UNIT IV

MATHEMATICS OF EFFICIENCY

Chapter I : Linear Programming; Maximization and Minimization (Graphical Method)

Linear Program / Linear Programming (LP)

➢ a mathematical model that indicates the goal and requirements of an allocation problem
➢ mathematical procedure for determining optimal allocation of scarce resources
➢ usually used for optimizing resources
➢ The practicality of LP is used in production industries, wherein the task is optimizing the raw materials and also
the cost of operating a production line such as the labor cost, electricity, utilities, or etc.
➢ an optimization technique for a system of linear constraints and a linear objective function.

Objective Function
➢ defines the quantity to be optimized, and the goal of linear programming is to find the values of the variables that
maximize or minimize the objective function

Why Linear Programming?

➢ Linear programming is useful for many problems that require an optimization of resources. It could be applied to
manufacturing, to calculate how to assign labor and machinery to minimize cost of operations.
➢ It could be applied in high-level business operations, to decide which products to sell and in what quantity in
order to maximize profit.
➢ It could also be applied in logistics, to decide how to apply resources to get a job done in the minimum amount of
time.

Properties of LP Models
➢ Seek to minimize or maximize
○ Minimize - the use of scarce resources or when we minimize cost; determining the most efficient
combination of skilled and not-skilled laborers to minimize the cost of labor and the likes
○ Maximize - maximizing the profit by finding ways on using the resources; determining the quantity of
product to manufacture to obtain maximum profit while considering several constraints
➢ Include “constraints” or limitations
○ When solving LP problems, we are constrained into conditions such as scarcity of materials or resources
because in production, we do not have unlimited resources and manpower.
➢ There must be alternatives available
➢ All equations are linear

Linear Programming Problems

➢ The maximization or minimization of some quantity is the objective in all linear programming problems.
○ The main objective of LP is to maximize or minimize the quantities of resources.
➢ All LP problems have constraints that limit the degree to which the objective can be pursued.
➢ A feasible solution satisfies all the problem’s constraints.
○ LP presents multiple solutions to the problem. When we talk about solutions, it is multiple configurations
of the number of quantities that satisfies the objective of the LP problem.
○ Algebra - trying to find the exact answer with one solution
○ LP - there is approximately infinitely many solutions
➢ An optimal solution is a feasible solution that results in the largest possible objective function value when
maximizing (or smallest when minimizing).
➢ A graphical solution method can be used to solve a linear programming problem with two variables.
➢ If both the objective function and the constraints are linear, the problem is referred to as a linear programming
problem.
➢ Linear functions are functions in which each variable appears in a separate term raised to the first power and is
multiplied by a constant.
○ In LF, each term is expressed into the first power.
➢ Linear constraints are linear functions that are restricted to be “less than or equal to”, “equal to”, or “greater than
or equal to” a constant
○ constraints are expressed in symbols of linear inequalities
 ➢ A linear programming problem’s goal is to find an extreme value of a linear function that is subject to certain
constraints.
Objective Function - the function we are trying to optimize
Constraints - the conditions that must be satisfied

Problem Formulation
➢ Problem formulation or modeling is the process of translating a verbal statement of a problem into a mathematical
statement.

Guidelines for Model Formulation

➢ Understand the problem thoroughly
➢ Describe the objective
○ Know what is asked. After thoroughly understanding the problem, you need to describe what the
objective is or what the task is all about.
➢ Define the decision variables
○ We will set variables that represent the quantities. This will be the unknowns that will decide what the LP
looks like.
➢ Describe each constraint
➢ Write the objective in terms of the decision variables
➢ Write the constraints in terms of the decision variables
○ Translation of verbal/written statements into mathematical statements will be utilized in the last three
guidelines.

LP Model Formulation
➢ Decision variables
○ Mathematical symbols representing levels of activity of an operation
○ Any letter/variable from the English alphabet can be used
➢ Objective function
○ Linear relationship reflecting the objective of an operation
○ Most frequent objective of business firms is to maximize profit
■ In business application, the main objective is to maximize profit and minimize cost.
○ Most frequent objective of individual operational units (such as production or packaging) is to minimize
cost
➢ Constraint
○ Linear relationship representing a restriction on decision making
■ When making a decision, we are always limited to defending our capacities or resources.

Graphical Procedure/Solution
➢ Plot model constraint on a set of coordinates in a plane
○ graphing linear functions
➢ Solve simultaneous each equations at each corner point to find the solution values at each point
○ Solving systems of linear equations or when we have 2 equations of lines intersecting on a cartesian plane
and solving the coordinates for those lines
➢ Substitute these values in the objective function to find the set of values that results in the maximum p value.

