Basic business mathematics

Investment decision/appraisal

Budgeting (cash & personnel budgeting)

Basic foreign exchange risk management

Inventory control

BASIC FINANCE MATHEMATICS

Business finance

Interest is the extra amount an investor receives after investing a certain sum at a certain rate for a
certain time or interest can be additional amount of money paid by the borrower to the lender for the
use of money loaned to him.

Types of Interest

1> Simple Interest-is where the annual interest is a fixed percentage of the original amount
borrowed or invested (i.e., principal).

i. A person borrowed ₦10,000 at 10% per annum with principal and interest to be repaid after
3 years.

Amount Borrowed ₦10,000

Year 1 Interest ₦1,000
Year 2 Interest ₦1,000
Year 3 Interest ₦1,000
Repayment ₦13,000

Repayment=P(1+(rxn)

=₦10,000(1+(0.1x3)

=₦10,000(1+(0.3)

=₦10,000(1.3)

=₦13,000

Simple Interest for period less than a year

ii. A person borrowed ₦10,000 at 10% per annum simple interest for 8 months. Calculate the
amount payment

₦10,000(1+(0.1x 8/12)

=₦10,000(1+(0.067)
 =₦10,000(1.067)

=₦10,670

Practice Questions

i. A person borrowed ₦10,000 for 4 years at an interest rate of 7% per annum. What must he
pay to clear the loan at the end of this period?

₦10,000(1+(0.07x 4)

=₦10,000(1+(0.28)

=₦10,000(1.28)

=₦12,800

ii. A person invested ₦60,000 for 5 years at an interest rate of 6%. What is the total interest
received from this investment?

=₦60,000(1+(0.06x 5)

=₦60,000(1+(0.3)

=₦60,000(1.3)

=₦72,800

iii. A person borrows ₦75,000 for 4 months at an interest rate of 8% per annum. What must he
pay to clear the loan at the end of this period?

=₦75,000(1+(0.08x 4/12)

=₦75,000(1+( 0.026)

=₦75,000(1.026)

=₦76,950

iv. A person invested ₦90,000 for 6 years. At the end of the investment, she received a card
transfer of ₦122,400 in full and final settlement of investment. What was the interest rate on
the investment?

Interest=((RP/P)-1) x1/n

= ((₦122,400/₦90,000)-1) x1/6

= (1.36-1) x 0.167

=0.36 x 0.167

=0.06
 =6%

2> Compound Interest- is where the annual interest is based on the amount borrowed plus interest
accrued to date.

i. A person borrows ₦10,000 at 10% annual compound interest to be repaid after 3 years.
Calculate the amount to pay the lender at the end of the third year.

Amount Borrowed ₦10000

Year 1 Interest ₦1000
₦11000
Year 2 Interest ₦1100
₦12100
Year 3 Interest ₦1210
Repayment ₦13310

= P(1+r)n

=₦10000(1+0.1)3

=₦10000(1.13)

=₦10000(1.331)

=₦13310

Practice Kit

iii. A person borrows ₦100,000 for 10 years of an interest rate of 8% compounding annual.
What must he pay to clear the loan at the end of this period?

= P(1+r)n

=₦100,000(1+0.08)10

=₦100,000(1.083)

=₦100,000(1.259712)

=₦125,971.2

iv. A person borrows ₦50,000 for 2 years at an interest rate of 12% per annum compounding
monthly. What must he pay to clear the loan at the end of this period?

= P(1+r)n

=₦50,000(1+0.12)2

=₦50,000(1.122)

=₦50,000(1.2544)

=₦62,720
 v. A person borrows ₦120,000 for 3 years at 10% per annum compounding quarterly. What
must he pay to clear the loan at the end of this period?

EPR= (1+r)n-1

= (1+ 0.1)1/4-1

= (1.1) ¼-1

= 1.024-1

= 0.024

P(1+r)n

=₦120,000(1+0.024)12

=₦120,000(1.024)12

=₦120,000(1.33)

=₦159,600

3> Continuous Compounding Interest- If a loan is compounded continuously, then the equivalent
period rate must be calculated.

EPR= (1+r)n-1

i. A bank lends ₦100,000 at annual interest rate of 12.55% with interest to be charged to the
borrower’s account on a quarterly basis for a period of 3 years. How much will the bank
client have to pay?

= (1+ 0.1255)1/4-1

= (1.1255) ¼-1

= 1.03-1

= 0.03

P(1+r)n

=₦10,000(1+0.03)12

=₦10,000(1.03)12

=₦10,000(1.426)

=₦142,600

P(1+r)n

=₦10,000(1+0.1255)3
 =₦10,000(1.1255)3

=₦10,000(1.426)

=₦142,600

Nominal & Effective Rate

Nominal Rate is the face value cost of a loan.

