CHAPTER 4: Mathematics of Finance

Learning objectives:

 Describe the time value of money theory

 Define interest, type of interests, future and present value of money
 Compute simple and compound interests
 Define annuity and analyze future and present value of money (sum of money or
an annuity)
 Solve sinking fund and amortization problems
 Analyze and solve mortgage problems

Introduction

Time value of money (TVM) is an important concept that money received in the
present is more valuable than the same sum received in the future. The basic concept of
mathematics of finance is that money has time value which is described either as present
value or future. There are some basic reasons to support the time value theory:

 First, a dollar can be invested and earn interest over time, giving it potential
earning power.
 Also, money is subject to inflation, eating away at the spending power of the
currency over time, making it worth a lesser amount in the future. Risks are also
associated in the process.

Present value is the value of money today; future value is the value of money at
some point in the future. The difference between money now and the same money in the
future is called interest. It is the price paid for the use of a sum of money over a period
of time. It is a fee paid for the use of another’s money, just rent is paid for the use of
another’s house. Example: a savings institution (banks) pay interest to depositors on the
money in the savings account, since the institutions have use of those funds while they
are on deposit; also a borrower pays interest to a lending agent (bank or individual) for
use of the agent’s fund over the term of the loan.

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Interest is usually computed as percentage of the principal over a given period of time.
This is called interest rate. Interest rate specifies the rate at which interest accumulates
per year throughout the term of the loan. The original sum of money that is lent or
invested/ borrowed is called the principal. Interests are of two types: simple interest
and compound interest.

Interest have a wide spread influence over decisions made by businesses and every of us
in our personal lives. Therefore, the basic objective of this unit is to discuss interest rates
and their effects on the value of money. Specifically, it covers simple interest, compound
interest, annuity, sinking fund and mortgage problems.

Simple Interest

It is type of interest where interest is paid on the initial amount of money invested or
borrowed only, and not on subsequently accrued (accumulated) interest. It is generally
used only on short-term loans or investments –often of duration less than one year.

Simple interest is given by the following formula: I=P*r*t

Where: I = Simple interest; P = principal amount

r = Annual simple interest rate; t = time in years, for which the interest is paid

If any three of the four variables are given, you can solve for the fourth (unknown
variable) and their relationship is as follows:

 Amount (A) = P + I= P + Prt= P (1 + rt). The sum of the original amount

(principal) and the total interest is the future amount or maturity value or in
short amount.
A
 P = I/rt or P = 1  rt
 r = I/Pt
 t = I/Pr

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Examples on Simple Interest Cases

1. Rahel wanted to buy TV which costs Br. 10, 000. She was short of cash and went
to Dashen Bank and borrowed the required sum of money for 9 months at an
annual interest rate of 6%. Find the total simple interest and the maturity value of
the loan.

Solution:
P = Br. 10,000 A=P+I
t** = 9 months = 9/12 = ¾ year = P (1 + rt)
r = 6% per year = 0.06 = 10, 000 (1 + 0.06 x ¾)
I=? A=? = 10, 000 x 1.045
Interest (I) = Prt = Br. 10, 450
= 10, 000 x 0.06 x ¾
= Br. 450
The total amount which will have to be repaid to Dashen at the end of the 9th
month is Br. 10, 450 (the original borrowed amount plus Br. 450 Interest).
** Note: It is essential that the time period t and r be consistent with each other. That
is if r is expressed as a percentage per year, t also should be expressed in number
of years (number of months divided by 12 if time is given as a number of months).
No.ofdays
If time is given as a number of days, then t = 360 days . this approach is known
as ordinary interest year method which uses a 360 day years, whereas if we use
365 days years the approach is called exact time method.

2. How long will it take if Br. 10, 000 is invested at 5% simple interest to double in
value?
Solution
Given: P = Br.10, 000 r = 5% = 0.05 A = Br.20, 000 (2 x 10, 000)
I* = Amount (A) – principal (p) = 20, 000 – 10, 000= 10,000 t = ?

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 10,000
t = I*/Pr = = 20 Years
10,000 (0.05)

Therefore it will take 2 0 years for the principal (Br. 10, 000) to double itself in value if it
is invested at 5% annual interest rate.
3. How much money you have to deposit in an account today at 3% simple interest
rate if you are to receive Br. 5, 000 as an amount in 10 years?

Solution Given: A=5,000birr; t=10 years; r=3%=0.03; P=?