Graphical Method
➢ The graphical method makes use of graphical techniques to determine the optimal solution for a linear
programming problem wherein we identify first the feasible region and its extreme points. Then we use tabulation
techniques to determine what is the highest profit or gain as well as the minimum cost.
➢ The problem with the graphical method is that it is only effective with problems with 2 variables. It is not
advisable for 3 or more variables because nawawala yung efficiency ng method na iyon.
➢ Has only 3 general steps
Example of a Linear Model
Max/min: (objective) P = c 1x1 + c2x2 + … + cnxn (objective function)(profit)
Subject to: (constraint) (inequalities)

Objective function and constraints are written in linear equations.

Example #1
Maximize: P = 5x + 7y
Subject to: x≤6
2x + 3y ≤ 19
x+y≤8
x,y ≥ 0
Our values for the decision variables (x and y) should always be equal or greater than 0. We do not accept negative values
for a linear programming problem.

Step 1. Graph the constraints.

2x + 3y = 19 x+y=8 x=6
2x + 3(0) = 19 x + (0) = 8
2x = 19 / 2 x=8
x=9½

2x + 3y = 19 x+y=8
2(0) + 3y = 19 (0) + y = 8
3y = 19 / 3 y=8
y=6⅓

x ≤ 6 → (9 ½, 6 ⅓)
2x + 3y ≤ 19 → (8, 8)
x + y ≤ 8 → (6,0)
➢ This is called the cartesian coordinate plane on the 1st quadrant.
➢ The lines and the shaded regions represent all the possible points or possible values of x and y that satisfy our
inequalities.

Feasible Region
➢ a region where all inequalities overlap
➢ contains all the possible solutions for our problem
➢ gives us the maximum value for our objective function

Step 2. Find the extreme points.

*located on the vertices/corners of the feasible region.
-1 (x = 6) x+y=8
-x = -6 x+2=8
x+y=8 x=8–2
y=2 x=6

-2 (x + y = 8) x+y=8
-2x – 2y = -16 x+3=8
2x + 3y = 19 x=8–3
y=3 x=5
Step 3. Substitute the point to the objective function.
Vertex P = 5x + 7y Value
(0,0) P = 5(0) + 7(0) 0
(6,0) P = 5(6) + 7(0) 30
(6,2) P = 5(6) + 7(2) 44
(5,3) P = 5(5) + 7(3) 46 Max
(0,6 ⅓) P = 5(0) + 7(6 ⅓) 44 ⅓

Example #2
This is an LP problem with data showing the gist of how products are being produced in terms of its cost and revenue.

There are 40 hours of labor and 120 pounds of clay available each day.

Decision variables:
x = number of bowls to produce
y = number of mugs to produce

Maximize: P = 40x + 50y

Subject to: x + 2y ≤ 40 hr
4x + 3y ≤ 120 lbs
x,y ≥ 0
Solution is: x = 24 bowls and y = 8 mugs
Revenue: $1,360

Step 1. Graph the constraints.

x + 2y = 40 x + 2y = 40
x + 2(0) = 40 (0) + 2y = 40
x = 40 2y = 40 / 2
y = 20

4x + 3y = 120 4x + 3y = 120
4x + 3(0) = 120 4(0) + 3y = 120
4x = 120 / 4 3y = 120 / 3
x = 30 y = 40

x + 2y ≤ 40 → (40,20)
4x + 3y ≤ 120 → (30,40)

Step 2. Find the extreme points.

-4 (x + 2y = 40) x + 2y = 40
-4x – 8y = -160 x + 2(8) = 40
– 4x + 3y = 120 x + 16 = 40
-5y = -40 / -5 x = 40 – 16
y=8 x = 24
Step 3. Substitute the point to the objective function.
Vertex P = 40x + 50y Value
A (0,0) P = 40(0) + 50(0) 0
B (30,0) P = 40(30) + 50(0) 1,200
C (24,8) P = 40(24) + 50(8) 1,360 Max
D (0,20) P = 40(0) + 50(20) 1,000
Example #3
Maximize: P = 250x + 75y
Subject to: 5x + y ≤ 100
x + y ≤ 60
x,y ≥ 0

Step 1. Graph the constraints.

5x + y = 100 x + y = 60
5x + (0) = 100 x + (0) = 60
5x = 100 / 5 x = 60
x = 20

5x + y = 100 x + y = 60
5(0) + y = 100 (0) + y = 60
y = 100 y = 60

5x + y ≤ 100 → (20,100)
x + y ≤ 60 → (60,60)

Step 2. Find the extreme points.

Step 3. Substitute the point to the objective function.

