Mathematics of Finance
MATH 1206
Course Resources:
Mathematics of Business and Finance, 4th Edition
Author(s) - Larry Daisley, Thambyrajah Kugathasan,
Diane Huysmans
Publisher- Vretta Inc.
https://nct.vitalsource.com/products/mathematics-of-business-and-finance-larry-daisley-thambyrajah-
v9781927737743
Course Evaluations:
Assessment Date/ week % of final grade
Test 1
(Based on CLO 1.1 to 2.2) Week 4 22.50%
Test 2
(Based on CLO 2.3 to 4.2) Week 7 22.50%
Test 3
Week 12 22.50%
(Based on CLO 4.3 to 5.1)
Test 4
Week 15 22.50%
(Based on CLO 5.1 to 6.5)
Quizzes and Assignments Week 5
Week 10 10.00%
Course Learning Objectives- Week 2
• Solve problems involving trade discounts including discount series and
single equivalent rate of discount.
• Apply the three most commonly used methods of cash discounts.
• Solve integrated problems involving discounts, mark-up and markdown.
Important Terms
List Price- The price quoted by supplier for a product.
Trade Discount- A reduction on the list price of the product.
Net price- The price of the product after deducting trade discounts from
the list price.
Trade Discount rate(d)- Trade discount as a percentage of the list price.
Single Trade Discount
Only one discount is offered from seller to buyer.
Formula-
Amount of trade discount= Trade discount rate(d) X List price(L)
Also,
Amount of trade discount= List Price(L)- Net price(N)
Formula for Net price-
N= L(1-d)
N= L(NCF)
Where NCF= Net cost factor= 1-d
Ex 5.1(a)
Calculate Trade discount and N when L
and d are given
List price of an item is $640. The trade discount is 20%. Find amount of trade
discount and net price of the item.
Solution-
Amount of trade discount= Trade discount rate(d) X List price(L)
= 0.20 X 640= $128
Net price= L – Amount of trade discount
= 640 – 128= $512
Ex 5.1(b)
Calculate List price and amount of trade
discount when N and d are given
After a 40% trade discount, the net price of an item is $420. calculate the
List price and the amount of trade discount.
Solution: N= L(1-d)
L= N /(1-d)
= 420/ (1-0.40)
L = $700
Amount of trade discount= L-N
= 700- 420= $280
Self Practice
Problem 5.1(c)
Problem 5.1(d)
Series of Trade Discount
A manufacturer may offer two or more discounts to different members of
the supply chain.
If a list price is subject to two or more discounts, these discounts are called a
discount series.
Additional discounts may be offered to encourage large volume orders and
early orders for seasonal items.
Additional discounts may be offered to different members of the merchandising
chain.
Discount Series Formulas
Formulas
NET PRICE = L (1 − d1)(1 − d2)(1 − d3) … (1 − dn)
For every discount series, a single equivalent rate of discount (SERD)
exists;
𝑆𝑖𝑛𝑔𝑙𝑒 𝐸𝑞𝑢𝑖𝑙𝑎𝑣𝑒𝑛𝑡 𝑅𝑎𝑡𝑒
𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑜𝑟 𝑎 = 1 − 𝑁𝑃𝐹 𝑓𝑜𝑟 𝑡ℎ𝑒 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑆𝑒𝑟𝑖𝑒𝑠
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑆𝑒𝑟𝑖𝑒𝑠
SERD = 1− [(1 − d1)(1 − d2)(1 − d3)…(1 − dn)]
Discount Series
An item listed at $160 is Net Price = $160(1 − 0.05)
subject to the trade (1 − 0.15)(1 − 0.20)
discount series 5%, 15%, =
and 20%. $160(0.95)(0.85)(0.80)
