Quantitative Techniques for Management

Aditya K Biswas
 Time Value of Money

• Cash Flow over Time

• Future Value is not same as the current Value
• Future Value of a single amount (present)
• Present Value of a single amount (future)
• Future Value of an Annuity
• Present Value of an Annuity
• Intra Year Compounding and discounting
 Simple Interest

• 1) A bank employee has taken a loan of Rs 5 lac

for housing. The interest rate is 10 % simple .
– How much he will have to pay after 5 Years ?
– If he pays Rs 1 lac every year when will his loan be
paid in full ?
– What will be the approx EMI if the loan period is 15
years?
• FV = PV ( 1 + r n)
 Compound Interest
• 1a) For the previous example what will be the amount
due after 5 years if the interest is @ 10 % compound
• 1b) If the employee pays Rs 1 lac per year what will be
his payment schedule?
• FVn = PV (1 + r ) n
Simple Interest Compound Interest
Year O/Bal Interest C/Bal O/Bal Interest C/Bal
1 1,000 100 1,100 1,000 100 1,100
5 1,400 100 1,500 1,464 146 1,610
10 1,900 100 2,000 2,358 236 2,594
20 2,900 100 3,000 6,116 612 6,728
50 5,900 100 6,000 106,718 10,672 117,390
100 10,900 100 11,000 12,527,829 1,252,783 13,780,612
 Growth Rate

• Doubling period for deposits is given by

Log (2)= n Log(1+r)
– Thumb rule is n = 0.35 + (69 / r)
• Growth rate (g=CAGR) can be calculated as
G = (1+g)n

• Calculate the CAGR when a company sales

grows 10 times in 10 years ( 0.26 % ?)
 Present Value – Discounting future

• We have seen FVn = PV (1 + r ) n

• Therefore PV = FVn [1 / (1 + r ) n ]
Year 1 2 3 4 5 6 7 8
Earning -10000 -5000 0 5000 5000 5000 5000 5000
Discount %
NPV
0 10,000.00 NPV
0.01 8,750.99
0.02 7,598.23 12,000.00
0.03 6,533.69 10,000.00
0.04 5,550.10
8,000.00
0.05 4,640.87
0.06 3,799.96 6,000.00
0.07 3,021.92 4,000.00
0.08 2,301.76
2,000.00
0.09 1,634.91
0.1 1,017.23 0.00
0.11 444.92 -2,000.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0.12 -85.50
-4,000.00
0.13 -577.20
0.14 -1,033.11 NPV Linear (NPV)
0.15 -1,455.89
 Internal Rate of Return

• NPV is zero when discounting rate = IRR

• Marginal attractive rate of return while analyzing
portfolio of projects
• IRR for initial screening of projects
• Cash inflow and outflow both discounted at the
same rate !
• Compare NPV at a given rate against IRR for
different projects to select
 Depreciation

• Measure against wear and tear of assets

• Fund created to replace after the useful life
• Books of accounts as per rules
• Benefits in TAX calculation
• Straight line method
• Written Down Value (WDV)
• Full year or part year
• Asset types – building, machinery, computers
 Problems - Depreciation

• 2) Calculate book value of a computer

purchased at Rs 100 lac after 4 years. The WDV
method was followed @ 40 % annual
– What are the tax benefits during year 1, 2, 3, 4 & 5 if
the company Tax is 30 %
• 3) Expenditure of Rs 100 lac in the current year
will be amortized in next 5 years. What is the
loss in Tax benefits if the Tax bracket is 30 % all
the years. Depreciation is not applicable here.
 Annuity

• Due in the beginning or end period (deferred)

• FVAn = A(1+r) n-1 + A(1+r) n-2 … + A
• FVAn = A * FVIFAr,n Where FVIFAr,n = [(1+r)n – 1] /r

• PVAn = A(1+r) -1 + …. A(1+r) -n

• PVAn = A[{1-(1/(1+r) n}/r]
• PVAn = A * PVIFAr,n (= A/r in case of perpetuity)
 Annuity

• 4) Deposited Rs 30,000 every year to PPF for 30

yrs interest being @11%. The Future value will
be 30,000 [(1+0.11)30 – 1] /0.11 = Rs 5,970,600
• 5) You deposit Rs 1000 every year for 5 years
and get Rs 15,937 after 10 years. What is the
effective interest rate? (Is it 10 % ?)
• 6) Borrowed Rs 1,080,000 for flat. Paying Rs
180,000 per year. What will be the maturity
period if interest rate is 12.5 %? (1.125n)=4;
n=11.76 years)
 Intra year compounding