Vertex P = 250x + 75y Value
A (0,0) P = 250(0) + 75(0) 0
B (20,0) P = 250(20) + 75(0) 5,000
C (10,50) P = 250(10) + 75(50) 6,250 Max
D (0,60) P = 250(0) + 75(60) 4,500

Example #4
Maximize: P = x + 2y
Subject to: x + 2y ≥ 100
2x – y ≤ 0
2x + y ≤ 200
x,y ≥ 0
Step 1. Graph the constraints.
x + 2y = 100 2x – y = 0 2x + y = 200
x + 2(0) = 100 2x – (0) = 0 2x + (0) = 200
x = 100 2x = 0 / 2 2x = 200 / 2
x=0 x = 100

x + 2y = 100 2x – y = 0 2x + y = 200
(0) + 2y = 100 2(0) – y = 0 2(0) + y = 200
2y = 100 / 2 y=0 y = 200
y = 50

x + 2y ≥ 100 →(100,50)
2x – y ≤ 0 →(0,0)
2x + y ≤ 200 →(100,200)
Step 2. Find the extreme points.

Step 3. Substitute the point to the objective function.

Chapter II : Formulating the Linear Programming Problem

Example #1
A farmer plans to use his fields to plant corn and wheat. Corn yields 113.5 bushels per acre and sells for $3.15 per bushels.
Wheat yields 35.8 bushels per acre and sells for $4.45 per bushel.
His constraints are:
1. No more than 120 acres of corn and wheat.
2. At least 20 acres and no more than 80 acres of corn.
3. At least 30 acres of wheat.

Let: x → acres for corn

y → acres for wheat

Maximize: P = (113.5)($3.15)x + (35.8)($4.45)y

Subject to: x + y ≤ 120
x ≥ 20
x ≤ 80
y ≥ 30
x,y ≥ 0

Example #2
A farmer has 50 acres of available land where he wants to plant a mixture of corn and spinach. Labor costs him $200 per
acre of corn and $250 per acre of spinach. Seeds cost him $200 per acre of corn and $100 per acre of spinach. He has a
maximum of $8,000 to spend on seeds and $12,000 on labor. He makes a profit of $120 per acre of corn and $60 per acre
of spinach. How many acres of each crop should he plant?
Corn Spinach
Profit 120 60
Land x y ≤ 50
Labor 200 250 ≤ 12,000
Seeds 200 100 ≤ 8,000

Let: x → corn
y → spinach

Maximize: P = 120x + 20y

Subject to: x + y ≤ 50
200x + 250y ≤ 12,000
200x + 100y ≤ 8,000
x,y ≥ 0

Example #3
Delia wishes to mix two types of food P and Q in such a way that the vitamin contents of the mixture contain at least 8
units of vitamin A and 11 units of vitamin B. Food P costs Php 40/kg and food Q costs Php 53/kg. Foop P contains 3
units/kg of Vitamin A and 5 units/kg of Vitamin B while Food Q contains 4 units/kg of Vitamin A and 2 units/kg of
Vitamin B. Determine the minimum cost of the mixture.
Food P Food Q
Cost 40 53
Vitamin A 3 4 ≥8
Vitamin B 5 2 ≥ 11

Let: x → kg of food P
y → kg of food Q

Minimize: C = 40x + 53y

Subject to: 3x + 4y ≥ 8
5x + 2y ≥ 11
x,y ≥ 0
Chapter III : Solving Linear Programming Problems Using Simplex Method

Simplex Method
➢ Has numerous processes compared to the graphical method.
➢ Effective for problems with 3 or more variables.

Why Simplex Method?

1. Hindi na tayo nagcocompute ng mga variable. Walang algebra and elimination method.
2. Simultaneous. Sabay-sabay kono-compute ng simplex method and tatlo o higit pang variables.
3. We can use technology to do the method for us such as excel.

Sample Problem #1
A manufacturer produces three types of plastic fixture. The time required for molding, trimming, and packaging is given
in the table. (Times are given in hours per dozen fixtures). How many dozen of each type of fixture should be produced to
obtain a maximum profit?

Step 1. Construct the table.

Process Type A Type B Type C Total time available
Molding 1 2 1/2 12,000
Trimming 2/3 2/3 1 4,600
Packaging 1/2 1/3 1/2 2,400
Profit $11 $16 $15

Step 2. Introduce decision variables.

Let: x1 → the number of dozens for Type A
x2 → the number of dozens for Type B
x3 → the number of dozens for Type C

Step 3. Formulate the linear programming problem.