Note1: This might not be the true annual cost because it doesn’t take into consideration the
way the loan is compounded.

i. A trader wants to borrow 1million naira. He has been offered 2 different loans. Loan
A charged interest at 10% per annum and loan B at 5% per 6months. Which loan
should he take?

Loan A ₦ Loan B ₦
Amount borrowed 1,000,000 1,000,000
1st 6 months 5% 50,000
1,050,000
2nd 6 months 5% 52,500
Annum rate 10% 100000
Repayment 1,100,000 1,102,500
Annuity

INVESTMENT DECISION/APPRAISAL
Traditional Method: This is a means of identifying variable business without putting time value of money
into consideration such as payback back period, accounting rate of return.

Payback period is looking at the period it will take you to recoup back your investment

Advantages

It is very easy to understand and calculate

Disadvantages

It does not put into consideration the time value of money.

INITIAL INVESTMENT/CASHFLOW

(INITIAL INVESTMENT-OPENING CUMMULATIVE CASHFLOW)/CLOSING CUMMULATIVE CASHFLOW-OPEN

CUMMULATIVE CASHFLOW)

A firm decided to invest in an asset with an initial cost of ₦1,000,000 over the next 5 years. The opening
and closing period cumulative cashflow are ₦900,000 and ₦1,200,000. Calculate the payback period.
 (₦1,000,000-₦900,000)/ (₦1,200,000-₦900,000)

₦100,000/₦300,000=0.333

=4months

If an investment of ₦100,000 and ₦50,000 cash proceeds in each of his first two years. Calculate the
payback period

₦100,000/₦50,000

=2 Years

Use the info provided to determine the most viable project between A & B, if ₦10,000 is to be spent on
either of the project.

Savings before depreciation

Year A (₦) B (₦)

1 5,000 1,000
2 4,000 2,000
3 3,000 3,000
4 1,000 4,000
5 - 5,000
6 - 6,000

TT LTD

INVESTMENT APPRAISAL USING PBP

A B
YEAR CASHFLOW (₦) CUMM. CASHFLOW (₦) CUMM.
CASHFLOW (₦) CASHFLOW (₦)
0 (10,000) (10,000) (10,000) (10,000)
1 5,000 5,000 1,000 9,000
2 4,000 1,000 2,000
3 3,000
4
5
6
PBPP= (1000/3000) X12= 4months

TOTAL = 2years 4 months

Discounted Method is a type of investment appraisal that put into consideration time value of money.
  Net Present Value (NPV)

 Internal Rate of Return (IRR)

 Discounted payback period (DPP)

 Net Present Value (NPV) generally establishes a target a minimum rate below which a proposal
will be rejected by management. It involves calculating the value of expected cash inflow and
cash outflow through the process of discounting and establishing whether in total the PV of cash
inflow is higher than the present value of cash outflow.

Decision rule

1. If NPV is positive then accept

2. If NPV is negative then reject

3. If NPV is zero

Fintrak is considering in investing on academy students which will improve her cashflow by
60000 per annum for the next 5 years, at the end of which they will be released. The machine
will cost 150000 and estimated working capital of 10000. Assume that the cost of capital is 15%.

You’re required to calculate the net present value of this project and advise Fintrak Software
Company Limited

YEAR CASHFLOW (₦) D.F (15%) PV (₦)

0 (160,000) 1 (160,000)
1 60,000 0.869 52,140
2 60,000 0.756 45,360
3 60,000 0.658 39,480
4 60,000 0.572 34,320
5 60,000 0.497 29,820
NPV 41,120
D.F= 1

        (1+r)n

D.F=    1          = 0.869

        (1.15)1

Advantages

NPV takes into consideration the time value of money

It gives a single figure to access investment project

 Internal Rate of Return (IRR) is another method of investment appraisal using discounting
method. IRR of a project is the discounted rate of return on investment which makes the npv of
the project cashflows to be zero.

IRR Investment decision rules

A company might establish the minimum rate of return that it wants to earn on an investment. If
other factors such as non-financial considerations and risk and uncertainty are ignored.

1. If a project IRR is equal to or higher than the minimum acceptable rate of return then it
should be undertaken.

2. If the IRR is lower than the minimum required then ignore.

LR+        NPV(+ve)        x (HR-LR)

(NPV(+ve)-NPV(-ve)

1. A business required a minimum expected rate of return of 12% on its investment. A proposed
capital investment has the following expected cashflow. Using IRR advise the business
management to undertake the project or not.