• FVn = PV (1 + r/m ) mn

• PV = FVn [1 / (1 + r/m ) ] mn

• Effective interest rate for 12 % annual when

compounded half yearly is 12.36 % and when
compounded quarterly it becomes 12.55 %
 AP & GP

• Series – Natural numbers, odd numbers, even

numbers, squares of 2, Fibonacci, Prime etc.
• Nth term by Induction : Tn = f(n)
• Series with common difference or common ratio
• Arithmatico- Geometric series –
 a, (a+d)r, (a+2d)r2 , …. (a+(n-1)d)rn-1
• S=a+(a+d)+(a+2d) … n terms .. AP series
• S= a+ar+ar2 + … n terms … GP series
 Series SUM

• Sn = n(a+l)/2 = an + n(n-1)d/2 for AP

• Sn = a(rn – 1)/ (r-1) for GP
• Sn = 12 + 22 + 32 + 42 + …… + n2
= n(n+1)(2n+1)/6 [Hint consider n3 – (n-1)3 ]
• Similar for Sn = 13 + 23 + … + n3 = [n(n+1)/2] 2
• S=2+5x+8x^2+11x^3+ …. |x| <1 = (2+x)/(1-x) 2
• S= 2*5+5*8+8*11 + … + (3n-1)(3n+2) .. n terms
= n (n+1)(n+2)/6
 Mean

• AM = (X1+X2+ .. Xn)/n ..
– Consider Bank interest –and also the concept of
weighted averages
• GM = (X1*X2..*Xn)1/n ..
– Interest rate over periods - multi period and intra year
– CAGR estimation
• HM = n / ( 1/X1 +1/X2 .. + 1/Xn)
– Consider 2,3,4,5,6 and see that AM >= GM >= HM
– Average speed when D distance travel with v1 and
then again D with v2. Average P/E ratios in equity.
 Permutation

• n! = 1*2*3…*n .. This is factorial of n

• Multiplication principle in permutation
– One event has m possible results, another event has
n possibility. Then together there are mn possible
outcomes of the two events.
• Arrange n distinct objects .. n !
• Arrange r distinct objects out of n .. n! / (n-r)!
• Arrange n objects n1 alike, n2 alike ..n! /(n1! n2!)
 Combinations

• Choose r distinct objects from n .. No repetition

– n!/ [(n-r)!r!]
• Choose r distinct objects from n .. Repetition ok
– n^r permutations, (n+r-1)!/[(n-1)!r!] combinations
• Binomial theorem (x+y)^n = ∑n (nCk)x^k*y^n-k
 Problems
• 7) 4 books on Maths, 3 Chemistry, 2 History and 1
English. How many ways these books can be arranged
keeping same subjects together (6912)

• 8) Tournament has 4 Russians, 3 from USA, 2 from GB

and 1 from Brazil. Result will be in the order of
placement showing country. How many possibilities ?
(12600)

• 9) 7 men and 5 women to from a committee of 2 women

and 3 men (350). What if 2 men refuse to work together
(300)
 Concept of Probability

• A full deck of cards contain 4 suits X 13 each.

Find the number of ways
– a) 5 cards can be selected from 52 cards
– b) 3 cards will be Kings and 2 Queens
• P {X=n} = n/N , N-> infinity (n success in N trials)
• http://www.scribd.com/doc/25411216/800-
Permutation-Combination-Prob-Lesson
 SET theory

• SET, objects, membership (Fuzzy), Finite,

Countable, Uncountable, Real numbers
• Singleton, Empty φ, Subset, Superset
• Ordered pairs, Triples, Quadruples,
• Complementary set, Disjoint set
• Venn diagram
• Union, Intersection and Difference of sets
• Cardinality of Set, Union of two sets
• De Morgan’s Law
 Problems

• 10) In a town of 500 people, 285 read Hindu,

212 read Indian Express & 127 read ToI. Of
these 20 read Hindu and ToI, 29 read Hindu and
IE, 35 read ToI & IE. 50 do not read newspaper.
How many read only one paper? [321]
 More