Step 4. Transform the variables on the right side to left side to make the equation equal to. (Objective Function)
Step 5. Add slack variables to balance the equations. (Constraints)

Step 6. Construct the simplex tableau.

x1 x2 x3 s1 s2 s3 P
1 2 ½ 1 0 0 12,000
⅔ ⅔ 1 0 1 0 4,600
½ ⅓ ½ 0 0 1 2,400
-11 -16 -15 0 0 0 0

Step 7. Determine the pivot column, row, and element.

x1 x2 x3 s1 s2 s3 P
1 2 ½ 1 0 0 12,000 12,000 ÷ 2 = 6,000
⅔ ⅔ 1 0 1 0 4,600 4,600 ÷ ⅔ = 6,900
½ ⅓ ½ 0 0 1 2,400 2,400 ÷ ⅓ = 7,200
-11 -16 -15 0 0 0 0

a. Determine the pivot column (most negative).

b. Divide the numbers in column P to the numbers in the pivot column.
c. The lowest ratio determines the pivot row.
d. The intersection of the pivot column and pivot row is the pivot element.
Step 8. Transform the pivot element into “1” .
New R1 = ½ R1
½ [ 1 2 ½ 1 0 0 | 12,000 ]
= [ ½ 1 ¼ ½ 0 0 | 6,000 ]
x1 x2 x3 s1 s2 s3 P
½ 1 ¼ ½ 0 0 6,000
⅔ ⅔ 1 0 1 0 4,600
½ ⅓ ½ 0 0 1 2,400
-11 -16 -15 0 0 0 0

Step 9. Transform every number of the pivot column in 0.

New R2 = -⅔ R1 + R2
-⅔ [ ½ 1 ¼ ½ 0 0 | 6,000 ]
+ [ ⅔ ⅔ 1 0 1 0 | 4,600 ]
= [ ⅓ 0 ⅚ -⅓ 1 0 | 600 ]
x1 x2 x3 s1 s2 s3 P
½ 1 ¼ ½ 0 0 6,000
⅓ 0 ⅚ -⅓ 1 0 600
½ ⅓ ½ 0 0 1 2,400
-11 -16 -15 0 0 0 0

New R3 = -⅓ R1 + R3
-⅓ [ ½ 1 ¼ ½ 0 0 | 6,000 ]
+ [ ½ ⅓ ½ 0 0 1 | 2,400 ]
= [ ⅓ 0 5/12 -⅙ 0 1 | 400 ]
x1 x2 x3 s1 s2 s3 P
½ 1 ¼ ½ 0 0 6,000
⅓ 0 ⅚ -⅓ 1 0 600
5
⅓ 0 /12 -⅙ 0 1 400
-11 -16 -15 0 0 0 0

New R4 = 16R1 + R4
16 [ ½ 1 ¼ ½ 0 0 | 6,000 ]
+ [ -11 -16 -15 0 0 0 | 0 ]
= [ -3 0 -11 8 0 0 | 96,000 ]
x1 x2 x3 s1 s2 s3 P
½ 1 ¼ ½ 0 0 6,000
⅓ 0 ⅚ -⅓ 1 0 600
5
⅓ 0 /12 -⅙ 0 1 400
-3 0 -11 8 0 0 96,000
*1st Iteration*

Step 10. Repeat the process from Step 7 to 9 if there is still a negative number at the last row.
Determine the pivot column, row, and element.
x1 x2 x3 s1 s2 s3 P
½ 1 ¼ ½ 0 0 6,000 6,000 ÷ ¼ = 24,000
⅓ 0 ⅚ -⅓ 1 0 600 600 ÷ ⅚ = 720
5
⅓ 0 /12 -⅙ 0 1 400 400 ÷ 5/12 = 960
-3 0 -11 8 0 0 96,000

Transform the pivot element into “1” .

New R2 = 6/5 R2
6
/5 [ ⅓ 0 ⅚ -⅓ 1 0 | 600 ]
= [ ⅖ 0 1 -⅖ 6/5 0 | 720 ]
x1 x2 x3 s1 s2 s3 P
½ 1 ¼ ½ 0 0 6,000
6
⅖ 0 1 -⅖ /5 0 720
5
⅓ 0 /12 -⅙ 0 1 400
-3 0 -11 8 0 0 96,000
Transform every number of the pivot column in 0.
New R1 = -¼ R2 + R1
-¼ [ ⅖ 0 1 -⅖ 6/5 0 | 720 ]
+ [ ½ 1 ¼ ½ 0 0 | 6,000 ]
= [ ⅖ 1 0 ⅗ -3/10 0 | 5,820 ]
x1 x2 x3 s1 s2 s3 P
3
⅖ 1 0 ⅗ - /10 0 5,820
6
⅖ 0 1 -⅖ /5 0 720
5
⅓ 0 /12 -⅙ 0 1 400
-3 0 -11 8 0 0 96,000