A 5,000
P = 1  rt = 1  (0.03 x 10) = Br. 3, 846.15
In order to have Br. 5, 000 at the end of the 10th year, you have to deposit Br. 3846.15
in an account that pays 3% per year.
4. At what interest rates will Br. 5, 000 yield Br. 2, 000 in 8 years time.

Solution: Given: P = Br. 5,000; I = Br. 2,000; t = 8 years; r = ?

2, 000
r = I/pt= = 0.05 = 5%
5, 000 x 8

Compound Interest

If the interest, which is due, is added to the principal at the end of each interest period
(such as a month, quarter, and year), then this interest as well as the principal will earn
interest during the next period. In such a case, the interest is said to be compounded.
The result of compounding interest is that starting with the second compounding period;
the account earns interest on interest in addition to earning interest on principal
during the next payment period. Interest paid on interest reinvested is called compound
interest.

The sum of the original principal and all the interest earned is the compound amount.
The difference between the compound amount and the original principal is the compound
interest.

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The compound interest method is generally used in long-term borrowing unlike that of
the simple interest used only for short-term borrowings. The time interval between
successive conversions of interest into principal is called the interest period, or
conversion period, or compounding period, and may be any convenient length of
time. The interest rate is usually quoted as an annual rate and must be converted to
appropriate rate per conversion period for computational purposes. Hence, the rate per
compound period (i) is found by dividing the annual nominal rate (r) by the number of
compounding periods per year (m): i = r/m

Example if r = 12%, i (rate per compound period) for different conversion period (m) is
calculated as follows: Annually (once a year) i = r/1 = 0.12/1 =0.12; Semi annually
(every 6 months), i = r/2 = 0.12/2 =0.06; Quarterly (every 3 months)= r/4=0.12/4 =
0.03; Monthly; i = r/12 = 0.12/12=0.01

Therefore, to calculate the value of “A” or other variables in the compound interest
formula, you can use one of the three approaches which ever convenient to you, these
are: calculators, logarithmic rules, and readymade tables.

Compound amount formula: A = P (1 + i)n

Where: A = amount (future value) at the end of n periods.

P = Principal (present value)
i = r/m = Rate per compounding period.
n = mt = total number of conversion periods
t = total number of years
m = number of compounding/ conversion periods per Year
r = annual nominal rate of interest

5. Assume that Br. 10, 000 is deposited in an account that pays interest of 12% per year,
compounded quarterly. What are the compound amount and compound interest at the
end of one year?

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Solution, Given: P = Br. 10, 000; r = 12%; t = 1 year; m = No. of conversion periods per
year = 4 times (per quarter). This means interest will be computed at the end of each
three month period and added in to the principal. i = r/m 12%/4 = 3%; n=total
conversion period=mt=4*1=4; A=?, I=?
A = P (1 + i)n=10,000*(1+0.03)4=11,255.088 birr;
Compound Interest = Compound amount – original principal
I=A-P=11,255.088-10,000=1,255.088 birr
6. Find the compound amount and compound interest after 10 years if Br. 15,000
were invested at 8% interest if compounded: i) annually ii) semi-annually
iii) quarterly iv) monthly v) daily vi) hourly vii) instantaneously

Solution: Given: t=10 years P=Br. 15,000 r=8%=0.08

i) m=1, i=r/m=.08/1=0.08, n=mt=1*10=10;

A=P(1+i)n=15,000*(1+0.08)10=32,383.875; I=A-P=32,383.875-15,000=17,383.875birr

ii) m=2, i=r/m=.08/2=0.04, n=mt=2*10=20;

A=P(1+i)n=15,000*(1+0.08)20=32,866.85; I=A-P=32,866.85-15,000=17,866.85birr

iii) m =4, i=r/m=.08/4=0.02, n=mt=4*10=40;

A=P(1+i)n=15,000*(1+0.02)40=33,120.60; I=A-P=33,120.60-15,000=18,120.60birr

iv) m=12, i=r/m=.08/12=0.0067, n=mt=12*10=120;

A=P(1+i)n=15,000*(1+0.0067)120=33,427.16; I=A-P=33,427.16-15,000=18,427.16 birr

v) m=365, i=r/m=.08/365=0.00022, n=mt=365*10=3,650;

A=P(1+i)n=15,000*(1+0.00022)3,650=33,480.46;I=A-P=33,480.46-15,000=18,480.46 birr

vi)m=365x24=8,760, i=r/m=.08/8,760=0.0000091324, n=mt=8,760*10=87,600;