• Relations: R is binary relation if all elements are

ordered pairs. z ∈ R where z =(x,y), xRy
– Domain R ={x| there exists y such that xRy holds}
– Range R={y| there exists x for each y that xRy holds}
• Functions: Domain F=A , Range F in B
– F:A->B, <F(a)| a ∈ A>
– Injection, Bijection, Surjection examples
X = {1,2,3} , Y= {D, B, C, A}
 Problems
• 11. How much you need to deposit (one time) in bank to
get Rs 100,000 after 5 years when the interest is 12%
compounded monthly?
• 12. what will be equivalent monthly payment if you do
not want one time deposit.
• 13. A man has total Rs 5,00,000 which he will invest for
his son and daughter who will get the amount with
interest when they attain age 18 in the ratio 2:1. Son is
now aged 10 and the daughter is 8. The interest is 10%
simple. How much to invest for son?
• 14. Sum squares of n natural numbers.
 Problems
• 15. If (ab+bc) is the geometric mean of (a^2 +b^2) and
(b^2+c^2) then show that b is the GM of a and c.
• 16. 4 numbers are in AP and the total is 24. The product of
first and last number is -45. Find the numbers.
• 17. Examination question paper contains 12 questions.
Parts I consisting of 5 and part II consisting of 7 questions
Student has to attempt 8 questions choosing at least 3 from
each part. How many ways the selection can be made.
• 18. In hostel there are 100 students. 60 drink tea, 50 drink
milk and 30 drink both. How many do not take any? Use
Venn diagram.
 Problems

A = {2,4,6,8,10} B={1,2,3,4,5,8,9,10}
• 19. Explain Union and Intersection of A and B
• 20. What will be set difference of A related to B
• 21. Explain the symmetric difference

A = {1,2,3,} B= {2,3,4} U={1,2,3,4,5,6}

• 22. State and explain De Morgan’s law involving A and B
which are subsets of the universe U.
• 23. Also explain the cardinality of Sets after Union.
 Problem
• 24. If you invest Rs 500,000 in immediate Annuity (to
begin after 1 year) for 10 years. What amount will you
receive annually if the rate of return is 8% annual.
• 25. What will be the Annuity for 10 years if it is deferred
by 10 years (annuity investment after 10 years) and the
interim rate of return is 10 %
• 26. Book value of a computer system after 2 years
following WDV for depreciation (40 %) is 60 % of book
value of another asset with same procurement cost and
time but following straight line depreciation. What is the
estimated life of this Asset?
 Problems

• 27. Consider Patients, Beds and Doctors in a Hospital.

How relationship can be established through Set
concepts & Cardinality.
• 28. Analyze given yearly cash flows for 2 projects for
different discounting rates and comment.
– Project A: -18000, +5000, +5000, +5000, +10000
– Project B: -20000, +5000, +10000, +10000, +0
 Mathematics for Economics

• Linear function: y=f(x)= a+bx where a & b known

• Graph of a linear function
• Equation of a straight line: y=mx+c; y=c
when x=0; slope of the line is m= dy / dx
• Line passing through a point (x1, y1) given m
y1=mx1+c will be (y-y1)=m(x-x1)
• Intersection of lines:a1x+b1y=c1 & a2x+b2y=c2 will
be the solution of these equations. Solve by Gauss
Jordan method of elimination etc..
 Mathematics for Economics
• Parallel shifts: ax+by=c1, c2, c3, …
• Lines through same point on Y axis but different
intercepts on X axis: y=mx+c; m=m1, m2 …
• Convex and Concave functions: Consider a point
in between f(x1) and f(x2) [uni modal?]
f[α*X1 + (1- α)x2] > α f(X1 ) + (1- α) f(x2) : concave
f[α*X1 + (1- α)x2] < α f(X1 ) + (1- α) f(x2) : convex
For all 1> α > 0
• First order derivative dY/dX when Y=a+bX+cX2 is
b+2cX : rate of change tangent at x1=b+2cX1
 Linear and non linear

X 0 1 2 3 4 5
Y1 2 5 8 11 14 17 =2+3x
Y2 2 4 4 2 -2 -8 =2+3x-x^2
Y3 2 0 0 2 6 12 =2-3x+x^2
Y4 3 6 9 12 15 18 =3+3x
Y5 5 8 11 14 17 20 =5+3x

25

20

15

10

0
0 1 2 3 4 5
-5

-10

Y1 Y2 Y3 Y4 Y5
 Problems
• 29. Profit from selling product A is Rs 5 and from Product
B is Rs 10. Show that total profit is represented by iso
profit parallel lines depending on number of A and B
products sold as X1 and X2
• 30. When Y=2+5X-X2
– What is the rate of change of Y at X=2
– where is an optimum ?
• 31. Find intersection of 2x+3y-13=0 and 3x+2y-12=0
• 32. Y=2+5X-X2 is a convex function or concave?
Consider between X=0 and X=2