Year Cashflow (₦) D.F (12%) NPV (₦)

0 (80,000) 1 (80,000)
1 20,000 0.893 17,860
2 36,000 0.797 28,692
3 30,000 0.712 21,360
4 17,000 0.636 10,812
(1,276)

Year Cashflow (₦) D.F (10%) NPV (₦)

0 (80,000) 1 (80,000)
1 20,000 0.91 18,200
2 36,000 0.83 29,880
3 30,000 0.75 22,500
4 17,000 0.68 11,560
2,140

10+        2140        x (12-10)

(2140--1276)

10+        2140        x (2)

(3416)
=11.25%
 BUDGETING
BUDGET is quantitative and financial plan of the operations of an organization or an individual. Budget
identify the resources and the commitment required to fulfill the organization or individual goals for the
budgeted period. A budget includes financial and non-financial aspects of the planned operations.

OBJECTIVES OF A BUDGET AND WHAT BUDGET IS NOT(ASSIGNMENT)

Types of Budget (Ass)
 Cash Budget
A cash budget summarizes the cashflow effect of all the functional and policy related budget by
coordinating them into one summarized statement.
BENEFITS OF CASH BUDGET(ASS)
FORMAT
Receipt JAN FEB MARCH TOTAL
₦ ₦ ₦ ₦
Sales X X X X
Other Cash Inflow X X X X
Total (A) XXXXX XXXXX XXXXX XXXXX

Payments(B)
Purchases X X X X
Other Cash X X X X
Outflow
Total (B) XXX XXX XXX XXX
A-B XX XX XX XX
Opening Balance X X X X
Balance c/d X X X X

1. Fintrak Ltd produces household items for the domestic market. In the previous year, the
suffers theft in its offices, losing all cash at hand in the process.
On the day of the theft the company has an overdraft balance of ₦125million with its bankers.
Due to the good working relationship that exists between the company and its bankers, a short-
term loan of ₦500million was granted to the company on 31st December 2021. On the following
terms and conditions;
Facility -Short term
Duration- 1 year
Interest- 27.5%/annum Simple Interest
Repayment- Principal payment in 4 equal quarterly installment and interest payable monthly in
arrears
Additional Information
1. Production in unit
2021 2022
NOV (₦) DEC (₦) JAN (₦) FEB (₦) MAR (₦) APR (₦) MAY (₦) JUN (₦)
5000 6,000 5,000 8,000 6,000 5,000 5,000 6,000
2. Raw material used for the production costs ₦10000/unit. 25% of this is paid in the same
month as production and the balance of 75% in the month following production.
3. Direct labor which cost ₦1000/unit are payable in the same month as production while
variable expenses is estimated at ₦6000/unit. 50% of variable are payable in the same
month as production and the balance in the following months.

4. Sales 250000/unit are as follows

2021 2022
OCT (₦) NOV (₦) DEC (₦) JAN (₦) FEB (₦) MAR (₦) APR (₦) MAY (₦) JUN (₦)
200 600 600 768 720 640 500 500 560

5. All sales are on credit and debtors take an average credit period of 2 months
6. Fixed overheads are ₦18million/month and are payable each month.
7. A new packaging equipment costing ₦84m is to be paid for equally in march and sept 2022.
It has a useful life of 5 years on a straight-line depreciation policy. The depreciation of this
equipment has not been included in the fixed overhead above.
8. Rent income of 6m/quarter is to be received at the end of each quarter
You are required
a. Prepare a cash budget for the company for the 6 months ended 30 th June 2022
b. Briefly explain the purpose and importance of cash budget in business planning and
decision making

2. The cash flows of Sankay Limited for three projects A, B and C are given below:
Project A Project B Project C

Le Le Le

Capital Expenditure 80,000 128,000 144,000

Cash Inflow

Year

1 40,000 24,000 52,000

2 16,000 32,000 66,000

3 16,000 40,000 26,000

4 8,000 16,000 26,000

5 24,000 16,000 28,000

6 12,800 40,000 20,000

You are required to: Calculate the payback period for the three projects.
 a. List FOUR reasons why payback method of capital investment appraisal is widely used
despite its limitation.

3. Skidon Limited has a cash balance of GMD432,000 as at the beginning of June. The following
information are extracted from the records of the company.