A=P(1+i)n=15,000*(1+0.08)87,600=33,382.99; I=A-P=33,382.99-15,000=18,382.99birr

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 vii) Instantaneous (Continuous) compounding; A=P*ert= 15,000*e.08*10=33,383.11

I=A-P=33,383.11-15,000=18,383.11

When a number of conversion period within a year increases, the interest earned also
increases continuously toward an upper limit. The limiting case occurs where interest is
compounded continuously.
Present value: frequently it is necessary to determine the principal P which must be
invested now at a given rate of interest per conversion period in order that the compound
amount A is accumulated at the end of n conversion periods. Under these conditions, P is
called the present value of A. This process is called discounting and the principal is
now a discounted value of future value A.
= P=A/(1+i) n=A*(1+i)-n
Present value=

7. How much should you invest now at 8% compounded semiannually to have Br.
10, 000 toward your brother’s college education in 10 years?
Solution: Given: A=10,000, r=.08, m=2, i=r/m=0.08/2=0.04, t=10, n=mt=2*10=20,
P=? P=A/(1+i)n=A*(1+i)-n=10,000/(1.04)20=4,563.87 birr

8. How long it takes to accumulate Br. 8, 000 if you invest Br. 6, 000 at 12%
compounded monthly?
Solution: Given: A=8,000, P=6,000, r=12%=0.12, m=12, i=r/m=0.12/12=0.01, t=?,
n=?

A/P=(1+i)n =8,000/6000=1.01n=log8,000/6000=log1.01n=3log8/6=n.log1.01
n=log1.33/log1.01=28.66≈29months; t=n/m=29/12=2.42 years

Effective Rate

An effective rate is the simple interest rates that would produce the same return in one
year had the same principal been invested at simple interest without compounding. In
other words, the effective rate r converted m times a year is the simple interest rate that

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would produce an equivalent amount of interest in one year. It is denoted by re. t=1
thus, P(1+re)=P(1+r/m)m; 1+ret=(1+r/m)m; Effective rate=re=(1+r/m)m-1
9. What is the effective rate corresponding to a nominal rate of 16% compounded
quarterly?
Solution: Given: r=0.16; re = (1 + 0.16/4)4 -1= (1.04)4 –1=1.169859 – 1=16.99%
10. An investor has an opportunity to invest in two investment alternatives A and B
which pays 15% compounded monthly, and 15.2% compounded semi-annually
respectively. Which investment is better investment, assuming all else equal?

Solution: Given: m=12; rA=0.15, rB=0.152 i=r/m=iA=0.15/12=0.0125;

iB=0.152/2=0.076 re=(1+i)m-1=Effective rate A: 1.012512-1=0.16075=16.1%;
Effective rate B: 1.152577612-1=0.157776=15.8%
Since the effective rate for investment A (16.1%) is greater than the effective rate for
investment B (15.8%), A is the preferred investment alternative.

Annuities
An annuity is any sequence of equal periodic payments. The payments may be made
weekly, monthly, quarterly, annually, semiannually or for any fixed period of time. The
time between successive payments is called payment period for the annuity. If payments
are made at the end of each payment period, the annuity is called an ordinary annuity. If
payment is made at the beginning of the payment period, it is called annuity due. In this
course we will discuss only ordinary annuities. The amount, or future value, of an annuity
is the sum of all payments plus the interest earned during the term of the annuity. The
term of an annuity refers to the time from the begging of the first payment period to
the end of the last payment period.

Ordinary Annuity
An ordinary annuity is a series of equal periodic payments in which each payment is
made at the end of the period. In an ordinary annuity the first payment is not considered
in interest calculation for the first period because it is paid at the end of the first period
for which interest is calculated. Similarly, the last payment does not qualify for interest at

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all since the value of the annuity is computed immediately after the last payment is
received.

 (1  i ) n 1
Future value of annuity=
= A = R 
 i 

Where; R = Amount of periodic payment; i = interest rate per payment period; n = (mt)
total no. of payment periods

Example: Annuity Cases

11. Abebe deposits Br. 100 in a special savings account at the end of each month. If
the account pays 12%, compounded monthly, how much money, will Mr. X have
accumulated just after 15th deposit?

