Chapter 2

Fractions
Practical Business Math Procedures, 12th Edition
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning unit objectives
LU 2-1: Types of Fractions and Conversion Procedures
1. Recognize the three types of fractions.
2. Convert improper fractions to whole or mixed numbers and mixed numbers to
improper fractions.
3. Convert fractions to lowest and highest terms.
LU 2-2: Adding and Subtraction of Fractions
1. Add like and unlike fractions.
2. Find the least common denominator (LCD) by inspection and prime numbers.
3. Subtract like and unlike fractions.
4. Add and subtract mixed numbers with the same or different denominators.

LU 2-3: Multiplying and Dividing Fractions

1. Multiply and divide proper fractions and mixed numbers.
2. Use the cancellation method in the multiplication and division of fractions.
Types of Fractions

Numerator Proper
Proper fractions have a value
less than 1; its numerator is 1, 1, 1, 4, 18
smaller than its denominator. 4 2 12 7 55

Denominator
Types of Fractions

Numerator
Improper Fractions
Improper fractions have a value
equal to or greater than 1; its
14, 7, 15, 22
numerator is equal to or
14 6 14 19
greater than its denominator.

Denominator
Types of Fractions

Mixed Numbers

Mixed numbers are the sum of a

5 1, 5 9, 8 7, 3 5, 13 9
whole number greater than zero and 6 10 8 6 11
a proper fraction
Converting Improper Fractions to
Whole or Mixed Numbers
2 Steps
15
1. Divide the numerator of the 15 =1
improper fraction by the
denominator

2. a. If you have no remainder, 16 1

the quotient is a whole = 3
number 5 5

3R1
2 b. If you have a remainder,
5 16
the quotient is a mixed
15
number.The remainder is
1
placed over the old
denominator as the proper
fraction of the mixed
number.
Converting Mixed Numbers to
Improper Fractions
6 1
3 Steps 8
1. Multiply the denominator of the (8 x 6) = 48
fraction by the whole number.

2. Add the product from Step 1 to (8 x 6) = 48

the numerator of the old fraction. 48 + 1 = 49

3. Place the total from Step 2 over

the denominator of the old 49
fraction to get the improper 8
fraction.
Reducing Fractions to Lowest
Terms by Inspection

Find the lowest whole number 24 24 / 6 4

that will divide evenly into the = =
30 30 / 6 5
numerator and denominator.
Finding the Greatest Common Divisor
24
30
1
Step 1. Divide the 24 30
numerator into the 24
denominator. 6

4
Step 2. Divide the remainder in 6 24
Step 1 into the divisor of Step 1. 24
0

Step 3. Divide the remainder of 24 / 6 = 4

Step 2 into the divisor of Step 2. 30 / 6 5
Continue until the remainder is
0.
Divisibility Tests

2 3 4
Last digit is Sum of the Last two
2,4,6,8 digits is digits can
divisible by 3 be divided
by 4

12 6 36 12 140 1(40)
= = =
14 7 69 23 160 1(60)
3+6=9/3=3 35 7
=
6 + 9 = 15 / 3 = 5 40 8
Divisibility Tests

5 6 10
Last digit is The number is even The last digit
0 or 5 and 3 will divide is 0
into the sum of the
digits

15 = 3 12 = 2 90 9
=
20 4 18 3 100 10
Raising Fractions to Higher Terms
When Denominator is Known
4 = ?
7 28
2 Steps
1. Divide the new denominator by the old 4
denominator to get the common number 7 28
that raises the fraction to higher terms. 28
0

2. Multiply the common number from Step 1

by the old numerator and place it as the
new numerator over the new denominator. 4 x 4 = 16

16
28
Adding Like Fractions

• Add the numerators and place the total 1 4 5

over the denominator. 7 + 7 = 7

• If the total of your numerators is the same

as your original denominator, convert your
answer to a whole number. If the total is 5+ 6 = 11 2
= 1
larger than your original denominator, 9 9 9 9
convert your answer to a mixed number.
Least Common Denominator
(LCD)
• The smallest nonzero whole number 3 5
into which ALL denominators will divide 7 + 21
evenly.

What is the least common denominator? 7

42

21
Adding Unlike Fractions

4 Steps 1 + 1 +1 +1
1. Find the LCD. 3 8 9 12

2. Change each fraction to a like fraction

with the LCD.
24 + 9 +8 +6 =47
3. Add the numerators and place the total 72 72 72 72 72
over the LCD.
4. If necessary, reduce the answer to
lowest terms.
Prime Numbers
A prime number is a whole number greater than 1 that is only divisible
by itself and 1. The number 1 is not a prime number.

Examples

2, 3, 5, 7, 11, 13, 17, 19, 23, 29, 31, 37, 41, 43

Adding Mixed Numbers
4 7 7
4
20 20
3 Steps
3 12
6 6
1. Add the fractions. 5 20
2. Add the whole numbers. 1 5
+7 +7
3. Combine steps 1 & 2. Be sure you do not 4 20
have an improper fraction in your final Step 1 24 4
answer. If necessary, reduce the answer 20 20
= 1
to
lowest terms. 4+6+7 = 17
4
Step 2 18
20
Step 3 18 1
5
Subtracting Like Fractions

2 Steps

1. Subtract the numerators and 9 - 1 = 8

10 10 10
place the total over the
denominator

8 / 2 = 4
2. If necessary, reduce the answer 10 / 2 5
to lowest terms.
Subtracting Unlike Fractions
4 Steps
5 2
Step 1. Find the LCD. -
8 64

Step 2. Raise the fraction to its equivalent value. 5 = 40

8 64

Step 3. Subtract the numerators and place the 40 - 2 = 38

answer over the LCD. 64 64 64

Step 4. If necessary, reduce the answer to lowest 38 = 19

terms. 64 32
Subtracting Mixed Numbers
When Borrowing Is Not Necessary:

3 Steps
Step 1. Subtract fractions, making sure to 61 64
find the LCD. 2 8

Step 2. Subtract whole numbers.

_ 3 3
Step 3. Reduce the fractions to lowest 8 8
terms.
61
8
Subtracting Mixed Numbers
When Borrowing Is Necessary:
4 Steps
2 6
Step 1. Make sure the fractions have the LCD. 31 3 2
2 4 4

3 3
Step 2. Borrow from the whole number. -1 3 -1 -1
4 4 4
Step 3. Subtract whole numbers and
fractions. 3
14
Step 4. Reduce the fractions to lowest terms.
Multiplying Proper Fractions
2 Steps
Step 1. Multiply the numerator and the
denominator. 5 1 4 20 = 10
x x =
Step 2. Reduce the answer to lowest 1 6 7 42 21
terms.
Multiplying Mixed Numbers
Convert the mixed numbers
to improper fractions.

1
21 X 11 =
7 X3 =7 =1 3
3 2 3 2 2 2
1

Multiply the numerator Reduce the answer to lowest terms.

and denominators.
 Dividing Proper Fractions

Invert (turn upside down) the

divisor (the second fraction). Multiply the fractions.

1 . 2 1 X3 =3
8 . 3
=
8 2 16

Reduce the answer to

lowest terms.
Dividing Mixed Numbers

1. Convert all mixed

numbers to improper
fractions.
3. Reduce the
answer to lowest
terms.

8 3 X 25 =
35 X6 105
=
3
= 3
4 6 4 17 34 34

2. Invert the divisor and

multiply.
Problem 2-38
Seventy-seven million people were born between 1946 and 1964. The U.S. Census
classifies this group of individuals as baby boomers. It is said that today, and every
day for the next 18 years, 10,000 baby boomers will reach 65. If 1/4 of the 65 and
older age group uses e-mail, 1/5 obtains the news from the Internet, and 1/6
searches the Internet, find the LCD and determine total technology usage for this age
group as a fraction. LU 2-2(1, 2)

Solution:
LCD 60
1 1 1 15 12 10 37
+ + = + + =
4 5 6 60 60 60 60
Problem 2-46
A trip to the White Mountains of New Hampshire from Boston will take you 2 and ¾
hours. Assume you have traveled 1/11 of the way. How much longer will the trip
take? LU 2-3(1, 2)

Solution:

5 1
10 11 5 1
x 4 = = 2 2 hours
11 2
1 2
Problem 2-56
Albertsons grocery planned a big sale on apples and received 750 crates from
the wholesale market. Albertsons will bag these apples in plastic. Each plastic
bag holds 1/9 of a crate. If Albertsons has no loss to perishables, how many bags
of apples can be prepared? LU 2-3(1)

Solution:

750 / 1 = 750 x 9 = 6,750 bags

9
 Chapter 3
Decimals
Practical Business Math Procedures, 12th Edition
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning unit objectives
LU 3-1: Rounding Decimals; Fraction & Decimal Conversions
1. Explain the place values of whole numbers and decimals; round
decimals.
2. Convert decimal fractions to decimals, proper fractions to decimals,
mixed numbers to decimals, and pure and
mixed decimals to decimal fractions.

LU 3-2: Adding, Subtracting, Multiplying, and Dividing Decimals

1. Add, subtract, multiply, and divide decimals.
2. Complete decimal applications in foreign currency.
3. Multiply and divide decimals by shortcut methods.
 Table 3.1 - Bag of M&M’s
Decimal Percent
Color Fraction (hundredth) (hundredth)

18 .33 32.73%
55
Red 10 .18 18.18%
55
Blue 9 .16 16.36%
55
Orange 7 .13 12.73%
55
Brown 6 .11 10.91%
55
Green 5 .09 9.09%
55
Total 55 1.00 100.00%
55 = 1
Decimal place-value chart
Rounding Decimals
3 Steps
Step 1. Identify the place value
of the digit you want to
round.
. 3272727
Step 2. Identify the digit to the
right. If 5 or more,
increase the identified
digit by 1. If less than 5,
do not change.
.337272
Step 3. Drop all digits to the
right of the identified
digit. .33
Rounding Decimals

Round to nearest dollar: $166.39 $166

Round to nearest cent: $1,196.885 $1,196.89

Round to nearest hundredth: $38.563 $38.56

Round to nearest thousandth: $1,432.9981 $1,432.998

Converting Decimal Fractions
to Decimals
2 Steps Fraction Decimal # of places
1. Count the number of zeros in 3
.3 1
the denominator. 10
2. Place the numerator of the 3 .03 2
decimal fraction to the right 100
of the decimal point the same 3
number of places as you have 1,000 .003 3
zeros in the denominator. Do
not go over the total number 3
of denominator zeros. 10,000 .0003 4
Converting Proper Fractions
to Decimals
.75 Decimal

3 4 3.00
4
28
20
20
0
Converting Mixed Numbers
to Decimals
Step 1 .4
8 2
5 5 2.0
20
0
Step 2

8 + .4 = 8.4
Converting Pure Decimals to
Decimal Fractions
Step 1. Place the digits to the right of the
decimal point in the numerator of the fraction. 24
Omit the decimal point.

Step 2. Put a 1 in the denominator 24

of the fraction. 1

.24
Places: The number of digits to the right 2
of the decimal point.

Step 3. Add the same number

of zeros (as the places) to the denominator of the 24
100
fraction. For mixed decimals, add the fraction to the
whole number.
Converting Mixed Decimals to
Decimal Fractions
Step 1. Place the digits to theStep
right
1 of the decimal
17.45 point in the numerator of the fraction. Omit the 45
decimal point.

