6 Investments 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 $9500 at

the beginning of the year.

7 Shares originally worth $10.50 fall in a stock market crash to

$2.10. Find the percentage decrease.

8 Walter Electric shipped a large shipment of capacitors but clients

eventually returned 2% of the capacitors. If 130 capacitors were

returned from that months shipment, how many had been shipped ?

9 At Best Buy the price of a DVD player dropped by 20% to $ 1 7 9 .

What was the original price to the nearest dollar?

Mathematics For Business

Introduction

When money is borrowed (or invested), the borrower must repay

the original amount, within a certain amount of time.

The initial amount is called the principal, capital or the present

value and is denoted by (P)

The borrower usually must also pay a charge for borrowing

the money, called interest (I)

The total amount paid is called the future value or amount

of the loan and is denoted by (S)

The amount of interest depends on the size of the principal (P),

the length of time the loan (n), and the interest rate ( r % )

Nearly all interest is calculated using one of two methods:

1Simple interest: pays interest only on the principal, not on any

interest which has accumulated.

2Compound interest: pays interest on the principal and the accu-

mulated interest, not just the principal.

Mathematics For Business

Compound Interest

If the interest due at the end of each payment period is added to

the principal, so that the interest computed for the next payment

period is based on this new amount of the old principal plus

interest, then the interest is said to have been compounded

That is, compound interest is interest paid on the initial

principal and previously earned interest.

Amount of Annual Compound Interest

If a principal P is invested for n years earning interest at the rate of

r% per year compounded annually, then the accumulated amount is

compounded annually. How much will Ali have after 10 years?

Compound Interest

In practice, interest is usually compounded more than once a

year where the interval of time between successive interest

calculations is called the conversion period.

In general, for a given interest rate more conversions means

youll earn more on an investment ... and pay more on a loan.

If interest at a rate of r% per year is compounded m times a year

on a principal of P , then:

the simple interest rate per conversion period is , and

the number of conversion periods after n years is mn.

Compound Interest Formula

The amount S after t years due to a principal P invested at an annual

interest rate r% compounded m times per year is

Compound Interest

monthly, and daily. What do we mean by compounding

semiannually, quarterly, and so on? It means that at the end of a

fixed time period, interest is calculated and added to the

account.

Here is a summary of common compound interest intervals.

Examples

Example

Ali invested $800 at 12% for 2 years. Find the amount at the end

of 2 years if the interest is compounded.

Solution: P = 800, r = 0.12, and n = 2

Annually: This means that m = 1, so

Examples

Example

How much should Omar invest at 8%, compounded quarterly, so

that he will have 50,000 Dhs at the end of 7 years?

Solution: We are given S = 50000, r = 0.08, m = 4, and n = 7. Using

the compound interest formula, we have

other words, the present value of 50,000 due in 7 years is 2,8719

Mathematics For Business

Examples

Example

3An investor has visions of doubling her money in 6 years. What

interest rate is required for her to do so if the investment draws

interest compounded quarterly?

Solution: We have S = 2P , m = 4, and n = 6. Using the

compound interest formula, we have

Taking the 24th root of both sides of the equation gives

Mathematics For Business

Examples

Example

4IfMaryam has 10,000 Dhs to invest at 3% per annum

compounded monthly, how long will it be before she has 15,000

Dhs? Solution: Given S = 15, 000, P = 10, 000, m = 12, and r

= 0.03. Using the compound interest formula, we have

Taking the logarithm of both sides of the equation gives

Mathematics For Business

Continuous Compounding of Interest

What happens to the accumulated amount over a fixed period

of time if the interest is compounded more and more

frequently? What happens if we compound continuously, for

example every minute, second or microsecond.

The more often interest is compounded, the larger the accumu-

lated amount. But does the accumulated amount approach a limit

when interest is computed more and more frequently?

This is called continuous compounding, the total value is given by

the formula below

Continuous Compounding

The amount S after t years due to a principal P invested at an annual

interest rate r% compounded continuously is

Examples

Example 1

Amina deposited $650 into an account earning 4% compounded con-

tinuously. How much will Amina have at the end of 11 years?

In this case, we are given P = 650, r = 0.04 ,and n = 11. Using the

continuous compound interest formula, we have

Example 2

A present value of $1000 is invested at 10% compounded continuously.

How many years are required for a future value of $?3000

In this case, we are given P = 1000, r = 0.1, and S = 3000. Using the

continuous compound interest formula, we have

Exercises

1Suppose $10,000 is invested at an annual rate of 5% for 10 years.

Find the future value if interest is compounded as follows:

b) Quarterly d) Weekly f)Continuously

compounded continuously. How much will she have in the

account after 5 years?

3Ahmed has recently inherited $92,000. He decides to invest it for

10years before he spends any of it. The two banks in his town

offer the following terms:

Bank A: 5.5% per year compounded annually.

Bank B: 5.25% per year compounded monthly.

Which bank offers Ahmed the greater interest on his inheritance?

Mathematics For Business

Exercises

4 Ali was offered $25,000 cash now or $29,500 to be paid after

two years for a resort cabin. If money can be invested in todays

market for 4% annual interest compounded quarterly, which offer

should Ali accept?

5 How much should be invested now at 4% per annum so that

after 2 years the amount will be $10,000 when the interest is

compounded:

a) Monthly?

b) Daily?

c) Continuously?

6 Saleh plans to buy a house in four years. He will make a

40,000 Dhs down payment on the property. How much should

he invest today at 6% annual interest compounded monthly to

have the required amount in four years?

Mathematics For Business

Exercises

that compounded interest quarterly. After 5 years of

accumulating interest, the account had grown to $1485.95.

What was the annual interest rate of the bank?

8 On the day of their first grandchilds birth, a new set of grandpar-

ents invested $10,000 in a trust fund earning 4.5% compounded

monthly. How old the grandchild will be when the trust fund is

worth $25,000?

9 How long will it take for an investment to double in value if it

earns 5% compounded annually?

10 How long will it take an investment of $8000 to triple if the

investment earns interest at the rate of 8% compounded

continuously?

Mathematics For Business

Annual Percentage Rate (APR)

The Annual percentage rate (APR) or the effective rate of interest

is the equivalent annual simple rate of interest that would

yield the same amount as compounding after 1 year.

The effective rate of an annual interest rate r compounded m

times per year is the simple interest rate that produces the same

total value of investment per year as the compound interest.

Annual Percentage Rate (APR)

When the nominal rate is compounded m times per year,

Example

Example

Find the annual percentage rate of 8% compounded quarterly.

Solution:

In this case, we have, r = 0.08, and m = 4. Using the APR formula,

we have

pounded quarterly.

Exercises

nually. The rate at Bank B is 9.6% compounded monthly, and

the rate at Bank C is 9.7% compounded quarterly. If you need to

borrow money, at which bank will you pay the least interest?

2 Find the effective rate of interest corresponding to a nominal

rate of 8% per year compounded

b) Semiannually d) Monthly f) Continuously

10.4% per year compounded quarterly. Over the same period,

Acme Mutual Fund grew at the rate of 10.6% per year

compounded semiannually. Which mutual fund has a better rate

of return?

Mathematics For Business

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