New R3 = -5/12 R2 + R3
-¼ [ ⅖ 0 1 -⅖ 6/5 0 | 720 ]
+ [ ⅓ 0 5/12 -⅙ 0 1 | 400 ]
= [ ⅙ 0 0 0 -½ 1 | 100 ]
x1 x2 x3 s1 s2 s3 P
3
⅖ 1 0 ⅗ - /10 0 5,820
6
⅖ 0 1 -⅖ /5 0 720
⅙ 0 0 0 -½ 1 100
-3 0 -11 8 0 0 96,000

New R4 = 11R2 + R4
11 [ ⅖ 0 1 -⅖ 6/5 0 | 720 ]
+ [ -3 0 -11 8 0 0 | 96,000 ]
= [ 7/5 0 0 18/5 66/5 0 | 103,920 ]
x1 x2 x3 s1 s2 s3 P
3
⅖ 1 0 ⅗ - /10 0 5,820
6
⅖ 0 1 -⅖ /5 0 720
⅙ 0 0 0 -½ 1 100
7 18 66
/5 0 0 /5 /5 0 103,920
*2nd/Final Iteration*
Step 11. Interpret the simplex tableau.
x1 x2 x3 s1 s2 s3 P
3
⅖ 1 0 ⅗ - /10 0 5,820
6
⅖ 0 1 -⅖ /5 0 720
⅙ 0 0 0 -½ 1 100
7 18 66
/5 0 0 /5 /5 0 103,920
P = 103,920
x1 = 0
x2 = 5,820
x3 = 720
s1 = 0
s2 = 0
s3 = 100

Sample Problem #1: Application on Agriculture

A farmer owns a 300 acre farm and plans to plant at most three crops (wheat, corn, cotton). The seed for crops
wheat, corn and cotton costs $30, $40, and $50 per acre, respectively. A maximum of $6400 can be spent on seed. Crops
wheat, corn, cotton require 1, 1, and 2 work days per acre, respectively, and there are a maximum of 200 work days
available. If the farmer can make a profit of $200 per acre on wheat, $250 per acre on corn, and $100 per acre on cotton:

1. How many acres of each crop should be planted to maximize profit?

2. What is the maximum profit?
3. How many acres are planted?
4. How much money is used?
5. How many days are used?
Step 1. Construct the table.
Wheat Corn Cotton
Land ≤ 800
Seeds $30 $40 $50 ≤ 6,400
Work days available 1 1 2 ≤ 200
Profit $200 $250 $100

Step 2. Introduce decision variables.

Let: x1 → number of acres for wheat
x2 → number of acres for corn
x3 → number acres for cotton

Step 3. Formulate the linear programming problem.

Step 4. Transform the variables on the right side to left side to make the equation equal to. (Objective Function)
Step 5. Add slack variables to balance the equations. (Constraints)

Step 6. Construct the simplex tableau.

x1 x2 x3 s1 s2 s3 P
1 1 1 1 0 0 300
30 40 50 0 1 0 6,400
1 1 2 0 0 1 200
-200 -250 -100 0 0 0 0

Step 7. Determine the pivot column, row, and element.

x1 x2 x3 s1 s2 s3 P
1 1 1 1 0 0 300 300 ÷ 1 = 200
30 40 50 0 1 0 6,400 6,400 ÷ 40 = 160
1 1 2 0 0 1 200 200 ÷ 1 = 200
-200 -250 -100 0 0 0 0

Step 8. Transform the pivot element into “1” .

New R2 = 1/40 R2
1
/40 [ 30 40 50 1 0 0 | 6,400 ]
= [ ¾ 1 5/4 0 1/40 0 | 160 ]
x1 x2 x3 s1 s2 s3 P
1 1 1 1 0 0 300
5 1
¾ 1 /4 0 /40 0 160
1 1 2 0 0 1 200
-200 -250 -100 0 0 0 0

Transform every number of the pivot column in 0.