Step 2. Put a 1 in the denominator of the fraction. 45

1
17.45
Places: The number of digits to the right of
Places 2
the decimal point.

Step 3. Add the same number of zeros (as the places)

17 45 Step 3 For mixed
45
100 to the denominator of the fraction. 100
decimals, add the fraction to the whole number.
Adding Decimals
Add: 4 + 7.3 + 36.139 + .0007 + 8.22

4.0000
7.3000
36.1390 CHECK
.0007 4.0000
8.2200 7.3000
55.6597 36.1390
.0007
8.2200
55.6597
Subtracting Decimals
Subtract: 45.3 - 15.273

45.300
- 15.273
30.027
CHECK
45.300
- 15.273
= 30.027
Multiplying Decimals
8.52 (2 decimal places)
x 6.7 (1 decimal places)
= 5964
5112
57084 57.084

(3 decimal places)

2.36
x .016 Need to add zero
1416
236
03776 .03776

(5 decimal places)
Dividing Decimals
3 Steps Example

Step 1. Make the divisor a whole number 2.5 32.800

by moving the decimal point to
the right.
Step 2. Move the decimal point in the 25. 328.00
dividend to the right the same
number of places as in the
13.12
divisor (step 1). If there are not
25. 328.00
enough places, add zeros to the
25
right of the dividend. 78
Step 3. Place the decimal point in the 75
quotient above the new decimal 30
25
point in the dividend. Divide as 50
usual. 50
Decimals Applications in
Foreign Currency
The price of an Microsoft Surface 3 can be bought in Canada for $600 U.S. dollars. Using
the currencies table from the Wall Street Journal let us see what the Surface 3 would sell
for in Canadian dollars. In the table on page 74, 1 U.S. Dollar equals $1.1341 Canadian
dollars . To find the cost in Canadian dollars:
1. You multiply the number of U.S. dollars ($600) times $1.1341.
$600 x $1.1341 = $680.46
2. To check your calculations, take the $680.46 Canadian dollars cost of the Surface
3 and multiply it by $0.8817. This is what the Canadian dollar is worth against the
U.S. dollar. It equals $599.96 (this amount is off .04 due to rounding).

Table factor from currency table

CHECK $600.00 x $1.1341 = $680.46

Shortcuts for Multiples of 10
Multiplication
Step 1. Count the zeros in the multiplier.
Step 2. Move the decimal point in the multiplicand the same number
of places to the right as you have zeros in the multiplier.

6890 6.89 x 1000 6.89 x 10 68.9

6.89 x 100

689
Shortcuts for Multiples of 10
Division
Step 1. Count the zeros in the divisor.
Step 2. Move the decimal point the same
number of spaces to the left.

.00689 6.89 / 1000 6.89 / 10 .689

6.89 / 100

.0689
 Problem 3-8
Round 75.9913 as indicated: LU 3-1(1)

Solution: Tenth Hundredth Thousandth

76.0 75.99 75.991
 Problem 3-16

Convert the following decimal fractions to a decimal (round to nearest hundredth

as needed): LU 3-1(2)

979
1,000

Solution:
979
1,000 1. count zeroes: 3
2. move 3 places to right
.979
.98 3. round to nearest hundredth
 Problem 3-23

Convert the following decimal to a fraction. Do not reduce to lowest terms. LU 3-1(2)

.825

Solution:
Step 1. Place the digits to the right of the decimal point in the numerator of the fraction.
Omit the decimal point. 825
Step 2. Put a 1 in the denominator of the fraction: 825
1
Step 3. Add the same number of zeros to the denominator of the fraction. For mixed
decimals, add the fraction to the whole number.
825
1,000
 Problem 3-27

Convert the following to mixed numbers. Do not reduce to the lowest terms. LU 3-1(2)
28.48

Solution:
Step 1. Place the digits to the right of the decimal point in the numerator of the fraction.
Omit the decimal point. 48
Step 2. Put a 1 in the denominator of the fraction. 48
1
Places: The number of digits to the right of the decimal point. 2 Places
Step 3. Add the same number of zeros to the denominator of the fraction.
48
100
For mixed decimals, 48
28
add the fraction to the whole number. 100
 Problem 3-62
A Chevy Volt costs $29,000 in the United States. What would it cost in Canada? Check your
answer. LU 3-2(2)

Solution:
$29,000 X 1.1341 = $32,888.90

Check $32888.90 X .8817 = $28,998.14 The number is off due to rounding.

 Chapter 5
Solving for the Unknown:
A How-To Approach for
Solving Equations
Practical Business Math Procedures, 12th Edition
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning unit objectives
LU 5-1: Solving Equations for the Unknown
1. Explain the basic procedures used to solve equations for the unknown.
2. List the five rules and the mechanical steps used to solve for the
unknown in seven situations; know how to check the answers.
LU 5-2: Solving Word Problems for the Unknown
1. List the steps for solving word problems.
2. Complete blueprint aids to solve word problems; check the solutions.
Terminology
Expression – A meaningful combination of numbers and letters called
terms.

Equation – A mathematical statement with an equal sign showing that

a mathematical expression on the left equals the
mathematical expression on the right.

Formula – An equation that expresses in symbols a general fact, rule, or

principle.

Variables and constants are terms of mathematical expressions.

Solving Equations for the
Unknown
Equality in equations

A+8 58

Left side of equation Right side of equation

Dick’s age in 8 years will equal 58.

Variables and Constants Rules

1. If no number is in front of a letter, it is a 1:

B = 1B; C = 1C
2. If no sign is in front of a letter or number, it is a +:
C = +C; 4 = +4
Solving for the Unknown Rule

Whatever you do to one side of

an equation, you must do to the
other side.
Opposite Process Rule

If an equation indicates a process

such as addition, subtraction,
multiplication, or division, solve
for the unknown or variable by
using the opposite process.
Opposite Process Rule

A + 8 = 58
8 is subtracted from both
sides of equation to
- 8 - 8
isolate variable A on the
left.
A = 50

Check
50 + 8 = 58
Equation Equality Rule

You can add the same quantity or number to

both sides of the equation and subtract the
same quantity or number from both sides of
the equation without affecting the equality of
the equation.
You can also divide or multiply both sides of the
equation by the same quantity or number
(except zero) without affecting the equality of
the equation.
Equation Equality Rule
7G = 35
By dividing both sides
7G = 35 by 7, G equals 5.
7 7
G = 5

Check

7(5) = 35
Multiple Processes Rule

When solving for an unknown that

involves more than one process,
do the addition and subtraction
before the multiplication and
division.
Multiple Process Rule
H +2= 5
4

H +2= 5 1. Move constant to right

4 side by subtracting 2
-2 -2 from both sides.
H = 3
4
2. To isolate H, which is
()
4 H
4
= 4(3)
divided by 4, we do the
opposite process and
H = 12 multiply 4 times both
sides of the equation.
Check

12 + 2 = 5
4

3+2=5
Parentheses Rule
When equations contain parentheses (which
indicates grouping together), you solve for the
unknown by first multiplying each item inside the
parentheses by the number or letter just outside
the parentheses.
Then you continue to solve for the unknown with
the opposite process used in the equation. Do the
addition and subtraction first; then do the
multiplication and division.
Parentheses Rule
5(P - 4) = 20
1. Parentheses tell us that everything inside
5P – 20 = 20 parentheses is multiplied by 5.
+ 20 + 20 Multiply 5 by P and 5 by 4.

5P = 40 2. Add 20 to both sides to isolate 5P

on left.
5P = 40 3. To remove 5 in front of P, divide
5 5
both sides by 5 to result in P
P = 8 equals 8.

Check

5(8 - 4) = 20
5(4) = 20
20 = 20
Like Unknown Rule
To solve equations with like
unknowns, you first combine the
unknowns and then solve with the
opposite process used in the
equation.
Like Unknown Rule
4A + A = 20
To solve this equation:
5A = 20 4A + 1A = 5A. Thus, 5A =
20. To solve for A, divide
5A = 20
5 5 both sides by 5, leaving A
equals 4.
A =4

Check

4(4) +4 = 20
16 + 4 = 20
Solving Word Problems for
Unknowns
1) Read the entire problem.
3) Let a variable represent the
unknown.

Y = Computers

4) Visualize the relationship

Read again if necessary! between the unknowns and
variables. Then set up an
2) Ask: “What is the problem equation to solve for the
looking for?” unknown(s).

4Y + Y = 600

5) Check your results to

ensure accuracy.
Solving Word Problems for the
Unknown
Blueprint aid

Unknown(s) Variable(s) Relationship

Solving Word Problems for the
Unknown
ICM Company sold 4 times as many computers as Ring Company. The difference
in their sales is 27. How many computers of each company were sold?

Unknown(s) Variable(s) Relationship

Computers Sold:
ICM 4C 4C
Ring C -- C
27

4C -- C = 27 Ring = 9 computers
Mechanical 3C = 27
Steps ICM = 4(9) = 36 computers
3 3
C= 9 Check 36 - 9 = 27
 Drill Problem 5-2
Solve the unknown from the following equation: LU 5-1(2)

A + 64 = 98

Solution:

A + 64 = 98

-- 64 -- 64
A = 34
Drill Problem 5-5
Solve the unknown from the following equation: LU 5-1(2)

5Y = 75

Solution:

5Y = 75

5Y = 75
5 5

Y = 15
Problem 5-11
Jessica and Josh are selling Entertainment Books to raise money for the art room at
their school. One book sells for $15. Jessica received the prize for selling the most
books in the school. Jessica sold 15 times the books sold by Josh. Together they sold
256 books. How many did each one of them sell? LU 5-2(2)

Solution:
Unknown(s) Variable(s) Relationship
Jessica 15X 15 X
Josh X + X
256 total books

X + 15X = 256
16X = 256
X = 16 (Josh)
16 x 15 = 240 (Jessica)
 Chapter 6
Percents and their
Applications
Practical Business Math Procedures, 12th Edition
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning unit objectives
LU 6-1: Conversions
1. Convert decimals to percents (including rounding percents), percents
to decimals, and fractions to percents.
2. Convert percents to fractions.
LU 6-2: Application of Percents—Portion Formula
1. List and define the key elements of the portion formula.
2. Solve for one unknown of the portion formula when the other two
key elements are given.
3. Calculate the rate of percent decreases and increases.
Table 6.1 - Bag of M&M’s
Decimal Percent
Color Fraction (hundredth) (hundredth)

Yellow 18 .33 32.73%

55
Red 10 .18 18.18%
55
Blue 9 .16 16.36%
55
Orange 7 .13 12.73%
55
Brown 6 .11 10.91%
55
Green 5 .09 9.09%
55
Total 55 1.00 100.00%
55 = 1
Converting Decimals to
Percents
Step 1. Move decimal point 2 places to the right. You are multiplying
by 100. If necessary, add zeros.
Step 2. Add a percent symbol at the end of the number.

.49 49 % 8 800 %

Step 2 Step 1 Step 2

Step 1
Rounding Percents

Step 1. When you convert from a fraction or decimal, be sure your

answer is in percent before rounding.
Step 2. Identify the specific digit. If the digit to the right of the
identified digit is 5 or greater, round the identified digit.
Step 3. Delete digits to the right of the identified digit.