Solution: Given: R=100, r=0.12, m=12, i=0.12/12=0.01; n=15

 (1  0 .01)15 1
A = 100   = 100*16.096896=1,609.69 birr
 0.01 

12. A person deposits Br. 200 a month for four years into an account that pays 7%
compounded monthly. After the four years, the person leaves the account
untouched for an additional six years. What is the balance after the 10 year
period?

Solution: Given:R=200, r=0.07, m=12, i=0.07/12=0.00583,t1=4, t2=6, n1=48, n2=72

 (1 0 .00583 ) 48 1
A (after 4 years) = 200   =11,040.95;
 0.00583 
72
A 10=11.040.95(1.00583) =16,779.40

Present Value of Annuity:

It represents the amount that must be invested now to purchase the payments due in the
future.

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 1  (1  i )  n 
P = R =
 i 

13. What is the present value of an annuity that pays Br. 400 a month for the next five
years if money is worth 12% compounded monthly?

Solution: Given; R=400, r=0.12, m=12, i=0.12/12=0.01 t=5 years n=mt=12*5=60,

P=?
1  (1  i )  n  1  (1  0.01) 60 
P = R  = 400   =17,982.02 birr
 i   0.01 

Sinking Fund:

A sinking fund is a fund into which equal periodic payments are made in order to
accumulate a definite amount of money up on a specific date. Sinking funds are generally
established in order to satisfy some financial obligations or to reach some financial goal.
If the payments are to be made in the form of an ordinary annuity, then the required
periodic payment into the sinking fund can be determined by reference to the formula for
the amount of an ordinary annuity as follows:
 i 
R= A   , R being fixed periodic payment to achieve financial goal
 (1  i ) 1
n

14. How much will have to be deposited in a fund at the end of each year at 8%
compounded annually, to pay off a debt of Br. 50, 000 in five years?

Answer: A=50,000, t=5 years, r=0.08, m=1, i=0.08, R=?

 i   0.08 
R= A   , R= 50,000   =8,522.82 birr
 (1  i ) 1  (1 0.08)5 1
n

The total amount of deposit over the 5 year period is equal to 5 x 8, 522.80 = Br.42,614

15. Ato Chala has a savings goal of Br. 100,000 which he would like to reach 15 years
from now. During the first 5 years he is financially able to deposit only Br. 1000
each quarter into the savings account. What must his quarterly deposit over the
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 last 10 (ten) years be if he is to reach his goal? The account pays 10% interest,
compounded quarterly.

Solution: Given: A=100,000, t=15 years, R=1000, r=0.10, m=4, i=0.10/4=0.025,

t1=5years, n1=20, t2= 10 years, n2=40

 (1  0 .025) 20 1 40
1000   = 25,544.66 birr; 25,544.66(1.025) =68,589.04
 0.025 

 0.025 
P10=31,410.96   = 466.02
 (1  0.025)40 1
Thus, if Chala makes quarterly payments of Br. 1000 into a savings account over the first
five years and then quarterly payments of Br. 466.02 over the next 10 years, he will
reach his savings goal of Br. 100,000 at the end of 15 years.

Amortization

Amortization means retiring a debt in a given length of time by equal periodic payments
that include compound interest. After the last payment, the obligation ceases to exist it is
dead and it is side to have been amortized by the periodic payments. Prominent
examples of amortization are loans taken to buy a car or a home amortized over periods
such as 5, 10, 20 or 30 years.
 i 
R=P  n 
1  (1  i ) 

Where: R = Periodic payment; P = Present value of a loan; i = Rate per period

n = Number of payment periods
16. Ato Elias borrowed Br. 15, 000 from Commercial Bank of Ethiopia and agreed to
repay the loan in 10 equal installments including all interests due. The banks
interest charges are 6% compounded Quarterly. How much should each annual
payment be in order to retire the debt including the interest in 10 years.

Solution: Given: P=15,000; r=0.06, m=4, t=10 years n=mt=40, i=0.06/4=0.015, R=?

