Section 6.

2 Applications in Business and Economics

Continuous Income Stream

To understand the concept of a continuous income stream, let us consider

the problem below.

Example 1: The rate of change of the income produced by a vending ma-

chine is given by
f (t) = 4, 000e0.05t
where t is time in years since the installation of the machine. Find the total
income produced by the machine during the first 5 years of operation.

Solution: The area under the graph of the rate-of-change function from 0 to
5 represents the total income over the first 5 years (see figure below),

1
and is given by a definite integral:
Z 5
Total income = 4, 000e0.05t
0

5
= 80, 000e0.05t 

0

= 80, 000e0.05(5) − 80, 000e0.05(0)

= 102, 722 − 80, 000

= $22, 722

The vending machine produces a total of $22, 722 during the first 5 years of
operation.

In Example 1, we assumed that the rate of change of income was given by the
continuous function f . The assumption is reasonable because income from a
vending machine is often collected daily. In such situations, we assume that
income is received in a continuous stream; that is, we assume that the
rate at which income is received is a continuous function of time. The rate
of change is called the rate of flow of the continuous income stream.

DEFINITION Total Income for a Continuous Income Stream

If f (t) is the rate of flow of a continuous income stream, then

the total income produced during the period from t = a to t = b is
Z b
Total income = f (t)dt.
a

Try this out!

Exercise 1: Find the total income produced by a continuous income stream
in the first 2 years if the rate of flow is

f (t) = 600e0.06t .

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Let us solve another example.
Example 2: The rate of flow of a continuous income stream is a linear func-
tion, increasing from $2, 000 per year when t = 0 to $4, 000 per year when
t = 5. Find the total income produced in the first 5 years.

Solution: The rate of flow of the continuous income stream is a linear func-
tion. That is
f (t) = at + b
for some numbers a 6= 0 and b. We know that at t = 0, the rate is $2, 000
per year. That is
2, 000 = f (0) = a(0) + b = b.
We also know that at t = 5, the rate is $4, 000 per year. So

4, 000 = f (5)
4, 000 = a(5) + 2, 000
2, 000 = 5a
400 = a

Hence
f (t) = 400t + 2, 000.
Therefore, the total income produced in the first 5 years is
Z 5
Total income = (400t + 2, 000) dt
0

5
2
= (200t + 2, 000t) 

0

= [200(5)2 + 2, 000(5)] − [200(0)2 + 2, 000(0)]

= $15, 000.

Try this out!

Exercise 2: The rate of flow f (t) of a continuous income stream is a linear
function, decreasing from $12, 000 per year when t = 0 to $9, 000 per year
when t = 10. Find the total income produced in the first 10 years.

3
 Try this out!
Exercise 3: Find the total income produced by a continuous income stream
in the first 5 years if the rate of flow is f (t) = 2, 500 dollars per year.

To illustrate the next concept, let us consider again the vending machine
scenario. The income from the vending machine is received in a continuous
stream. In other words, income is received continuously. Suppose that we in-
vest continuously this income at an annual rate r, compounded continuously.
That is, at every point in time, the income received is immediately invested.
We want to find the total value of all the investments over a period of T
years. We call this total value the future value of a continuous income
stream.

To find the formula of the future value of a continuous income stream with
a rate of flow of f (t), first we choose an arbitrary time t1 within the time
interval [0, T ]. The flow of income at time t = t1 will be f (t1 ). This amount
is immediately invested at the rate r compounded continuously, as soon as
it is produced. Its future value at time t = T will be

f (t1 )er(T −t1 ) .

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We will repeat this procedure for all times t within the time interval [0, T ].
Finally, we add all the computed future values of the form

f (t)er(T −t) .

This sum is the future value of the continuous income stream which is given
by the definite integral Z T
f (t)er(T −t) dt.
0

DEFINITION Future Value of a Continuous Income Stream

If f (t) is the rate of flow of a continuous income stream, 0 ≤ t ≤ T ,

and if the income is continuously invested at a rate r, compounded
continuously, then the future value (FV) at the end of T years is
given by
Z T Z T
r(T −t)
FV = f (t)e dt = e rT
f (t)e−rt dt.
0 0

The future value of a continuous income stream is the total value of

all money produced by the continuous income stream (income and
interest) at the end of T years.

5
Example 3: Using the continuous income rate of flow for the vending ma-
chine in Example 1, namely,

f (t) = 4, 000e0.05t

find the future value of this income stream at 12%, compounded continu-
ously for 5 years, and find the total interest earned. Compute answers to the
nearest dollar.

Solution: With r = 0.12 and T = 5, we get

Z 5
FV = e 0.12(5)
4, 000e0.05t e−0.12t dt
0

Z 5
0.6
= e (4, 000) e0.05t−0.12t dt
0

Z 5
= 4, 000e 0.6
e−0.07t dt
0

 5
e−0.07t 

0.6
= 4, 000e
−0.07 0

4, 000e0.6  −0.07(5)
− e−0.07(0)

=− e
0.07

4, 000e0.6  −0.35 
=− e −1
0.07

≈ $30, 748

The future value of the income stream at 12% compounded continuously at

the end of 5 years is $30, 748.
In Example 1, we saw that the total income produced by this vending machine
over a 5-year period was $22, 722. The difference between future value
and income is interest. So

$30, 748 − $22, 722 = $8, 026

is the interest earned by the income produced by the vending machine during
the 5-year period.

6
 Try this out!
Exercise 4: Consider a continuous income stream with rate of flow

f (t) = 2, 000e0.06t .

1. Find the total income for this continuous income stream.

2. Find the future value, at 2.95% interest, compounded continuously for

6 years, of this continuous income stream.

3. Find the interest earned after 6 years.

Try this out!

Exercise 5: An investor is presented with a choice of two investments: an
established clothing store and a new computer store. Each choice requires
the same initial investment and each produces a continuous income stream of
4%, compounded continuously. The rate of flow of income from the clothing
store is
f (t) = 12, 000,
and the rate of flow of income from the computer store is expected to be

g(t) = 10, 000e0.05t .

Compare the future values of these investments to determine which is the

better choice over the next 5 years.