18% .3272727 .3273727 32.73%

55
Rounding Percents

18
.3272727
55

32.72727%

32.73%
Converting Percents to Decimals
Step 1. Drop the percent symbol.
Step 2. Move decimal point 2 places to the left. You are
dividing by 100. If necessary, add zeros.

54.5% 54.5 .545

824.4%
824.4
8.244
Converting Fractional Percents
to Decimals
Step 1. Convert a single fraction percent to its decimal equivalent by
dividing the numerator by the denominator.
Step 2. If a fractional percent is combined with a whole number (mixed
fractional percent) convert the fractional percent first. Then
combine the whole number and the fractional percent.
Step 3. Drop the percent symbol; move the decimal point two places to
the left (this divides the number by 100).

1% 7 3%
4 1/4 = .0025 4 31 / 4 =
.25 .0775
07.75
Converting Fractions to
Percents
Step 1. Divide the numerator by the denominator to
convert the fraction to a decimal.
Step 2. Move decimal point 2 places to the right; add
the percent symbol.

3 1
4 3/4 = 75% 1/5 = 20%
5
.75 .20
Converting a Whole Percent (or a
Fractional Percent) to a Fraction
Step 1. Drop the percent symbol.
Step 2. Multiply the number by 1/100.
Step 3. Reduce to lowest terms.

156% 156 156 X 1 /100 =

14
156 = 1 56 1
25
100 100

1% 1 1
8 8 800
1 X 1 /100 =
8
Converting Mixed Percent to
Fraction
Step 1. Drop the percent symbol.
Step 2. Change the mixed percent to an improper fraction.
Step 3. Multiply the number by 1/100.
Step 4. Reduce to lowest terms.
Note: If you have a mixed or decimal percent, change the decimal portion
to fractional equivalent and continue with Steps 1 to 4.

1 25 X 1
12 % = 100 =
2 2 1
25 = 8
200

1
12.5% = 12 % = 25
2 X 1 = 1
2 100 25 = 8
200
Solve Percents with the Portion
Formula
• When solving problems
involving portion, base,
or rate, you must give
two of these elements.
• Portion (P) = Base (B) x
Rate (R)
Solving for Portion
Sales of Milk Chocolate M&M’s® are 80% of total M&M’s® sales.
Total M&M’s® sales are $400,000. What are the sales of Milk
Chocolate M&M’s®?

Portion (P) = Base (B) x Rate (R)

P = $400,000 x .80
P = $320,000
Solving for Base
Sales of Peanut and other M&M’s® chocolate candies are 20% of
total M&M’s® sales. Sales of Milk Chocolate M&M’s® sales are
$320,000. What are the total sales of all M&M’s®?

320,000 is 80% of base

Portion (1.00 - .20)
Base =
Rate
Base = $320,000
.80
B = $400,000
Solving for Rate
Sales of Milk Chocolate M&M’s® are $320,000. Total M&M’s®
sales are $400,000. What is the percent of Peanut and other
M&M’s® chocolate candies sales compared to total M&M’s®
sales?

Rate = Portion
Base
Rate = $80,000 (400,000 – 320,000)
$400,000
R = 20%
Calculating Percent Decreases and
Increases
Step 1. Find the difference between amounts
(such as advertising costs).

Step 2. Divide step 1 by the original amount

(the base): R = P / B. Be sure to express
your answer in percent.
Rate of Percent Increase
Sheila Leary went to her local supermarket and bought a bag of
M&M’s®. The bag gave its weight as 18.40 ounces, which was 15% more than a
regular 1-pound (16 ounces) bag of M&M’s®. Sheila, who is a careful shopper,
wanted to check and see if she was actually getting a 15% increase.

Rate = Portion Difference between old and new amount

Base Old amount

Rate = 2.40 oz
16.00 oz

Rate = .15 or 15% increase

Rate of Percent Decrease
The increase in the price of sugar caused the M&M/Mars company to
decrease the weight of each 1-pound bag of M&M’s® to 12 ounces. What
is the rate of percent decrease?

Rate = Portion Difference between old and new amount

Base Old amount

4 oz
Rate =
16.00 oz

Rate = .25 or 25% decrease

Drill Problem 6-6
Convert the following decimal to percent: LU 6-1(1)

6.006

Solution:

600.6% Add % sign

Drill Problem 6-11
Convert the following percent to decimal: LU 6-1(1)

119%

Solution:

1.19 Drop % sign

Drill Problem 6-15
Convert the following fraction to percent (round to the nearest tenth percent as
needed): LU 6-1(2)

7
8

Solution:

7 = .875 = 87.5% Add % sign

8
 Drill Problem 6-19
Convert the following to fraction and reduce to the lowest terms: LU 6-1(1)

2
31 %
3
Solution:

2
31 % = 95 X 1_ = 95
=
19
3 3 100 300 60
 Drill Problem 6-26
Solve for the portion (round to the nearest hundredth as needed): P = R X B
LU 6-2(2)

119% of 128.9

Solution:

1.19 X 128.9 = 153.39

 Chapter 7
Discounts: Trade and
Cash
Practical Business Math Procedures, 12th Edition
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning unit objectives
LU 7-1: Trade Discounts—Single and Chain
(Includes Discussion of Freight)
1. Calculate single trade discounts with formulas
and complements.
2. Explain the freight terms FOB shipping point
and FOB destination.
3. Find list price when net price and trade discount rate are known.
4. Calculate chain discounts with the net price equivalent rate and single
equivalent discount rate.
LU 7-2: Cash Discounts, Credit Terms, and Partial Payments
1. List and explain typical discount periods and credit periods that a
business may offer.
2. Calculate outstanding balance for partial payments.
Invoice
Trade Discount Amount &
Net Price Formulas
List price x Trade discount rate = Trade discount amount

$11,550 x 25% = $2,887.50

List price - Trade discount amount = Net Price

$11,550 - 2,887.50 = $8,662.50

Freight Terms
From Buyer Prospective
FOB Shipping Point - buyer pays the freight cost
FOB Boston - the buyer in San Diego pays the freight

s
e
ll
e
r

From Seller Prospective

FOB Destination - seller pays the freight cost
FOB San Diego - the seller in Boston pays the freight
Complement
Complement - The difference between the
Complement single discount rate and 100%. The
complement is what percentage the buyer
will pay.

75%

25% For example, if the trade discount is

25%, the complement is 75% (100% --
25%).

Trade
Discount
Single Trade Discount
The price of a Macintosh computer is $2,700. The manufacturer offers
a 40% trade discount. What are the trade discount amount (TDA) and
the net price?

TDA = $2,700 x .40 = $1,080

Net price = $2,700 - $1,080 = $1,620

Using Complement:
$2,700 x .60 = $1,620
Calculating List Price When Net Price &
Trade Discount Rate Are Known
List Price = Net Price .
Complement of trade discount rate

Example:
A Macintosh computer has a $1,620 net price and a 40% trade
discount. What is the list price?

100% - 40% = 60%

$1,620 = $2,700 list price
.60
Chain Discounts
Chain discounts are trade discounts in a series of two or more
successive discounts. For example: 20/15/10.

To find the net price equivalent rate,

multiply the complements:
100% 100% 100%
- 20 - 15 - 10
.80 x .85 x .90 = .612 net price %

Warning: Do not just add up the discounts to

calculate the discount!

20 + 15 + 10 = 45%

.20 x .15 x .10 = .388 net trade discount

Calculating Net Price with a
Chain Discount
The price of office equipment is $15,000. With a chain discount of
20/15/10, what is the net price?

$15,000 $15,000 $12,000 $10,200

x .20 - 3,000 - 1,800 - 1,020
$3,000 $12,000 $10,200 $9,180
x .15 x .10
$1,800 $1,020
Calculating Net Price Using Net
Price Equivalent Rate
The price of office equipment is $15,000. With a chain discount
of 20/15/10, what is the net price?

Find the net price equivalent rate by multiplying the complements:

.80 x .85 x .90 = .612
To find the net price, multiply the net price equivalent rate by the list price:
$15,000 x .612 = $9,180

Trade discount amount:

$15,000 - $9,180 = $5,820
Calculating Trade Discount Amount
Using Single Equivalent Discount Rate
The price of office equipment is $15,000. With a chain discount of
20/15/10, what is the net price?

Find the net price equivalent rate by multiplying the complements:

.80 x .85 x .90 = .612
To find the single equivalent discount rate, subtract the net price equivalent
rate from 1:
1.00 - .612 = .388
Net Price = 15000 x 0.612 =$ 9180
Trade discount amount:
$15,000 x .388 = $5,820
Cash Discounts
A cash discount is for prompt payment. It is not taken on freight,
returned goods, sales tax, or trade discounts.

Credit Period
Mar. 1 Mar. 31

Time period sellers give buyers to pay invoices.

Discount Period

Mar. 1 Mar. 10

Time period buyer has to take advantage of cash discount.

Invoice
Ordinary Dating Method
2/10, n/30 is read: “two ten, net thirty”

Example: $400 invoice dated July 5; terms 2/10, n/30; paid on July 11.
$400 x.02 = $8 cash discount
$400 - $8 = $392 paid
or
$400 x .98 = $392
Receipt of Goods (ROG)
3/10, n/30 ROG - Cash discount period begins when the buyer receives the goods.

Example: $900 invoice dated May 9, received goods July 8; terms 3/10, n/30 ROG; paid
on July 20.
End of Month (EOM)
1/10 EOM -- 1% discount, up until the 10th of the following month.

Example: $600 invoice dated July 6; terms 1/10 EOM; paid on August 10.

$600 x .01 = $6
$600 - $6 = $594
or
$600 x .99 = $594
End of Month (EOM)
2/10 EOM – Considered the “25th rule;” skip a month. When seller sells good
after the 25th of the month, buyers gain an additional month.
Example: $800 invoice dated April 29; terms 2/10 EOM; paid on June 18.

No discount; $800 paid.

 Partial Payment
Molly McGrady owes $400. Molly ’s terms were 2/10, n/30. Within 10
days Molly sent in a payment of $80. How much is her new balance?

100% - 2% = .98 Step 1. Find the complement of discount

rate.
$80 Step 2. Divide partial payment by the
0.98 = $81.63 complement (amount credited).
(1 - 0.02)
Step 3. Subtract Step 2 from the
amount owed (outstanding
balance).
$400 - $81.63 = $318.37
 DRILL Problem 7-1
Net Price Single Equivalent
List Chain Equivalent Discount Rate Trade Net
Item Price Discount Rate (in decimals) (in decimals) Discount Price
Apple iPad $799 3/1
.9603 .0397 $31.72 $767.28

Solution:

1.00 1.00
- .03 - .01
.97 x .99 = .9603 x $799 = $767.28
1.0000
- .9603
.0397 x $799 = $31.72
 DRILL Problem 7-4

List Chain Net Trade

Item Price Discount Price Discount

Trotter treadmill $3,000 9/4 $2,620.80 $379.20

Solution:

$3,000 x .8736 = $2,620.80 (.8736 = .91 x .96)

$3,000 X .1264 = $379.20 (1 - 0.8736 = 0.1264)

 DRILL Problem 7-15
Gross Amount of
Invoice (freight
charge already Freight Date of Terms of Date of Cash Net Amount
included) Charge Invoice Invoice Payment Discount Paid
$7,000 $100 4/8 2/10, n/60 4/15 ? ?