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  i   0.015 
R=P  n 
= 15,000  40 
= 15, 000 (0.033427)= Br. 501.4
1  (1  i )  1  (1  0.015) 

Interest = [501.4 x 40] – 15, 000 =20056 – 15,000=5,056 birr

Loan (A)=15,000; m=4, r=0.06; i=0.06/4=0.015; I=15,000*0.015=225; P=501.41-225=276.41

Balance=15,000-276.41=14,724……
Amortization Schedule

Balance Principal Interest Payment

15,000.00 276.41 225 501.41
14,723.59 280.56 220.85 501.41
14,443.03 284.76 216.65 501.41
14,158.27 289.04 212.37 501.41
13,869.23 293.37 208.04 501.41
13,575.86 297.77 203.64 501.41
13,278.09 302.24 199.17 501.41
12,975.85 306.77 194.64 501.41
12,669.08 311.37 190.04 501.41
12,357.71 316.04 185.37 501.41
12,041.66 320.79 180.62 501.41
11,720.88 325.60 175.81 501.41
11,395.28 330.48 170.93 501.41
11,064.80 335.44 165.97 501.41
10,729.36 340.47 160.94 501.41
10,388.89 345.58 155.83 501.41
10,043.31 350.76 150.65 501.41
9,692.55 356.02 145.39 501.41
9,336.53 361.36 140.05 501.41
8,975.17 366.78 134.63 501.41
8,608.39 372.28 129.13 501.41

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 8,236.10 377.87 123.54 501.41
7,858.23 383.54 117.87 501.41
7,474.70 389.29 112.12 501.41
7,085.41 395.13 106.28 501.41
6,690.28 401.06 100.35 501.41
6,289.22 407.07 94.34 501.41
5,882.15 413.18 88.23 501.41
5,468.97 419.38 82.03 501.41
5,049.60 425.67 75.74 501.41
4,623.93 432.05 69.36 501.41
4,191.88 438.53 62.88 501.41
3,753.35 445.11 56.30 501.41
3,308.24 451.79 49.62 501.41
2,856.45 458.56 42.85 501.41
2,397.89 465.44 35.97 501.41
1,932.45 472.42 28.99 501.41
1,460.03 479.51 21.90 501.41
980.52 486.70 14.71 501.41
493.81 494.00 7.41 501.41

17. If you have Br. 100,000 in an account that pays 6% compounded monthly and I
you decide to withdraw equal monthly payments for 10 years at the end of which
time the account will have a zero balance, how much should be withdrawn each
month?

Solution: Given: P=100,000, r=0.06, m=12, i=0.06/12=0.005, t=10 years, n=120, R=?

 0.005 
100,000  120 
=1,110.21 birr
1  (1  0.05) 

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Mortgage

In a typical home purchase transaction, the home buyer pays part of the cost in cash and
borrows the remaining needed, usually from a bank or savings and loan associations. The
buyer amortizes the indebtedness by periodic payments over a period of time. Typically
payments are monthly and the time period is long such as 30 years, 25 years and 20
years. Mortgage payment and amortization are similar. The only differences are: the
time period in which the debt/ loan is amortized /repaid/ is equal 12; and the amount
borrowed (the loan is repaid from monthly salary or Income, but in amortization money
take other values). In sum, mortgage payments are of amortization in nature involving
the repayment of loan monthly over an extended period of time. Therefore, in mortgage
payments we are interested in the determination of monthly payments.

Taking:
A or P = total debt
R = monthly mortgage payments
r = stated nominal rate per annum
n = 12 x number of years (period of the loan)
R & A can be determined as follows respectively:

 r / 12  1 (1  r / 12)  n 
R=A or P  n 
; an d A = R  
1  (1  r / 12) 
;;

 r / 12 
18. Ato Assefa purchased a house for Br. 115, 000. He made a 20% down payment
with the balance amortized by a 30 year mortgage at an annual interest of 12%
compounded monthly so as to amortize/ retire the debt at the end of the 30th
year. Required: i) Find the periodic payment ii) Find the interest charged.

Solution: Given: A=115,000*0.8=92,000, t=30, r=.12 m=12, i=.12/12, n=360, R=?

 0.01 
R= 92,000  360 
=92, 000 (0.010286125)=946.32 birr
1  (1  0.01) 

Total payment=946.32*360=340,675.20; I=340,675.20-92,000=248,675.2

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 19. Ato Amare purchased a house for Br. 50,000. He made an amount of down
payment and pay monthly Br. 600 to retire the mortgage for 20 years at an annual
interest rate of 24% compounded monthly. Find the mortgage, down payment,
interest charged and percentage of the down payment to the selling price.