New R1 = -1R2 + R1
-1 [ ¾ 1 5/4 0 1/40 0 | 160 ]
+ [ 1 1 1 1 0 0 | 300 ]
= [ ¼ 0 -¼ 1 -1/40 0 | 140 ]
x1 x2 x3 s1 s2 s3 P
1
¼ 0 -¼ 1 - /40 0 140
5 1
¾ 1 /4 0 /40 0 160
1 1 2 0 0 1 200
-200 -250 -100 0 0 0 0
New R3 = -1R2 + R3
-1 [ ¾ 1 5/4 0 1/40 0 | 160 ]
+ [ 1 1 2 0 0 1 | 200 ]
= [ ¼ 0 ¾ 0 -1/40 1 | 40 ]
x1 x2 x3 s1 s2 s3 P
1
¼ 0 -¼ 1 - /40 0 140
5 1
¾ 1 /4 0 /40 0 160
1
¼ 0 ¾ 0 - /40 1 40
-200 -250 -100 0 0 0 0

New R4 = 250R2 + R4
5
250 [ ¾ 1 /4 0 1/40 0 | 160 ]
+ [ -200 -250 -100 0 0 1 | 0 ]
= [ -25/2 0 425
/2 0 25/4 1 | 40,000 ]
x1 x2 x3 s1 s2 s3 P
1
¼ 0 -¼ 1 - /40 0 140
5 1
¾ 1 /4 0 /40 0 160
1
¼ 0 ¾ 0 - /40 1 40
-25/2 0 425
/2 0 25
/4 1 40,000

Step 10. Repeat the process from Step 7 to 9 if there is still a negative number at the last row.
Determine the pivot column, row, and element.
x1 x2 x3 s1 s2 s3 P
¼ 0 -¼ 1 -1/40 0 140 140 ÷ ¼ = 560
5 1
¾ 1 /4 0 /40 0 160 160 ÷ ¾ = 213 ⅓
1
¼ 0 ¾ 0 - /40 1 40 40 ÷ ¼ = 160
-25/2 0 425
/2 0 25
/4 1 40,000

Transform the pivot element into “1” .

New R3 = 4R3
4 [ ¼ 0 ¾ 0 -1/40 1 | 40 ]
= [ 1 0 3 0 -1/10 4 | 160 ]
x1 x2 x3 s1 s2 s3 P
1
¼ 0 -¼ 1 - /40 0 140
5 1
¾ 1 /4 0 /40 0 160
1
1 0 3 0 - /10 4 160
-25/2 0 425
/2 0 25
/4 1 40,000

Transform every number of the pivot column in 0.

New R1 = -¼ R3 + R1
-¼ [ 1 0 3 0 -1/10 4 | 160 ]
+ [ ¼ 0 -¼ 1 -1/40 0 | 140 ]
= [ 0 0 -1 1 0 -1 | 100 ]
x1 x2 x3 s1 s2 s3 P
0 0 -1 1 0 -1 100
5 1
¾ 1 /4 0 /40 0 160
1 0 3 0 -1/10 4 160
-25/2 0 425
/2 0 25
/4 1 40,000

New R2 = -¾ R3 + R2
-¾ [ 1 0 3 0 -1/10 4 | 160 ]
+ [ ¾ 1 5/4 0 1/40 0 | 160 ]
= [ 0 1 -1 0 1/10 -3 | 40 ]
x1 x2 x3 s1 s2 s3 P
0 0 -1 1 0 -1 100
1
0 1 -1 0 /10 -3 40
1
1 0 3 0 - /10 4 160
-25/2 0 425
/2 0 25
/4 1 40,000
New R4 = 25/2 R3 + R4
25
/2 [ 1 0 3 0 -1/10 4 | 160 ]
+ [ -25/2 0 425/2 0 25/4 1 | 40,000 ]
= [ 0 0 250 0 5 50 | 42,000 ]
x1 x2 x3 s1 s2 s3 P
0 0 -1 1 0 -1 100
1
0 1 -1 0 /10 -3 40
1 0 3 0 -1/10 4 160
0 0 250 0 5 50 42,000

Step 11. Interpret the simplex tableau.

x1 x2 x3 s1 s2 s3 P
0 0 -1 1 0 -1 100
1
0 1 -1 0 /10 -3 40
1 0 3 0 -1/10 4 160
0 0 250 0 5 50 42,000

P = 42,000 1. How many acres of each crop should be planted to maximize profit?
x1 = 160 (acres of wheat) a. 160 acres of wheat and 40 acres of corn
x2 = 40 (acres of corn) 2. What is the maximum profit?
x3 = 0 a. P = $42,000
s1 = 100 3. How many acres are planted?
s2 = 0 a. 160 acres of wheat + 40 acres of corn = 200 acres
s3 = 0 4. How much money is used?
a. 30(160) + 40(40) + 50(0) = $6,400 of seed money is used
5. How many days are used?
a. 1(160) + 1(40) + 2(0) = 200 days are used