Solution:

$138 (.02 x $6,900)

($6,900 x .98 = $6,762 + 100) = $6,862

 DRILL Problem 7-19
Actual Partial Date of Amount of
Amount Invoice Payment Partial Payment to Balance
of Invoice Terms Date Made Payment Be Credited Outstanding
$700 2/10, n/60 5/6 $400 5/15 $408.16 $291.84

Solution:
$700.00
$400 = - 408.16
.98 $291.84
 Chapter 8
Markups and Markdowns:
Perishables and
Breakeven Analysis
Practical Business Math Procedures, 12th Edition
Jeffrey Slater and Sharon Wittry

8-1

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning unit objectives
LU 8-1: Markup Based on Cost (100%)
1. Calculate dollar markup and percent markup on cost.
2. Calculate selling price when you know cost and percent
markup on cost.
3. Calculate cost when dollar markup at percent markup on
cost are known.
4. Calculate cost when you know the selling price and
percent markup on cost.

8-2

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning unit objectives
LU 8-2: Markup Based on Selling Price (100%)
1. Calculate dollar markup and percent markup on selling
price.
2. Calculate selling price when dollar markup and percent
markup on selling price are known.
3. Calculate selling price when cost and percent markup
on selling price are known.
4. Calculate cost when selling price and percent markup
on selling price are known.
5. Convert from percent markup on cost to percent markup
8-3
on selling price, and vice versa.

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning unit objectives
LU 8-3: Markdowns and Perishables
1. Calculate markdowns; compare markdowns and
markups.
2. Price perishable items to cover spoilage loss.

LU 8-4: Breakeven Analysis

1. Calculating contribution margin (CM).
2. Calculating a breakeven point (BE).
8-4

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Operating Expenses

Shop

$ $
Customer Retailer Manufacture
Selling Cost
Price

-
Markup
 Terminology
Cost - The price retailers pay to a manufacturer or
supplier.
Selling Price - The price retailers charge customers.
Markup, Margin, or Gross Profit - The difference
between the cost of bringing the goods into the store
and the selling price.
Operating Expenses or Overhead - The regular expenses
of doing business, such as rent, wages, utilities, etc.
Net profit or Net Income - The profit remaining after
subtracting the cost of bringing the goods into the store
and the operating expenses. 8-5

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Basic Selling Price Formula
Assume Gap plans to sell hooded fleece jackets for $23 that cost
them $18.

8-6

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
8
 Markups Based on Cost (100%)

Cost + Markup = Selling price

100% 27.78% 127.78%

Cost is 100% - Dollar markup Percent markup on cost is

the Base is the portion the rate

8-7

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Calculating Dollar Markup and
Percent Markup on Cost
Gap buys fleece jackets for $18. They plan to sell them for $23.
• What is Gap’s markup? What is the percent markup on cost?

Dollar markup = Selling price -- Cost $ 5 = $23 -- $18

Percent markup on cost = Dollar markup $5

Cost $18 = 27.78% or .2778

Cost (B) = Dollar markup $5 = $18

Percent markup on cost .2778

Check Selling price = Cost + Markup

23 = 18 + .2778($18) 8-8

$23 = $18 + $5
McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Calculating Selling Price When You
Know Cost and Percent Markup on
Cost
Mel’s Furniture bought a lamp for $100. To make Mel’s desired
profit, he needs a 65% markup on cost.
• What is Mel’s dollar markup? What is his selling price?

S = C + M
S = $100 + .65($100)
S = $100 + $65 Dollar Markup
S = $165 Selling Price

8-9

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Calculating Cost When You Know
Selling Price and Percent Markup on Cost
Jill Sport, owner of Sports, Inc., sells tennis rackets for $50. To make her
desired profit, Jill needs a 40% markup on cost.
What do the tennis rackets cost Jill? What is the dollar markup?

Calculate S (Selling Price) = C (Cost) + M (Markup)

the cost: $50 = C + .40(C)
$50 = 1.40C
1.40 1.40
$35.71 = C

Calculate M = S - C 8-10
the dollar M = $50 - $35.71
markup: M = $14.29
McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Markups Based on Selling Price
(100%)

13
 Markups Based on Selling Price
(100%)
Percent (%) markup on selling price is the rate (R)
Dollar ($) markup is the portion (P)
Selling price is 100% - the base (B)

Cost + Markup = Selling price

78.26% + 21.74% = 100%

8-11

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Calculating Dollar Markup and
Percent Markup on Selling Price
The cost to Gap for a hooded fleece jacket is $18; the store then
plans to sell them for $23. What is Gap’s dollar markup? What is
its percent markup on selling price?

Dollar markup = Selling price -- Cost

$5 = $23 -- $18

Percent markup on selling price = Dollar markup

Selling price
$5 = 21.74%
$23 Check
Selling price = Dollar markup Selling price = Cost + Markup
Percent markup on SP 23 = 18 + .2174($23)
$23 = $18 + $5 8-12
$5 = $23
.2174
McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Calculating Selling Price When You
Know Cost and Percent Markup on
Selling Price
Mel’s Furniture bought a lamp for $100. To make Mel’s desired profit,
he needs a 65% markup on selling price.
• What are Mel’s selling price and dollar markup?

S (Selling price) = C (Cost) + M (Markup)

Calculate the
selling price: S = $100 + .65S
- .65S - .65S
.35S = $100
.35 .35

S = $285.71
8-13
Calculate the M = S -- C
dollar M = $285.71 -- $100
markup: M = $185.71
McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Calculating Cost When You Know
Selling Price and Percent Markup
on Selling Price
Jill Sport, owner of Sports, Inc., sells tennis rackets for $50. To make
her desired profit, Jill needs a 40% markup on selling price. What is the
dollar markup? What do the tennis rackets cost Jill?

S (Selling price) = C (Cost) + M (Markup)

$50 = C + .40($50)
$50 = C + $20
- 20 - $20 Dollar Markup
$30 = C 8-14

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Conversion

Formula for Converting Percent Markup Formula for Converting Percent Markup
on Cost to Percent Markup on Selling on Selling Price to Percent Markup on
Price: Cost:

Percent markup on cost Percent markup on selling price

1 + Percent markup on cost 1 -- Percent markup on selling price

.2778 = 21.74% .2174 = 27.78%

1 + .2778 1 -- .2174

8-15

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Conversion
• A desk is marked up • A DVD player is
30% based on selling marked up 40%
price. What is the based on cost. What
equivalent markup is the markup rate
based on the cost? based on selling
price?

19
 Markdowns
Markdown percent = Dollar markdown
Selling price (original)

Dollar markdown = Original selling price – New selling price

Example:

Sears marked down a $18.00 tool set to $10.80. What are the dollar
markdown and the markdown percent?

$18.00 -- $10.80 = $7.20 markdown

Dollar markdown = $7.20 = 40%

Selling price (original) $18.00

8-16

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Pricing Perishable Items
Alvin’s vegetable stand grew 300 pounds of tomatoes. He expects 5% of
the tomatoes to become spoiled and not salable. The tomatoes cost
Alvin $.14 per pound and he wants a 60% markup on cost.
• What price per pound should Alvin charge for the tomatoes?

TC (Total Cost) = 300 lb. x $.14 = $42.00

TS (Total Sales) = TC + TM (Total Markup)
TS = $42 + .60($42)
TS = $67.20

300 lbs X .05 = 15 lbs

$67.20 = $.24 Selling price per pound
285lbs
8-17
300lbs -- 15lbs

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Calculating a Contribution Margin
(CM)
Contribution margin (CM) = Selling price (S) – Variable cost (VC)

Example:
Assume Jones Company produces pens that have a selling price (S)
of $2 and a variable cost (VC) of $.80. Calculate the contribution
margin.

CM = $2,00 (S) -- $.80 (VC)

CM = $1.20

8-18

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Calculating a Breakeven Point
(BE)
Breakeven point (BE) = Fixed costs (FC)
Contribution margin (CM)

Example:
Jones Company produces pens. The company has a fixed cost
(FC) of $60,000. Each pen sells for $ 2.00 with a variable cost
(VC) of $.80 per pen.

Breakeven point (BE) = $60,000 (FC) = 50,000 units

$2.00 (S) - $.80 (VC)

8-19

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Problem 8-1
Find the dollar markup and selling price for the following problems. Round answers
to the nearest cent. LU 8-1(1, 2)

Item Cost Markup Percent Dollar Markup Selling Price

Blackberry iPad $500 20% ? ?
Solution:
S (Selling Price) = C (Cost) + M(Markup)
S = $500 + .20($500)
S = $500 + $100
S = $600

Check = Cost x (1 + Percent markup on cost)

$600 = $500 x 1.20

8-20

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Problem 8-3
Solve for cost (round to the nearest cent): LU 8-1(3)

Selling price of office furniture at Staples, $6,000

Percent markup on cost, 40%
Actual cost?

Solution:
C = Selling price
1 + Percent markup on cost

$6,000 = C + .40C
$6,000 = 1.40 C
1.40 1.40
$4,285.71 = C
8-21

Check $6,000 = $4,285.71

1.40
McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Problem 8-5
Cost Selling Price Dollar Markup Percent Markup on Cost*
$15.10 $22.00 ? ?
*Round to the nearest hundredth percent.

Solution:

Selling Price - Cost = Dollar markup

$22.00 - $15.10 = $6.90

Dollar markup = $6.90 = 45.70%

Cost $15.10

8-22

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Problem 8-7
Assume markups are based on selling price. Find the dollar markup and cost (round
answers to the nearest cent): LU 8-2(1, 2)

Item Selling Price Markup Percent Dollar Markup Cost

Sony LCD TV $1,000 45% ? ?

Solution: Note: Markup is on selling price, not cost.

$1,000.00 = C + .45($1,000)
$1,000.00 = C + $450.00
-$450.00 = -$450.00
$550.00 = C

Check
$550 = $1,000 X .55 8-23
C = Selling price X (1 – Percent markup on selling price)

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 9
Payroll
Practical Business Math Procedures, 12th Edition
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning unit objectives
LU 9-1: Calculating Various Types of Employees’ Gross Pay
1. Define, compare, and contrast weekly, biweekly, semimonthly, and
monthly pay periods.
2. Calculate gross pay with overtime on the basis of time.
3. Calculate gross pay for piecework, differential pay schedule, straight
commission with draw, variable commission scale, and salary plus
commission.

LU 9-2: Computing Payroll Deductions for Employees’ Pay; Employers’ Responsibilities

1. Prepare and explain the parts of a payroll register.
2. Explain and calculate federal and state unemployment taxes.
Payroll Cycles

9-3
Hourly Rate of Pay;
Calculation of Overtime
Gross pay = Hours employee worked x Rate per hour

Hourly overtime pay rate = Regular hourly pay rate x 1.5

Gross pay = Earnings for 40 hours + Earnings at time-and-a-half rate

Hourly Rate of Pay; Calculation of
Overtime
Employee M T W Th F S Total
R Valdez 13 8.5 10 8 11.25 10.75 61.5
*Rate is $9.00 per hour.