(i) Creditors for purchases give 1 month’s credit

(ii) Credit sales are settled as follows:
40% in month of sale

45% in the next month

12% in the following month

The balance is considered in receivables

(iii) Salaries are paid in the current month

(iv) Fixed overheads are paid one month in arrears which also include a monthly depreciation of
GMD80,000
(v) Other budgeted payments and receipts for the period are presented in the table below.

Month Cash Sales Credit Sales Purchases Salaries Fixed Overheads

GMD GMD GMD GMD GMD

April       000 1,184,000 883,200 144,000 480,000

May       000 1,312,000 979,200 144,000 480,000

June 320,000 1,280,000 960,000 152,000 480,000

July 352,000 1,440,000 1,104,000 209,000 512,000

August 400,000 1,600,000 1,200,000 160,000 512,000

You are required to prepare for June, July and August:

a. A schedule of budgeted collection from debtors

b. A cash budget.

1. Schedule of budgeted collection from debtors

JUNE JULY AUGUST

Debtors as at April 28,2020 142,080 --------- ---------

May 590,400 157440 ---------

June 512000 576000 153600

July --------- 576000 648000

August --------- ---------- 640000

1244480 1309440 1441600

2. Cash Budget

Receipts from debtors 1244480 1309440 1441600

Cash Sales 320000 352000 400000

Total Receipt 1,564,480 1,661,440 1,841,600

Purchases 960,000 1,104,000 1,200,000

Salaries 152,000 209,000 160,000

Fixed Overheads (wk2) 400000 400000 432000

Total Payment 1531200 1569000 1696000

a-b 33280 92440

Balance b/f 432000 465280 557720

Balance C/f 465280 557720

 Personnel Budget

Select 2 companies which are in the same industry. Be sure to timely enlist the company of your choices
with your teacher, as a company can only be used once in each class. The enlisting will be done on first
come first serve basis.
To execute the task below consult the company annual report over the 4-year period 2018-2021.
In addition to the requirement for each question ensure to provide formulas, assumptions and models as
appropriate. Analysis or conclusions which are not based on the applicable theory will consequently limit
your mark.
Provide report that include the following ratio analysis for both companies. Analyze the
companies consolidated financial statement using two profitability ratio two efficiency ratio two liquidity
ratio two financial gearing ratio
Reflect on the development of the ratio outcomes over the 4-year period and analysis and
conclusion based on the competition analysis. Make a comparison analysis between the two companies.
Task 2: Using the data obtain for the company you’ve chosen please provide the following data
a. For both companies calculate the return on equity by using the Dupont formular for only year 2021
b. What are the component that reflect the return on equity
Task 3: Working capital analysis
Using the data obtain for the company you’ve chosen please provide the following data
Analyze the liquidity position of the companies you’ve chosen
Calculate the operating cash cycle for the companies you’ve chosen (only for the final year)
Task 4: Only using the balance sheet for the final year classify source of the finance of your two
companies by internal, external, short term and non-short term.
 FOREIGN EXCHANGE (FOREX)
Many companies enter into foreign exchange transaction. The need for foreign exchange arises from
international trade and international investment.
NOTE 1: A company buying goods from another country might be required to pay in the foreign currency
such as the domestic currency of the supplier. It must therefore obtain the foreign currency to make the
payment.
NOTE 2: a company selling goods abroad might price the goods in the buyer’s domestic currency or in
another currency such as USD. When the customer pays in the foreign currency, the company might sell
the currency received in exchange for its own domestic currency.
NOTE 3: A company investing abroad might need to obtain foreign currency to acquire or to make the
investment.
SPOT RATE & FORWARD RATE
In the foreign exchange market, bank trade currency both spot and forward rates. A spot transaction is a
transaction for the sale of one currency in exchange for another for immediate settlement.
Currency can also be bought and sold at a pre-agreed future date and pre-agreed rate. Such rate
is called forward rate. Forward rate transactions are a useful means of reducing risks.

DIRECT QUOTE: is the number of units of the domestic currency that will be exchange from one unit of a
foreign currency.
INDIRECT QUOTE: is the number of units of foreign currency that will be traded for one unit of the
domestic currency.