Solving Linear Programming Problems Using Graphical Method

1. Graph the constraints.
2. Find the extreme points.
3. Substitute the point to the objective function.

Solving Linear Programming Problems Using Simplex Method

1. Construct the table.
2. Introduce decision variables. (x1, x2, x3…)
3. Formulate the linear programming problem. (Maximize/Minimize and Subject to)
4. Transform the variables on the right side to left side to make the equation equal to.
5. Add slack variables (s1, s2, s3…) to balance the equations.
6. Construct the simplex tableau.
7. Determine the pivot column, row, and element.
a. Determine the pivot column (most negative).
b. Divide the numbers in column P to the numbers in the pivot column.
c. The lowest ratio determines the pivot row.
d. The intersection of the pivot column and pivot row is the pivot element.
8. Transform the pivot element into “1”.
a. Multiply the reciprocal of the pivot element.
9. Transform every number of the pivot column in 0.
a. Multiply the additive inverse (opposite sign) into the pivot row then add to the new row.
10. Repeat the process from Step 7 to 9 if there is still a negative number at the last row. The transformation of the
simplex tableau will only end if there is no negative number at the last row.
11. Interpret the simplex tableau.
a. Only the rows that have three 0s and one 1 will have a value.
b. Kung ano ang ka-row ni number 1 sa column P, ‘yun ang value niya.

Prepared by:
Micah Joy Gamotea, DVM 1B
 UNIT V
MATHEMATICS OF FINANCE

Chapter I : Simple and Compound Interest

Interest
➢ Charges fee for the advantage of borrowing money
Principal
➢ Money you loan or credit to/from someone
Interest Rate
➢ Percent charged to the principle
Interest Period
➢ Time period

Simple Interest
➢ Technique used to calculate the proportion of interest paid on sum over a set time period at a set rate.

Interest = Principal x Rate x Time

I= Prt

*if the time given is months, divide it by 12

Examples:

1. Rosario borrowed 10,000 for one year at a rate of 8% simple interest. Compute the interest

Given: I= Prt
P= 10,000 = (10,000)(0.08)(1)
r= 8 % / 0.08 = 800
t= 1 year

2. Find the simple interest on loans of 10,200 when the rate is 4% and the loan period are 6 months; and 3 years.

Given: I= Prt
P= 10,200 = (10,200)(0.04)(6/12)
r= 4 % / 0.04 = 204
t= 6 months

Given: I= Prt
P= 10,200 = (10,200)(0.04)(3)
r= 4 % / 0.04 = 1, 224
t= 3 year

Ordinary and Exact Simple Interest

➢ Period of loan stated in days, computing its interest involves the number of days by the number of days in a 1
year.

Ordinary Simple Interest Exact Simple Interest

360 days 365 days/ 366 days if leap year
Uses by legal financial institution

*Rule of Thumb: If no sign of ordinary/ exact, it is considered as ordinary simple interest

Example:
1. Compute the ordinary simple interest on 12,000 at 3% for 120 days

Given: I= Prt
P= 12,000 =(12,000)(0.03)(120/360)
r= 3 % / 0.03 = (12,000)(0.03)(0.3)
t= 120/360 =(4,000)(0.03)
=120

2. Compute the exact simple interest on 12,000 at 3% for 120 days

Given: I= Prt
P= 12,000 =(12,000)(0.03)(120/365)
r= 3 % / 0.03 =(12,000)(0.03)(0.328)
t= 120/365 =(3,945.2)(0.03)
=118.36

Future value with Simple Interest

➢ The sum of principle and the interest is called Future Value (A)

A= Principal (P) + Interest (Prt)

A= P + Prt
A= P (1 + rt)

Examples:
1. Joanne lends ₱8,000 to her friend Dyan, so that Dyan can fly to Palawan to visit her family there. If Joanne is
charging Dyan only 3% simple interest within 6 months, how much does Dyan need to pay?

Given: A=P (1 + rt)

P = 8,000 =8,000 [ 1 + (0.03) (6/12) ]
r = 3% or 0.03 =8,000 [ 1 + 0.015 ]
t = 6 months =8,000 (1.015)
=8,120

2. What is the annual interest rate earned by a 33 – day T-bill with a future value of $1,000 that sells for $996.16?

Given: A=P (1 + rt)

P = $996.16 1000 = 996.16 [ 1 + (r) (33/360) ]
r=? 1000 = 996.16 [ 1 + (r) (0.09166) ]
t = 33 days 1000 = 996.16 + (996.16) (0.09166) r
1000 -996.16 = (996.16) (0.09166) r
3.84 / (996.16)(0.09166) = r
0.042 / 4.2 % = r

Miscellaneous Formulas

Principal Interest Rate Time/ Period

P= I / rt r= I / Pt T = I / Pr

P= A / ( I + rt) r= A-P / Pt T= A-P / Pr

Compound Interest
➢ Simply means that the interest associated with a bank account, loan or investment increases exponentially- rather
than linearly- over fine.
➢ The interest on loan or deposit calculated based on both the initial principal and accumulated interest from
previous periods.
➢ Usually uses by bigger financial institutions such as banks, loan and companies.