Hourly overtime pay rate = Regular hourly pay rate x 1.5

Gross pay = Earnings for 40 hours + Earnings at time-and-a-half rate

61.5 – 40 = 21.5 overtime hours $9 x 1.5 = 13.50 overtime rate

(40 hours x $9) + (21.5 hours x 13.5)

$360 + $290.25 = $650.25
Straight Piece Rate Pay

Gross pay = Number of units produced x Rate per unit

Example:
Ryan Foss produced 900 dolls. He is paid $.96 per doll. Calculate his
gross pay.

900 x $.96 = $864.00

Differential Pay Schedule
Gross pay = Number of units produced x Various rates per unit

Example:
Logan Company pays Abby Rogers on the basis of the following schedule:

Last week Abby produced 300 dolls. What is Abby’s gross pay?
(50 x $.50) +(100 x $.62)+(50 x $.75) + (100 x $1.25) = $249.50
Straight Commission with Draw
Commission is a certain percentage of the amount a salesperson sells.

Draw is an advance on the salesperson’s commission.

Example:

Logan Company pays Jackie Okamoto a straight commission of 15% on her

net sales (net sales are total sales less sales returns). In May, Jackie had net
sales of $56,000. Logan gave Jackie a $600 draw in May. What is Jackie’s gross
pay?
($56,000 x .15) = $8,400
-- 600
$7,800
 Variable Commission Scale
Different commission rates for different levels of net sales.

Example:

Up to $35,000 4% Last month, Jane Ring’s net sales were

$160,000. What is Jane’s gross pay based
Excess of $35,000 to $45,000 6% on the schedule?
Over $45,000 8%

($35,000 x .04) + ($10,000 x .06) + ($115,000 x .08) = $11,200

Salary Plus Commission
Gross pay = Salary + Commission

Example:
Logan Company pays Joe Roy a $3,000 monthly salary plus a 4% commission for
sales over $20,000. Last month Joe’s net sales were $50,000. Calculate Joe’s gross
pay.
$3,000 + ($30,000 x .04) = $4,200
Drill Problem 9-1
Complete the following table: LU 9-1(1)

Employee M T W Th F Hours Rate per Hour Gross Pay

Pete Paul 11 6 9 7 6 39 $7.95 ?

Solution:

M T W Th F Hours
Pete Paul 11 + 6 + 9 + 7 + 6 = 39

Hours Rate per Hour Gross Pay

Pete Paul 39 X $7.95 = $310.05
 Drill Problem 9-3
Complete the following table (assume the overtime for each employee is a
time-and-a-half rate after 40 hours): LU 9-1(2)

Total Total
Regular OT Regular Overtime Gross
Employee M T W Th F Sat Hours Hours Rate Rate Earnings
Blue 12 9 9 9 9 3 40 11 $8.00 ? ?

Solution:
Total Regular Overtime
M T W Th F Sat Hours Hours Hours
Blue 12 + 9 + 9 + 9 + 9 3 = 51 -- 40 = 11
Overtime rate = $8.00 X 1.5 = $12.00
40 X $8.00 = $320.00
11 X $12.00 = 68.40
$452.00
Drill Problem 9-5
Calculate gross earnings: LU 9-1(3)

Worker Units Produced Rate per Unit Gross Earnings

Lang 480 $3.50 ?

Solution:
(480 X $3.50) = $1,680.00
 Drill Problem 9-7
Calculate the gross earnings for the apple picker based on the following differential
pay scale: LU 9-1(3)

1–1,000: $.03 each 1,001–1,600: $.05 each Over 1,600: $.07 each

Number of
Apple Picker Apples Picked Gross Earnings
Ryan 1,600 $60.00

Solution:

(1,000 x $.03) + (600 x $.05) = $60.00

Drill Problem 9-11
Ron Company has the following commission schedule:

Calculate the gross earnings of Ron Company’s employees: LU 9-1(3)

Employee Total Sales Gross Earnings
Ron Ear $155,000 $4,500.00

Solution:

($80,000 x .02) = $1,600

($20,000 x .035) = 700
($55,000 x .04) = 2,200
$4,500
 Chapter 10
Simple Interest
Practical Business Math Procedures
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning unit objectives
LU 10-1: Calculation of Simple Interest and Maturity Value
1. Calculate simple interest and maturity value for months and years.
2. Calculate simple interest and maturity value by (a) exact interest and (b)
ordinary interest.

LU 10-2: Finding Unknown in Simple Interest Formula

1. Using the interest formula, calculate the unknown when the other two
(principal, rate, or time) are given.

LU 10-3: U.S. Rule -- Making Partial Note Payments before Due Date
1. List the steps to complete the U.S. Rule.
2. Complete the proper interest credits under the U.S. Rule.
Maturity Value

Maturity Value (MV) = Principal (P) + Interest (I)

The amount of the loan Cost of borrowing

(face value) money
Simple Interest Formula
Simple Interest (I) = Principal (P) x Rate (R) x Time (T)

Stated as a
Percent Stated in Years

Example: Hope Slater borrowed $40,000 for office furniture. The loan was for 6
months at an annual interest rate of 4%. What are Hope’s interest and maturity
value?

I = $40,000 x .04 x 6 = $800 interest

12

MV = $40,000 + $800 = $40,800 maturity value

Simple Interest Formula
Simple Interest (I) = Principal (P) x Rate (R) x Time (T)

Stated as a
Percent Stated in years

Example: Hope borrowed $40,000. The loan was for 1 year at a rate of 4%.
What is interest and maturity value?

I = $40,000 x .04 x 1 = $1,600 interest

MV = $40,000 + $1,600 = $41,600 maturity value

Simple Interest Formula
Simple Interest (I) = Principal (P) x Rate (R) x Time (T)

Stated as a
Percent Stated in years

Example: Hope borrowed $40,000. The loan was for 18 months at a rate of
4%. What is interest and maturity value?

I = $40,000 x .04 x 18 = $2,400 interest

12
MV = $40,000 + $2,400 = $42,400 maturity value
Two Methods of Calculating Simple
Interest and Maturity Value
Method 1: Exact Interest
Used by Federal Reserve banks and the federal government

Exact Interest (365 Days)

Time = Exact number of days

365
Method 1: Exact Interest
On March 4, Joe Bench borrowed $50,000 at 5%. Interest and principal are due on
July 6.

Counting days:
March 31 – 4 = 27 days Exact Interest (365 Days)
April : 30 days
May: 31 days
June: 30 days I=PxRxT
July: 6 days
$50,000 x .05 x 124 = $849.32 interest
365

MV = P + I
$50,000 + $849.32 = $50,849.32 maturity value
Two Methods of Calculating Simple
Interest and Maturity Value
Method 2 : Ordinary Interest (Banker’s Rule)

Ordinary Interest (360 Days)

Time = Exact number of days

360
Method 2: Ordinary Interest
On March 4, Joe Bench borrowed $50,000 at 5%. Interest and principal are due
on July 6.
Counting days:
March 31 – 4 = 27 days Ordinary Interest (360 Days)
April : 30 days
May: 31 days
June: 30 days
July: 6 days I = P x R x T
$50,000 x .05 x 124 = $861.11 interest
360

MV = P + I
$50,000 + $861.11 = $50,861.11 maturity value
Two Methods of Calculating Simple
Interest and Maturity Value
On May 4, Dawn Kristal borrowed $15,000 at 8%.
Interest and principal are due on August 10.
Counting days:
May 31 – 4 = 27 days
June: 30 days
July: 31 days
August: 10 days

Exact Interest (365 Days) Ordinary Interest (360 Days)

I=PXRXT I=PXRXT
$15,000 x .08 x 98 = $322.19 interest $15,000 x .08 x 98 = $326.67 interest
365 360

MV = P + I MV = P + I
$15,000 + $322.19 = $15,322.19 $15,000 + $326.67 = $15,326.67
Finding Unknown in Simple
Interest Formula: PRINCIPAL
Principal = Interest
Rate x Time
Example: Tim Jarvis paid the bank $19.48 interest at 9.5% for 90 days. How much
did Tim borrow using the ordinary interest method?

P = $19.48 . = $820.21
.095 x (90/360)
.095 times 90 divided by 360. (Do not
round answer.)

Interest (I) = Principal (P) x Rate (R) x Time (T)

Check 19.48 = 820.21 x .095 x 90/360
Finding Unknown in
Simple Interest Formula: RATE
Rate = Interest
Principal x Time

Example: Tim Jarvis borrowed $820.21 from a bank. Tim’s interest is $19.48 for 90
days. What rate of interest did Tim pay using the ordinary interest method?

$19.48 .
R = $820.21 x (90/360) = 9.5%

Interest (I) = Principal (P) x Rate (R) x Time (T)

Check 19.48 = 820.21 x .095 x 90/360
Finding Unknown in Simple
Interest Formula: TIME
Time (years) = Interest
Principle x Rate
Example: Tim Jarvis borrowed $820.21 from a bank. Tim’s interest is $19.48 at a 9.5%.
What was the duration of the loan using ordinary interest method?

T = $19.48 = .25.
$820.21 x .095
.25 x 360 = 90 days

Convert years to days (assume 360 days)

Interest (I) = Principal (P) x Rate (R) x Time (T)

Check 19.48 = 820.21 x .095 x 90/360
U.S. Rule - Making Partial Note
Payments before Due Date
Any partial loan payment first covers any interest that has built
up. The remainder of the partial payment reduces the loan
principal.

Allows the borrower to receive proper interest credits.

U.S. Rule (Example)
Jeff Edsell owes $5,000 on an 4%, 90-day note. On day 50, Joe pays $600 on the note.
On day 80, Jeff makes an $800 additional payment. Assume a 360-day year. What is
Jeff’s adjusted balance after day 50 and after day 80? What is the ending balance due?

Step 1. Calculate interest on principal from $5,000 x .04 x 50 = $27.78

date of loan to date of first principal 360
payment.

Step 2. Apply partial payment to interest due. $600 – 27.78 = $572.22

Subtract remainder of payment from principal. $5,000 – 572.22 = $4,427.78
U.S. Rule (Example, Continued)
Jeff Edsell owes $5,000 on an 4%, 90-day note. On day 50, Jeff pays $600 on the note.
On day 80, Jeff makes an $800 additional payment. Assume a 360-day year. What is
Jeff’s adjusted balance after day 50 and after day 80? What is the ending balance due?