= $103.36
Discount Series (4 of 5)
A manufacturer sells an LED i.Net Price = List Price × NPF
TV for $998 less 30%, 10%, 𝑁𝐸𝑇 𝑃𝑅𝐼𝐶𝐸 = 𝐿 1 − 𝑑1 1 − 𝑑2 1 − 𝑑3 ⋯ 1 − 𝑑𝑛
20%
Find; ii. Net Price = $998(1 − 0.30)
i. The Net Price. (1 − 0.10) (1 − 0.020) =
ii. Amount of Discount. $502.99
iii. The single equivalent rate Discount = List Price – Net
of discount. Price
= $998 – 502.99
= $495.01
Discount Series (5 of 5)
iii. Discounts are 30%, 10%, 20%
𝑆𝑖𝑛𝑔𝑙𝑒 𝐸𝑞𝑢𝑖𝑙𝑎𝑣𝑒𝑛𝑡 𝑅𝑎𝑡𝑒
𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑜𝑟 𝑎 = 1 − 1 − 𝑑1 1 − 𝑑2 1 − 𝑑3 ⋯ 1 − 𝑑𝑛
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑆𝑒𝑟𝑖𝑒𝑠
𝑆𝑖𝑛𝑔𝑙𝑒 𝐸𝑞𝑢𝑖𝑙𝑎𝑣𝑒𝑛𝑡 𝑅𝑎𝑡𝑒
𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑜𝑟 𝑎 = 1 − 1 − 0.30 1 − 0.10 1 − 0.20
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑆𝑒𝑟𝑖𝑒𝑠
= 1 − 0.504
= 0.496 = 𝟒𝟗. 𝟔%
Self Practice
Example 5.1 (j)
Payment Terms and Cash Discounts
An invoice for the goods is sent, and the seller specifies payment terms on
the invoice.
The business selling the goods can offer a cash discount to encourage
prompt payment.
Cash Discounts (1 of 2)
All payment terms have three things in common:
1. The rate of discount is stated as a percent of the net amount of the
invoice (the amount remaining after trade discounts are deducted).
2. The discount period is stated, indicating the time period when the cash
discount can be applied.
3. The credit period is stated, indicating the time period when the invoice
must be paid.
Cash Discounts (2 of 2)
Offered in a variety of ways;
1. Ordinary dating, whereby payment terms are based on the invoice
date.
2. End-of-month dating, or E.O.M. dating.
Shift the invoice date to the last day of the month.
3. Receipt-of-goods dating, or R.O.G.
Used when the transportation of the goods takes a long time.
Sample Sales Invoice
Ordinary Dating (1 of 3)
Commonly used payment terms are 2/10, n/30 (read “two ten, net
thirty”)
if the payment is made within 10 days of the date of the invoice, a
discount of 2% may be deducted from the net amount of the invoice.
otherwise, a payment of the net amount of the invoice is due within 30
days.
Ordinary Dating (2 of 3)
Determine the payment needed to settle an invoice with a net
amount of $950, dated September 22, terms 2/10, n/30, if the invoice
is paid
i. On October 10;
ii. On October 1.
Ordinary Dating (3 of 3)
Ten days after September 22 is October 2. The discount period ends
October 2.
i. October 10 is beyond the last day for taking the discount. The full
amount of the invoice of $950 must be paid.
ii. October 1 is within the discount period; the 2% discount can be taken.
Amount paid = Net amount − 2% of the net amount
= 950.00 − 0.02(950.00)
= 950.00 − 19.00
= $931.00
End-of-the-Month Dating (1 of 2)
Commonly the credit period (such as n/30) is not stated.
In our example, “2/10, n/30 E.O.M.” would be written “2/10 E.O.M.
End-of-the-Month Dating (2 of 2)
An invoice for $1,233.95 dated July 16, terms 2/10 E.O.M., is paid on
August 10. What is the amount paid?
The abbreviation E.O.M. means that the invoice is treated as if the invoice
date were July 31. So August 10 is the last day for taking the discount.