CONVERT
Strong and weak rate

BIG AND OFFER PRICES

The big price is the rate at which the bank is willing to buy the currency. The offer price (ask price) is the
rate at which the bank is willing to sell the currency.
NOTE 1: if an importer has to pay a foreign supplier in a foreign currency, they might ask their bank to
sell them the required amount of the currency.
For example: Suppose that a UK trading company has imported goods of which it must now pay $10,000
a. In order to pay the bill, the company must obtain $10000 from the bank in other words, the
bank will sell dollar to the company
b. When the bank agreed to sell $10000 to the company, it will tell the company what the SPOT
rate of exchange will be for the transaction.
NOTE 2: The rule is that banks buy currency at lower rate and sell at higher rate.
Illustration 1: Calculate how many dollars an exporter will receive or how many dollars an importer
would pay, ignoring the banks commission, in each of the following situations if they were to exchange
currency at SPOT rate.
 a. A US exporter receives a payment from a Danish customer of 150,000 KR
b. A US importer buys goods from a Japanese supplier and paid 1,000,000 YEN
SPOT rate are as follows

BANK SELL BANK BUY

Danish KR/$ 9.4300 9.5380
Japanese Yen/$ 203.650 205.781
Solution
1.150000/9.580= $15726.57
2.1000000/203.650= $4910.385

SPREAD
The difference between the BIG and Offer Price is known as the SPREAD.

A US based company is engaged in both import and export activities. During a particular month, it sold
goods to a UK company and received 5million Pounds. In the same month, US company import goods
from a UK supplier which cost 25million Pounds. If the exchange rate were €/$0.5075+/-0.0003, calculate
the dollar value of the bank receipts and payment.
SELLING-ADD
0.5078
5million/0.5078= $9846396.22
BUYING-Subtract

0.5072

25million/0.5072 = $49290220.82

PERSONNEL BUDGET
Personal Budget is the total of the basic salaries and allowances of the various categories of staffs in each
ministry or extra-ministerial department.
(P(x-1)+Basic Salary)n
P is incremental rate
X is the next step of the staff
1 is constant
N is number of staffs in each position

Mr Olowolayemo is on grade level 10, step 5 and the structure of his salary is given as ₦60,000x₦20000
Compute Mr Olowolayemo current basic salary.
=(20000(5-1)+60000)1
=80000+60000
=140,000

The ministry of commerce and industry in Lagos state of Nigeria is about to prepare its 2023 budget for
submission to the state budget department. The permanent secretary made available to you the
following operation in respect of the personnel cost.
Job Title No in post Grade level Salary
Director of Commerce - 17 60000x20000
Deputy director of 2 16 55000x18000
commerce
Assistant director of 3 15 50000x15000
commerce
Chief accountant 4 14 45000x12000
Assistant Chief 5 13 40000x10000
Accountant
Principal Accountant 4 12 35000x9000
Senior commercial 8 10 30000x8000
officer
Commercial Officer 1 5 9 25000x7000
Commercial Officer 2 10 8 20000x6000
Principal Trade Officer 12 10 30000x8000
Senior Trade Officer 10 9 25000x7000
Higher Trade Officer 12 8 20000x6000
Executive Trade Officer 15 7 15000x5000
Assistant Trade Officer 18 6 12000x4000
Clerical Officer 25 4 10000x3000
Assistant Clerical Officer 20 3 8000x2000
Office Assistant 5 3 8000x2000
Drivers 10 3 8000x2000
Cleaners 12 3 8000x2000
The following relevant information is also available:
i. All the salary levels shown above as step of the grades and it’s the ministry policy to prepare
personnel cost budget based on step 4 if the grade level.
ii. One deputy director, two assistant director and one chief accountant are due for promotion
during the budget year.
iii. During 2023, four senior commercial officers will be employed to strengthen the commercial
division.
iv. Staff allowance constitute 40% of staff salary.
You are required a summary form, personnel cost budget for the commerce division of the ministry.
Soln
MINISTRY OF COMMERCE AND INDUSTRIES
LAGOS STATE MINISTRY OF COOMERCE AND INDUSTRIES PERSONNEL COST BUDGET FOR 2023
FISCAL YEAR

Job Title No in post Grade level Salary

Director of Commerce 1 17 120000
Deputy director of 3 16 327000
commerce
Assistant director of 2 15 190000
commerce
Chief accountant 3 14 243000
Assistant Chief 5 13 350000
accountant
Principal Accountant 4 12 248000
Senior commercial 12 10 648000
officer
Commercial Officer 1 5 9 230000
Commercial Officer 2 10 8 380000
Principal Trade Officer 12 10 648000
Senior Trade Officer 10 9 460000
Higher Trade Officer 12 8 456000
Executive Trade Officer 15 7 450000
Assistant Trade Officer 18 6 432000
Clerical Officer 25 4 475000
Assistant Clerical Officer 20 3 280000
Office Assistant 5 3 70000
Drivers 10 3 140000
Cleaners 12 3 168000
Total 6315000
40% Allowance 2526000
Total Personnel Cost 8841000