Step 3. Calculate interest on adjusted balance $4,427.78 x .04 x 30 = $14.76

that starts from previous payment date 360
and goes to new payment date. Then $800 – 14.76 = $785.24
apply Step 2.
$4,427.78 – 785.24 = $3642.54

Step 4. At maturity, calculate interest from last $3,642.54 x .04 x 10 = $4.05

partial payment. Add this interest to 360
adjusted balance. $3,642.54 + $4.05 = $3,646.59
 Drill Problem 10-1
Calculate the simple interest and maturity value for the following problem. Round to
the nearest cent as needed. LU 10-1(1)

Principal Interest Rate Time Simple Interest Maturity Value

$7,800 4 ¼% 18 mo. $497.25 $8,297.25

Solution:

$7,800 x .0425 x 18/12 = $497.25

MV = P + I

$8297.25 = $7,800 + $497.25

 Drill Problem 10-4
Complete the following, using ordinary interest: LU 10-1(2)

Date Date Exact Maturity

Principal Interest Rate Borrowed Repaid Time Interest Value
$1,000 8% March 8 June 9 93 $20.67 $1,020.67

Solution:
67 160 Difference = 93 days

T = Exact number of days / 360

$1,000 x .08 x 93/360 = $20.67

MV = P + I
$1,020.67 = $1,000.00 + $20.67
 Drill Problem 10-7
Complete the following, using exact interest: LU 10-1(2)

Date Date Exact Maturity

Principal Interest Rate Borrowed Repaid Time Interest Value
$1,000 8% March 8 June 9 93 $20.38 $1,020.38

Solution:
67 160 Difference = 93 days

$1,000 x .08 x 93/365 = $20.38

MV = P + I
$1,020.38 = $ 1,000.00 + $20.38
 Drill Problem 10-10
Solve for the missing item in the following (round to the nearest hundredth as needed):
LU 10-2(1)

Time Simple
Principal Interest Rate (months or years ) Interest
$400.00 5% ? $100.00

Solution:

$100 . = 5 years
$400.00 X .05
 Chapter 12
Compound Interest
and Present Value
Practical Business Math Procedures
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning unit objectives
LU 12-1 Compound Interest (Future Value) – The Big Picture

1. Compare simple interest with compound interest.

2. Calculate the compound amount and interest manually and by
table lookup.
3. Explain and compute the effective rate (APY).

LU 12-2 Present Value -- The Big Picture

1. Compare present value (PV) with compound interest (FV).

2. Compute present value by table lookup.
3. Check the present value answer by compounding.
Compounding Interest
(Future Value)
Compounding – Compound Interest –
Involves the calculation of interest The interest on the principal plus the
periodically over the life of the loan or interest of prior periods
investment

Present Value –
Future Value (compound amount) –
The value of a
The final amount of the loan or loan or investment today
investment at the end of the last period
Compounding Terms

Compounding Periods Interest Calculated

Compounding Annually Once a year
Compounding Semiannually Every 6 months
Compounding Quarterly Every 3 months
Compounding Monthly Every month
Compounding Daily Every day
Future Value of $1 at 8% for Four
Periods (Figure 12.1)
Compounding goes from present value to future value

$5.00
Future
$4.50 Value
$4.00 After 1 After 2 After 3 After 4
period, periods, periods, periods,
$3.50 $1 is $1 is $1 is $1 is
Present worth worth worth worth
$3.00 value $1.08 $1.17 $1.26 $1.36
$2.50
$1.00 $1.08 $1.1664 $1.2597 $1.3605
$2.00
$1.50
$1.00
$0.50
$0.00
0 1 2 3 4
Number of periods
Future Value of $1 at 8% for
Four Periods (Figure 12.1)
Manual Calculation

Year 1 Year 2 Year 3 Year 4

$ 1.00 $ 1.08 $ 1.17 $ 1.26
0.08 x .08 x .08 x .08
Interest $ 0.08 $ 0.09 $ 0.09 $ 0.10
Beg. Bal 1.00 1.08 1.17 1.26
End of year $ 1.08 $ 1.17 $ 1.26 $ 1.36
Tools for Calculating
Compound Interest
Number of periods (N) Number Rate for each period (R)
of years multiplied by the Annual interest rate divided by
number of times the interest is the number of times the interest
compounded per year is compounded per year

If you compounded $100 for 4 years at 8% annually,

semiannually, or quarterly, what is N and R?

Periods Rate
Annually: 4x1=4 Annually: 8% / 1 = 8%
Semiannually: 4x2=8 Semiannually: 8% / 2 = 4%
Quarterly: 4 x 4 = 16 Quarterly: 8% / 4 = 2%
 Simple Versus Compound
Interest
Simple Compounded

Bill Smith deposited $80 in a savings Bill Smith deposited $80 in a savings
account for 4 years at an annual account for 4 years at an annual
interest rate of 8%. What is Bill’s interest rate of 8%. What is Bill’s
simple interest and maturity value? interest and compounded amount?

I=PxRxT
Year 1 Year 2 Year 3 Year 4
I = $80 x .08 x 4 $ 80.00 $ 86.40 $ 93.31 $ 100.77
I = $25.60 x .08 x .08 x .08 x .08
Interest $ 6.40 $ 6.91 $ 7.46 $ 8.06
MV = $80 + $25.60
Beg. bal 80.00 86.40 93.31 100.77
MV = $105.60 End of year $ 86.40 $ 93.31 $ 100.77 $ 108.83
Interest: $108.83 -- $80.00 = $28.83
Calculating Compound Amount
by Table Lookup
Step 1. Find the periods: Years multiplied by number of times
interest is compounded in 1 year.

Step 2. Find the rate: Annual rate divided by number of times

interest is compounded in 1 year.

Step 3. Go down the period column of the table to the number desired;
look across the row to find the rate. At the intersection is the
table factor for the compound amount of $1.

Step 4. Multiply the table factor by the amount of the loan. This gives
the compound amount.
Future Value of $1 at Compound
Interest (Table 12.1)
Future value of $1 at compound interest (Partial)
Period 1% 1.50% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 1.0100 1.0150 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000

2 1.0201 1.0302 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100
3 1.0300 1.0457 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310
4 1.0406 1.0614 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108 1.3605 1.4116 1.4641

5 1.0510 1.0773 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026 1.4693 1.5386 1.6105
6 1.0615 1.0934 1.1262 1.1941 1.2653 1.3401 1.4185 1.5007 1.5869 1.6771 1.7716
7 1.0721 1.1098 1.1487 1.2299 1.3159 1.4071 1.5036 1.6058 1.7138 1.8280 1.9487

8 1.0829 1.1265 1.1717 1.2668 1.3686 1.4775 1.5938 1.7182 1.8509 1.9926 2.1436
9 1.0937 1.1434 1.1951 1.3048 1.4233 1.5513 1.6895 1.8385 1.9990 2.1719 2.3579
10 1.1046 1.1605 1.2190 1.3439 1.4802 1.6289 1.7908 1.9672 2.1589 2.3674 2.5937

11 1.1157 1.1780 1.2434 1.3842 1.5395 1.7103 1.8983 2.1049 2.3316 2.5804 2.8531
12 1.1260 1.1960 1.2682 1.4258 1.6010 1.7959 2.0122 2.2522 2.5182 2.8127 3.1384
13 1.1381 1.2135 1.2936 1.4685 1.6651 1.8856 2.1329 2.4098 2.7196 3.0658 3.4523

14 1.1495 1.2318 1.3195 1.5126 1.7317 1.9799 2.2609 2.5785 2.9372 3.3417 3.7975
15 1.1610 1.2502 1.3459 1.5580 1.8009 2.0789 2.3966 2.7590 3.1722 3.6425 4.1772
Calculating Compound Amount
by Table Lookup
Pam Donahue deposits $8,000 in her savings account that pays 6% interest
compounded quarterly. What will be the balance of her account at the end
of 5 years?

Periods (N) = 4 x 5 = 20
Rate (R) = 6%/4 = 1.5%
Table Factor = 1.3469

Compound Amount:
$8,000 x 1.3469 = $10,775.20
Nominal and Effective Rates (APY)
of Interest

Nominal Rate (stated rate) –

The rate on which the bank calculates interest

Effective rate (APY) = Interest for 1 year

Principal
Calculating Effective Rate APY
Nominal and Effective Rates (APY)
of Interest Compared (Figure 12.3)
Compounding Interest Daily
(Table 12.2)
Interest on a 1% deposit compounded daily--360 day basis
Period 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% 10.00%
1 1.0618 1.0672 1.0725 1.0779 1.0833 1.0887 1.0942 1.0996 1.1052

2 1.1275 1.1388 1.1503 1.1618 1.1735 1.1853 1.1972 1.2092 1.2214

3 1.1972 1.2153 1.2337 1.2523 1.2712 1.2904 1.3099 1.3297 1.3498
4 1.2712 1.2969 1.3231 1.3498 1.3771 1.4049 1.4333 1.4622 1.4917

5 1.3498 1.3840 1.4190 1.4549 1.4917 1.5295 1.5862 1.6079 1.6486

6 1.4333 1.4769 1.5219 1.5682 1.6160 1.6652 1.7159 1.7681 1.8220

7 1.5219 1.5761 1.6322 1.6904 1.7506 1.8129 1.8775 1.9443 2.0136

8 1.6160 1.6819 1.7506 1.8220 1.8963 1.9737 2.0543 2.1381 2.2253

9 1.7159 1.7949 1.8775 1.9639 2.0543 2.1488 2.2477 2.3511 2.4593
10 1.8220 1.9154 2.0136 2.1168 2.2253 2.3394 2.4593 2.5854 2.7179
15 2.4594 2.6509 2.8574 3.0799 3.3197 3.5782 3.8568 4.1571 4.4808
20 3.3198 3.6689 4.0546 4.4810 4.9522 5.4728 6.0482 6.6842 7.3870

25 4.4811 5.0777 5.7536 6.5195 7.3874 8.3708 9.4851 10.7477 12.1782

30 6.0487 7.0275 8.1645 9.4855 11.0202 12.8032 14.8747 17.2813 20.0772

Compounding Interest Daily
Use Table 12.2 to calculate what $1,500 compounded daily for
5 years will grow to at 7%.

N=5

R = 7%

Factor, 1.4190

$1,500 x 1.4190 = $2,128.50

Present Value of $1 at
8% for Four Periods (Figure 12.4)
Present value goes from the future value to the present value
Future Value
$1.20 $1.0000
$1.10 Present $.9259
value $.8573
$1.00 $.7938
$0.90 $.7350
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
0 1 2 3 4

Number of periods
Calculating Present Value by
Table Lookup
Step 1. Find the periods: Years multiplied by number of times interest is
compounded in 1 year.

Step 2. Find the rate: Annual rate divided by number of times

interest is compounded in 1 year.

Step 3. Go down the Period column of the table to the number

desired; look across the row to find the rate. At the
intersection of the two columns is the table factor for the
compound value of $1.

Step 4. Multiply the table factor by the future value. This is the
present value.
Present Value of $1 at End Period
(Table 12.3)
Present value of $1 at end period (partial)
Period 1% 1.50% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.9901 0.9852 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091

2 0.9803 0.9707 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264
3 0.9706 0.9563 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513

4 0.9610 0.9422 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830
5 0.9515 0.9283 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209
6 0.9420 0.9145 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645

7 0.9327 0.9010 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132

8 0.9235 0.8877 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665
9 0.9143 0.8746 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241

10 0.9053 0.8617 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855

11 0.8963 0.8489 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505
12 0.8874 0.8364 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186
13 0.8787 0.8240 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897

14 0.8700 0.8119 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633
15 0.8613 0.7999 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394
Comparing Compound Interest (FV)
(Table 12.1) with
Present Value (PV) (Table 12.3)
Compound value Table 12.1 Present value Table 12.3
Table Present Future Table Future Present
12.1 Value Value 12.3 Value Value
1.3605 x $80 = $108.84 .7350 x $108.84 = $80.00

(N = 4, R = 8%) (N = 4, R = 8%)

We know the present We know the future

dollar amount and find dollar amount and
what the dollar amount find what the dollar
is worth in the future. amount is worth in the
present.
Calculating Present Value Amount
by Table Lookup
Rene Weaver needs $20,000 for college in 4 years. She can earn 8% compounded
quarterly at her bank. How much must Rene deposit at the beginning of the year to
have $20,000 in 4 years?