Solution: Given: R=600, t=20, r=0.24, i=0.02

1 (1  r / 12)  n  1 (1 .02) 240 
P=R   =600   =600(49.56855)= 29,741.13 birr
 r / 12   0.02 
Down payment= 50,000-29,741.13=20,258.87; 20,258.87/50,000=40.52%
600*240=144,000; 144,000-29,741.13=114,258.87 birr

20. 20. Ato Liku purchases a house for Br. 250, 000. He makes a 20% down payment,
with a balance amortized by a 30 year mortgage at an annual interest rate of 12%
compounded monthly.
i. Determine the amount of the monthly mortgage payment.
ii. What is the total amount of interest Ato Liku will pay over the life of the
mortgage?
iii. Determine the amount of the mortgage Ato Liku will have paid after 10
years?

Solution: Given: P=250,000*0.8=200,000; t=30, r=0.12 i=0.01

 0.01 
R= 200,000  360 
= 2,057.23;
1  (1  0.01) 
2,057.23*360=740,602.8;
Ic=740,602.8-200,000=540,602.8
c) To determine the loan principal (mortgage paid) so far use the following:
Find the total principal outstanding loan balance using the following formula
1  (1  i )  ( n  x ) 
P = R 
 i 

x =total payment periods for which payment is made so far

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n-x will give the remaining total number of payment periods over which payment is yet to
be made.

For 10 years, x=12*10=120; so n-x=360-120=240

The loan balance after 10 years or 120 payment periods is calculated as follows

1  (1.01) 240 
P = 2057.23*   =186,836.43
 0.01 

Thus the principal (mortgage) paid so far during the ten years will be 200,000-
186,836.43=13,163.57

More problems

21. A small boy at the age of 10 drops 0.25 cents into a Jar each day. At the end of a
month (30 days months) he deposits this amount at Dashen Bank that pays 5%
interest compounded quarterly. If he makes the deposit every quarter without
interruption, how much will the boy have at the age of 20?
Solution

Amount of money at the end of every month the boy will have Br. 7.50 (0.25 x 30) to be
deposited at Dashen Bank every quarter

Therefore, R = 7.50 t = 10 years r = 5% m = 4, n = 40 i = 5%/4= 0.0125

 1.0125 40 1

A = 7.5  
 0.0125 

= 7.5 x 51.489557

If the small boy saves 0.25 cents every day and deposits it monthly in a bank account
= Br. 3861.72
that pays 5% compounded quarterly, he will have Br. 386.17 after 10 years.

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 22. Hiwot deposits Br. 1, 000 at the end of every 3 months period in to an account for
5 years which earn 10% interest compounded quarterly and then her deposits are
changed to Br. 500 monthly for the next 5 years which earn 12% interest
compounded monthly. How much is the account by the end of the time period
considered?
Solution

First 5 years: R1 = 1000 r = 10% m=4 i = 2.5% t=5 n = 20 A5 = ?

 1.025 20 1

A1 = 1,000   = 1,000 (25.54466) = Br. 25,544.66
 0.025 

This amount will be compounded quantity at a 12% interest rate. Therefore, the amount at the
end of the next 5 years will be calculated as follows.

P = 25,544.66 r = 12% m = 12 i = 1% t = 5 n = 5 x 12 = 60 A10=?

A10 = (25,544.66 (1.01)60= Br. 46,406.895

Since Hiwot continues her payment for the second 5 years of Br. 500, the amount will be
calculated using an annuity formal as:

 1.0160 1
A2 = 500  
 0.01 

= 500 (81.66966)

= Br. 40,834.845

At the end of the 10 years Hiwot will have a total amount of Br. 87,241.73 (Br. 46,406.9 + Br.
40,834.84).

23. XYZ Company purchased a delivery truck on credit from AMCE which requires a
payment of Br. 400,000 plus 5% interest compounded annually at the end of 5
years. The Company plans to set up a sinking fund to accumulate the amount
required to settle the debt.

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 i) Find the total debt at the end of the 5 year
ii) What should be the monthly deposit into the fund be if the account pays 15%
interest, compounded monthly?
Solution

a) A = ? t = 5 year p = 400, 000 Br. m = 1, r = 5%, n = 5

A = P (1 + i )n= 400, 000 (1.05)5= 510,512.625 Br.

b) Given

A = 510,512.625 Br. t = 5 years m = 12 n = 5 x 12 = 60; r = 12%; i= 1%

R=?

 i  0.01
R=A   = 510,512.625 X
 (1  i ) 1 (1.01) 60 1
n

0.01
= 510512.625 x
0.81669669

= 5150512.625 x 0.0122444

= Br. 6250.95

The company should deposit Br. 6250.95 every month for 5 years or 60 periods to a
sinking fund in order to settle its debt of 510512.625

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