Receipt-of-Goods Dating
Hansa Import Distributors has received an invoice of $8465.00 dated
May 10, terms 3/10, n/30 R.O.G., for a shipment of clocks that arrived
on July 15.
What is the last day for taking the cash discount and how much is to
be paid if the discount is taken?
Last day for taking the discount is ten days after receipt of the
shipment, that is, July 25.
Markup (1 of 2)
The primary purpose of operating a business is to generate profits.
The amount of profit depends on many factors. The selling price must cover
1. the cost of buying the goods;
2. the operating expenses (or overhead) of the business;
3. the profit required by the owner to stay in business.
Markup (2 of 2)
Blank Blank Profit (P)
Selling Price (S) Markup (M) Expenses (E)
Blank
Cost (C) Cost (C)
Selling Price = Cost of Buying + Expenses + Profit
S=C+E+P
M=E+P
therefore
S=C+M
Rate of Markup (1 of 3)
A markup may be stated in one of two ways:
1. as a percent of cost; or
2. as a percent of selling price.
Computing the rate of markup involves comparing the amount of markup
to a base amount.
Depending on the method used, the base amount is either the cost or the
selling price.
Since the two methods produce different results, great care must be taken
to note whether the markup is based on the cost or on the selling price.
Rate of Markup (2 of 3)
𝑹𝑨𝑻𝑬 𝑶𝑭 𝑴𝑨𝑹𝑲𝑼𝑷 𝑴𝑨𝑹𝑲𝑼𝑷 𝑴
= 𝑪𝑶𝑺𝑻 = 𝑪 × 𝟏𝟎𝟎
𝑩𝑨𝑺𝑬𝑫 𝑶𝑵 𝑪𝑶𝑺𝑻
𝑹𝑨𝑻𝑬 𝑶𝑭 𝑴𝑨𝑹𝑲𝑼𝑷 𝑴𝑨𝑹𝑲𝑼𝑷 𝑴
= = × 𝟏𝟎𝟎
𝑩𝑨𝑺𝑬𝑫 𝑶𝑵 𝑺𝑬𝑳𝑳𝑰𝑵𝑮 𝑷𝑹𝑰𝑪𝑬 𝑺𝑬𝑳𝑳𝑰𝑵𝑮 𝑷𝑹𝑰𝑪𝑬 𝑺
Rate of Markup (3 of 3)
Question Solution
A dealer bought personal Cost = 1850(1 − 0.32)(1 − 0.17)
computers for $1850.00 less = $1044.14
32%, and 17%. They were sold
M = 1575 − 1044.14 = $530.86
for $1575.00.
a) What was the markup as a)
530.86
= 0.508418 = 50.84%
1044.14
a percent of cost?
b) What was the markup as 530.86
a percent of selling price? b) = 0.337054 = 33.71%
1575.00
Self Practice
Example 5.3(a)
Example 5.3(b)
Markdown
It is the amount by which the selling price of a product is reduced
to determine the sale price or reduced selling price.
Clearance of seasonal items, out of fashion items
Markdown Formulas
Sale Price = Regular Selling Price − Markdown
SR = S − MD
Where SR is the reduced price.
𝑹𝑨𝑻𝑬 𝑶𝑭 𝑴𝑨𝑹𝑲𝑫𝑶𝑾𝑵 𝑴𝑫
= = × 𝟏𝟎𝟎
𝑴𝑨𝑹𝑲𝑫𝑶𝑾𝑵 𝑹𝑬𝑮𝑼𝑳𝑨𝑹 𝑺𝑬𝑳𝑳𝑰𝑵𝑮 𝑷𝑹𝑰𝑪𝑬 𝑺
SR = S (1− md)
Markdown Example
A bicycle originally priced at a) Amount of discount
$179 was sold for $129.
= $179 – 129 = $50
a)What was the amount of
discount? a) Markdown Rate
50
b)What is the markdown = × 100 = 27.93%
179
rate?