Invest
Today
Periods (N) = 4 x 4 = 16
Rate (R) = 8%/4 = 2%
Table Factor = .7284

Present Value:
$20,000 x .7284 = $14,568
Problem 12-13
Lynn Ally, owner of a local Subway shop, loaned $40,000 to Pete Hall to help him
open a Subway franchise. Pete plans to repay Lynn at the end of 8 years with 6%
interest compounded semiannually. How much will Lynn receive at the end of 8
years? LU 12-1(2)

Solution:

8 years x 2 = 16 periods 6% = 3% $40,000 x 1.6047 = $64,188

2
Problem 12-15
Melvin Indecision has difficulty deciding whether to put his savings in Mystic Bank or
Four Rivers Bank. Mystic offers 10% interest compounded semiannually. Four Rivers
offers 8% interest compounded quarterly. Melvin has $10,000
to invest. He expects to withdraw the money at the end of 4 years. Which bank gives
Melvin the better deal? Check your answer. LU 12-1(3)

Solution:

Mystic Four Rivers

4 years x 2 = 8 periods 4 years x 4 = 16 periods
10% = 5% 8% = 2%
2 4
$10,000 x 1.4775 = $14,775 $10,000 X 1.3728 = $13,728
-- 10,000 -- 10,000
$ 4,775 $ 3,728
 Problem 12-16
Lee Holmes deposited $15,000 in a new savings account at 9% interest compounded
semiannually. At the beginning of year 4 (after 3 years) , Lee deposits an additional
$40,000 at 9% interest compounded semiannually. At the end of 6 years, what is the
balance in Lee’s account? LU 12-1(2)

Solution:
3 years x 2 = 6 periods
9%
2 = 4.5%
$15,000 x 1.3023 = $19,534.50
+ 40,000.00
$ 59,534.50

$59,534.50 x 1.3023 = $77,531.78

Problem 12-27
Paul Havlik promised his grandson Jamie that he would give him $6,000 8 years
from today for graduating from high school. Assume money is worth 6% interest
compounded semiannually. What is the present value of this $6,000?
LU 12-2(2)

Solution:

8 years x 2 = 16 periods

6% = 3%
2
$6,000 x .6232 = $3,739.20
 Chapter 13
Annuities and Sinking
Funds
Practical Business Math Procedures
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning unit objectives
LU13-1: Annuities: Ordinary Annuity and Annuity Due (Find Future Value)
1. Differentiate between contingent annuities and annuities certain.
2. Calculate the future value of an ordinary annuity and an annuity
due manually and by table lookup.
LU 13-2: Present Value of an Ordinary Annuity (Find Present Value)
1. Calculate the present value of an ordinary annuity by table lookup
and manually check the calculation.
2. Compare the calculation of the present value of one lump sum
versus the present value of an ordinary annuity.

LU 13-3: Sinking Funds (Find Periodic Payments)

1. Calculate the payment made at the end of each period by
table lookup.
2. Check table lookup by using ordinary annuity table.
Compounding Interest (Future Value)
Annuity – Term of the annuity –

A series of payments The time from the beginning of the

first payment period to the end of the
last payment period

Present value of an annuity –

Future value of annuity –
The amount of money needed to
The future dollar amount of a series invest today in order to receive a
of payments plus interest stream of payments for a given
number of years in the future
Future value of an annuity of $1
at 8% (Figure 13.1)
$3.2464
$3.50
$3.00
$2.50 $2.0800

$2.00
$1.50 $1.00

$1.00
$0.50
$0.00
1 2 3
End of period
Classification of Annuities
Contingent annuities – Annuities certain –
have no fixed number of payments have a specific stated number of
but depend on an uncertain event payments

Life Insurance payments Mortgage payments

Classification of Annuities

Ordinary annuity – Annuity due –

regular deposits/payments made regular deposits/payments made at
at the end of the period the beginning of the period

Jan. 31 Monthly Jan. 1

June 30 Quarterly April 1
Dec. 31 Semiannually July 1
Dec. 31 Annually Jan. 1
Calculating Future Value of an
Ordinary Annuity Manually
Step 1. For period 1, no interest calculation is necessary, since money is
invested at the end of the period.

Step 2. For period 2, calculate interest on the balance and add the interest
to the previous balance.

Step 3. Add the additional investment at the end of period 2 to the new
balance.

Step 4. Repeat Steps 2 and 3 until the end of the desired period is
reached.
Calculating Future Value of an
Ordinary Annuity Manually
Find the value of an investment after 3 years for a $3,000 ordinary
annuity at 8%.

Manual Calculation
$ 3,000.00 End of Yr 1
240.00 plus interest
3,240.00
3,000.00 Yr. 2 Investment
6,240.00 End of Yr 2
499.20 plus interest
6,739.20
3,000.00 Yr. 3 Investment
$ 9,739.20 End of Yr 3
Calculating Future Value of an
Ordinary Annuity by Table Lookup
Step 1. Calculate the number of periods and rate per period.

Step 2. Look up the periods and rate in an ordinary annuity table. The
intersection gives the table factor for the future value of $1.

Step 3. Multiply the payment each period by the table factor. This
gives the future value of the annuity.

Future value of = Annuity payment x Ordinary annuity

ordinary annuity each period table factor
Ordinary annuity table: Compound
sum of an annuity of $1 (Table 13.1)
Ordinary annuity table: Compound sum of an annuity of $1 (partial)
Period 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000

2 2.0200 2.0300 2.0400 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000

3 3.0604 3.0909 3.1216 3.1525 3.1836 3.2149 3.2464 1.0000 3.3100

4 4.1216 4.1836 4.2465 4.3101 4.3746 4.4399 4.5061 4.5731 4.6410

5 5.2040 5.3091 5.4163 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051

6 6.3081 6.4684 6.6330 6.8019 6.9753 7.1533 7.3359 7.5233 7.7156
7 7.4343 7.6625 7.8983 8.1420 8.3938 8.6540 8.9228 9.2004 9.4872

8 8.5829 8.8923 9.2142 9.5491 9.8975 10.2598 10.6366 11.0285 11.4359

9 9.7546 10.1591 10.5828 11.0265 11.4913 11.9780 12.4876 13.0210 13.5795

10 10.9497 11.4639 12.0061 12.5779 13.1808 13.8164 14.4866 15.1929 15.9374

11 12.1687 12.8078 13.4863 14.2068 14.9716 15.7836 16.6455 17.5603 18.5312

12 13.4120 14.1920 15.0258 15.9171 16.8699 17.8884 18.9771 20.1407 21.3843
13 14.6803 15.6178 16.6268 17.7129 18.8821 20.1406 21.4953 22.9534 24.5227
14 15.9739 17.0863 18.2919 19.5986 21.0150 22.5505 24.2149 26.0192 27.9750
15 17.2934 18.5989 20.0236 21.5785 23.2759 25.1290 27.1521 29.3609 31.7725
Future Value of
an Ordinary Annuity
Find the value of an investment after 3 years for a $3,000 ordinary annuity
at 8%.

Periods (N) = 3 x 1 = 3
Rate (R) = 8%/1 = 8%

3.2464 (table factor) x $3,000 = $9,739.20

Calculating Future Value of an
Annuity Due Manually
Step 1. Calculate the interest on the balance for the period and add it to the
previous balance.

Step 2. Add additional investment at the beginning of the period to the

new balance.

Step 3. Repeat Steps 1 and 2 until the end of the desired period is
reached.
Calculating Future Value of
an Annuity Due Manually
Find the value of an investment after 3 years for a $3,000 annuity
due at 8%.

Manual Calculation
$ 3,000.00 Beginning Yr 1
240.00 Yr 1 Interest
3,240.00
3,000.00 Beginning Yr 2
6,240.00
499.20 Yr 2 Interest
6,739.20
3,000.00 Beginning Yr 3
9,739.20
779.14 Yr 3 Interest
10,518.34 End of Yr. 3
Calculating Future Value of an
Annuity Due by Table Lookup
Step 1. Calculate the number of periods and rate per period. Add
one extra period.

Step 2. Look up in an ordinary annuity table the periods and rate.

The intersection gives the table factor for the future value of
$1.

Step 3. Multiply the payment each period by the table factor.

Step 4. Subtract 1 payment from Step 3.

Future Value of an Annuity Due
Find the value of an investment after 3 years for a $3,000
annuity due at 8%.

Periods (N) = 3 x 1 = 3 + 1 = 4

Rate (R) = 8%/1 = 8%

4.5061 (table factor) x $3,000 = $13,518.30

$13,518.30 -- $3,000 = $10,518.30

Present value of an annuity of $1 at
8% (Figure 13.2)
$3.50
$2.5771
$3.00
$2.50 $1.7833

$2.00
$.9259
$1.50
$1.00
$0.50
$0.00
1 2 3
Number of periods
Calculating Present Value of an
Ordinary Annuity by Table Lookup
Step 1. Calculate the number of periods and rate per period.

Step 2. Look up the periods and rate in the present value of an

annuity table. The intersection gives the table factor for the
present value of $1.

Step 3. Multiply the withdrawal for each period by the table factor.
This gives the present value of an ordinary annuity .

Present value of ordinary Present value of

Annuity
annuity payment = × ordinary annuity
payment
payment
Present Value of an Annuity of $1
(Table 13.2)
Present value of an annuity of $1 (partial)
Period 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091

2 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355

3 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869

4 3.8077 3.7171 3.6299 3.5459 3.4651 3.3872 3.3121 3.2397 3.1699

5 4.7134 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908

6 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553
7 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684

8 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349

9 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590

10 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446

11 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951

12 10.5753 9.9540 9.3851 8.8632 8.3838 7.9427 7.5361 7.1607 6.8137
13 11.3483 10.6350 9.9856 9.3936 8.8527 8.3576 7.9038 7.4869 7.1034
14 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667
15 12.8492 11.9379 11.1184 10.3796 9.7122 9.1079 8.5595 8.0607 7.6061
 Present Value of an Annuity
John Fitch wants to receive a $8,000 annuity in
Manual Calculation
3 years. Interest on the annuity is 8% annually.
$ 20,616.80
John will make withdrawals at the end of each 1,649.34
Interest ==>
year. How much must John invest today to 22,266.14
receive a stream of payments for 3 years. (8,000.00)
Payment ==>
14,266.14
Interest ==> 1,141.29
15,407.43
N = 3 x 1 = 3 periods Payment ==> (8,000.00)
R = 8%/1 = 8% 7,407.43
Interest ==> 592.59
8,000.02
2.5771 (table factor) x $8,000 = Payment ==> (8,000.00)
End of Year 3 ==> 0.02
$20,616.80
Lump Sums versus Annuities
John Sands made periodic deposits of $200 to Floor Bank, which pays 8% interest
compounded semiannually. After 5 years, John makes no more deposits. What will be
the balance in the account 6 years after the last deposit?
Step 1. Future value of an annuity
N = 5 x 2 = 10 periods
R = 8%/2 = 4%
Step 2. Future value of a lump sum
12.0061 (table factor) x $200 =
N = 6 x 2 = 12 periods
$2,401.22
R = 8%/2 = 4%
1.6010 (table factor) x $2,401.22 =
$3,844.35
Lump Sums versus Annuities
Mel Rich decided to retire in 8 years to New Mexico. What amount must Mel
invest today so he will be able to withdraw $40,000 at the end of each year 25
years after he retires? Assume Mel can invest money at 5% interest compounded
annually.

Step 1. Present value of an annuity Step 2. Present value of a lump sum

N = 8 x 1 = 8 periods
N = 25 x 1 = 25 periods
R = 5%/1 = 5%
R = 5%/1 = 5%
.6768 x $563,756 = $381,550.06
14.0939 x $40,000 = $563,756
Sinking Funds
(Find Periodic Payments)
Sinking fund –
financial arrangement that sets aside
regular periodic payments of a particular
amount of money

Sinking fund = Future x Sinking fund

payment value table factor
SINKING FUND TABLE BASED ON $1
(Table 12.3)
Period 2% 3% 4% 5% 6% 8% 10%
1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
2 0.4951 0.4926 0.4902 0.4878 0.4854 0.4808 0.4762
3 0.3268 0.3235 0.3203 0.3172 0.3141 0.3080 0.3021
4 0.2426 0.2390 0.2355 0.2320 0.2286 0.2219 0.2155
5 0.1922 0.1884 0.1846 0.1810 0.1774 0.1705 0.1638
6 0.1585 0.1546 0.1508 0.1470 0.1434 0.1363 0.1296
7 0.1345 0.1305 0.1266 0.1228 0.1191 0.1121 0.1054
8 0.1165 0.1125 0.1085 0.1047 0.1010 0.0940 0.0874
9 0.1025 0.0984 0.0945 0.0907 0.0870 0.0801 0.0736
10 0.0913 0.0872 0.0833 0.0795 0.0759 0.0690 0.0627
11 0.0822 0.0781 0.0741 0.0704 0.0668 0.0601 0.0540

12 0.0746 0.0705 0.0666 0.0628 0.0593 0.0527 0.0468

13 0.0681 0.0640 0.0601 0.0565 0.0530 0.0465 0.0408
14 0.0626 0.0585 0.0547 0.0510 0.0476 0.0413 0.0357

15 0.0578 0.0538 0.0499 0.0463 0.0430 0.0368 0.0315

16 0.0537 0.0496 0.0458 0.0423 0.0390 0.0330 0.0278
17 0.0500 0.0460 0.0422 0.0387 0.0354 0.0296 0.0247
18 0.0467 0.0427 0.0390 0.0355 0.0324 0.0267 0.0219
Sinking Fund
To retire a bond issue, Moore Company needs $60,000 in 18 years from today. The
interest rate is 10% compounded annually. What payment must Moore make at the
end of each year? Use Table 13.3.

N = 18 x 1 = 18 periods
R = 10%/1 = 10%
0.0219 x $60,000 = $1,314

Check
Future Value of an annuity table
N = 18, R= 10%
$1,314 x 45.5992 = $59,917.35*
* Off due to rounding
 Problem 13-17
Josef Company borrowed money that must be repaid in 20 years. The company wants
to make sure the loan will be repaid at the end of year 20, so it invests $12,500 at the
end of each year at 12% interest compounded annually. What was the amount of the
original loan? LU 13-1(2)

Solution:

20 periods, 12% (Table 13.1)

$12,500 X 72.0524 = $900,655

 Problem 13-18
Bankrate.com reported on a shocking statistic: only 54% of workers participate in their
company’s retirement plan. This means that 46% do not. With such an uncertain future
for Social Security, this can leave almost 1 in 2 individuals without proper income during
retirement. Jill Collins, 20, decided she needs to have $250,000 in her retirement
account upon retiring at 60. How much does she need to invest each year at 5%
compounded annually to meet her goal? Tip: She is setting up a sinking fund. LU 13-3(1)

Solution:
Periods = 40 years X 1 = 40 periods

Interest rate per period = 5%/1 = 5%

$250,000 X .0083 = $2,075 each year

Problem 13-23
On Joe Martin’s graduation from college, Joe’s uncle promised him a gift of $12,000
in cash or $900 every quarter for the next 4 years after graduation. If money could
be invested at 8% compounded quarterly, which offer is better for Joe? LU 13-1(2),
LU 13-2(1)

Solution:

16 periods 8%/ 4 = 2%

$900 x 13.5777 = $12,219.93 or $900 x 18.6392 = $16,775.28

(Table 13.2) (Table 13.1) x .7284 (Table 12.3)
$12,219.11

2%, 16 periods
Problem 13-25
A local Dunkin’ Donuts franchise must buy a new piece of equipment in 5 years that
will cost $88,000. The company is setting up a sinking fund to finance the purchase.
What will the quarterly deposit be if the fund earns 8% interest?
LU 13-3(1)

Solution:

20 periods, 2% (Table 13.3)

.0412 X $88,000 = $3,625.60 quarterly payment

Problem 13-26
Mike Macaro is selling a piece of land. Two offers are on the table. Morton Company
offered a $40,000 down payment and $35,000 a year for the next 5 years. Flynn
Company offered $25,000 down and $38,000 a year for the next 5 years. If money
can be invested at 8% compounded annually, which offer is better for Mike?
LU 13-1(2)

Solution:

Morton: 5 periods, 8% (Table 13.2)

3.9927 X $35,000 = $139,744.50 + $40,000 = $179,744.50

Flynn: 5 periods, 8% (Table 13.2))

3.9927 X $38,000 = $151,722.60 + $25,000 = $176,722.60

Morton’s offer is the better deal.

 Chapter 14
Installment Buying
Practical Business Math Procedures
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning unit objectives
LU 14-1: Cost of Installment Buying
1. Calculate the amount financed, finance charge, and deferred payment.
2. Calculate the estimated APR by table lookup .
3. Calculate the monthly payment by formula and by table lookup.

LU 14-2: Revolving Charge Credit Cards

1. Calculate the finance charges on revolving charge credit card accounts.
Cost of Installment Buying
Deferred payment price (DPP) –
Amount financed (AF) –
the total of all monthly payments plus
the amount actually borrowed. the down payment.
AF = Cash price -- Down payment DPP = Total of all + Down
monthly payments payment

Finance charge (FC) – Installment loan –

the interest charge. A loan paid off in a series of equal
FC = Total of all -- Amount periodic payments. Payments include
monthly payments financed interest and principal.
Cost of Installment Buying
Mary Wilson would like to buy a 4X4 Pickup that cost $9,345. If she puts down $300
she can finance the balance for 60 months at 10.5% (monthly payment = $194.38).
Calculate the amount financed, finance charge, and deferred payment price.

Amount financed = Cash price -- Down payment

$9,045 = $9,345 -- $300

Finance charge = Total of all -- Amount

monthly payments financed
$2,617.80 = $11,662.80 -- $9,045
($194.38 x 60)

Deferred payment Price = Total of all + Down

monthly payments payments
$11,962.80 = $11,662.80 + $300
Calculating APR by Table
Step 1. Divide the finance charge by amount financed and multiply by $100 to
get the table lookup factor.

Step 2. Go to APR Table 14.1. At the left side of the table are listed the number
of payments that will be made.

Step 3. When you find the number of payments you are looking for, move to the
right and look for the two numbers closest to the table lookup number.
This will indicate the APR.
Annual Percentage Rate (APR)

Calculating APR rate by table

Finance charge x $100 = Table 14.1
Amount financed lookup number

$2,617.80 x 100 = $28.94

$9,045

Between 10.25% -- 10.50%

Annual Percentage Rate Table per
$100 (Table 14.1)
Annual percentage rate table per $100 (partial)
# of Payments 10.00% 10.25% 10.50% 10.75% 11.00% 11.25% 11.50% 11.75% 12.00% 12.25% 12.50%
36 16.16 16.58 17.01 17.43 17.86 18.29 18.71 19.14 19.57 20.00 20.43
37 16.62 17.06 17.49 17.93 18.37 18.81 19.25 19.69 20.13 20.58 21.02
38 17.08 17.53 17.98 18.43 18.88 19.33 19.78 20.24 20.69 21.15 21.61
39 17.54 18.00 18.46 18.93 19.39 19.86 20.32 20.79 21.26 21.73 22.20
40 18.00 18.48 18.95 19.43 19.90 20.38 20.86 21.34 21.82 22.30 22.79

41 18.47 18.95 19.44 19.93 20.42 20.91 21.40 21.89 22.39 22.88 23.38
42 18.93 19.43 19.93 20.43 20.93 21.44 21.94 22.45 22.96 23.47 23.98
43 19.40 19.91 20.42 20.94 21.45 21.97 22.49 23.01 23.53 24.05 24.57

44 19.86 20.39 20.91 21.44 21.97 22.50 23.03 23.57 24.10 24.64 25.17
45 20.33 20.87 21.41 21.95 22.49 23.03 23.58 24.12 24.67 25.22 25.77

46 20.80 21.35 21.90 22.46 23.01 23.57 24.13 24.69 25.25 25.81 26.37
47 21.27 21.83 22.40 22.97 23.53 24.10 24.68 25.25 25.82 26.40 26.98

48 21.74 22.32 22.90 23.48 24.06 24.64 25.23 25.81 26.40 26.99 27.58

49 22.21 22.80 23.39 23.99 24.58 25.18 25.78 26.38 26.98 27.59 28.19
50 22.69 23.29 23.89 24.50 25.11 25.72 26.33 26.95 27.56 28.18 28.80
60 27.48 28.22 28.96 29.71 30.45 31.20 31.96 32.71 33.47 34.23 34.99
Calculating the Monthly
Payment by Formula
The pickup truck advertisement below shows a $194.38 monthly
payment. We can check this by formula and by table lookup.

Finance charge + Amount financed

Number of payments of loan

$2,617.80 + $9,045 = $194.38

60
Calculating the Monthly
Payment by Table

Step 1. Divide the loan amount by $1,000.

$9,045 = 9.045
$1,000

Step 2. Look up the rate (10.5%) and the number of months

(60). At the intersection is the table factor showing the
monthly payment per $1,000 ($21.49).

Step 3. Multiply the quotient in Step 1 by the factor in Step 2.

9.045 x $21.49 = $194.38
Loan Amortization Table (Table 14.2)
(Monthly payment per $1,000 to pay principal
and interest on installment loan) (Partial)
Terms in
months 7.50% 8.00% 8.50% 9.00% 10.00% 10.50% 11.00% 11.50% 12.00%
6 170.34 170.58 170.83 171.2 171.56 171.81 172.05 172.3 172.55
12 86.76 86.99 87.22 87.46 87.92 88.15 88.38 88.62 88.85
18 58.9 59.15 59.37 59.6 60.06 60.29 60.52 60.75 60.98
24 45 45.23 45.46 45.69 46.14 46.38 46.61 46.84 47.07
30 36.66 36.89 37.12 37.35 37.81 38.04 38.28 38.51 38.75
36 31.11 31.34 31.57 31.8 32.27 32.5 32.74 32.98 33.21
42 27.15 27.38 27.62 27.85 28.32 28.55 28.79 29.03 29.28
48 24.18 24.42 24.65 24.77 25.36 25.6 25.85 26.09 26.33
54 21.88 22.12 22.36 22.59 23.07 23.32 23.56 23.81 24.06
60 20.04 20.28 20.52 20.76 21.25 21.49 21.74 21.99 22.24