General Formula A= future value annually (n=1)

A = P(1 + r/n)^nt P= Principal semi-anually (n=2)
r= rate quarterly (n=4)
t= time/period monthly (n=12)
n= number of periods

Example:
1. If 20,000 is invested for 2 years at 6% compounded annually, compute the future value of the investment

Given: A=P (1 + r/n)^nt

P = 20,000 = 20,000 (1 + 0.06/1 ) ^1(2)
r = 0.06 / 6% = 20,000 (1 + 0.06 ) ^2
t = 2 years = 20,000 (1.1236)
n= 1 = 22, 472

2. Find the future value of 38,000 invested for 5 years at 5% compounded quarterly

Given: A=P (1 + r/n)^nt

P = 38,000 = 38,000 (1 + 0.05/4 ) ^4(5)
r = 0.05 / 5% = 38,000 (1 + 0.125 ) ^20
t = 5 years = 38,000 (1.125)^20
n= 4 = 38,000 ( 1.28203723)
= 48, 717. 41
Investing
➢ Same as borrowing money/ lending, they have the same computation.

Example:
1. Mrs. Celestine has a 12 years old son and she is planning to invest for her son’s education that will worth 120,000
when he turns 18. If Mrs. Celeste can earn 5% compounded semi-annually, how much money should she put into
each investment today?

Given: A=P (1 + r/n)^nt

P = 120,000 120,00= P (1 + 0.05/2 ) ^2(6)
r = 0.05 / 5% 120,00= P(1 + 0.025 ) ^12
t = 6 years 120,00= P (1.025)^12
n= 2 120,00= P(1.3448888242)
89,226.71 = P

Inflation
➢ It is the rate at which the prices for goods and services are rising. Hence, the purchasing power of currency is
falling.

Example:
1. Assuming an annual inflation rate of 3%, what is the equivalent value of 50,000 10 years from now?

Given: A=P (1 + r/n)^nt

P = 50,000 = 50,000 (1 + 0.03/1 ) ^1(10)
r = 0.03 / 3% = 50,000 (1 + 0.03) ^10
t = 10 years = 50,000 (1.03)^10
n= 1 = 50,000 ( 1.3439163793)
= 67,195.82

It means that in 10 years,the purchasing power of 67,195.82 is equivalent only to 50,000

Things to remember in saving money.

- Interest
- Inflation rate

Chapter II : Annuities and Loan

Loan
➢ Money you borrow for large purchases
Amortization
➢ Process of repaying the loan with regular scheduled payments
Annuities
➢ Lump-sum deposit with regular withdrawals over a period of time

Type of Annuities

Fixed Indexed Variable

● Pays at a fixed rate
● With a fixed interest rate, you
know in advance how much
your annuity will grow and
how much income it will pay
out.
● Pays based on the value of an ● You actually own an
indexed market investment inside an account
● Has the CAP and floor ● No limit
● There are two phases to an ● The value of
annuity contract – the which can vary based on the
accumulation (savings) phase performance of an underlying
and the annuity (payout) portfolio of sub accounts
phase (mutual funds).
● A type of annuity contract
between you
and an insurance company.
● promises to provide returns
linked to the performance
of a market index.

Ordinary and Annuities due

Ordinary annuity
➢ Makes payments at the end of each period.
➢ Eg: Bonds

Annuity Due
➢ payments come at the beginning of each period.
➢ Eg: Rent

Future Value of an Annuity

where,
𝑛𝑡
FVordinary = 𝐶 [ (1 + 𝑟/𝑛 ) − 1 /(𝑟/𝑛) C= periodic payment
r= annual interest rate
n= compounding period
t= time
Examples:
1. What is the future value of an annuity, ten years from now, that makes 10 annual payments of Php10,000, if the
interest rate is 7% per year compounded quarterly?

𝑛𝑡
Given: 𝐶 [ (1 + 𝑟/𝑛 ) − 1 /(𝑟/𝑛)
4(10)
C= 10,000 10, 000[ (1 + 0. 07/4 ) − 1 /(0. 07/4)
40
r= 0.07 / 7% 10, 000[ (1 + 0. 0175) − 1 /(0. 0175)
40
t= 10 years 10, 000[ (1. 0175) − 1 /(0. 0175)
n= 4 10, 000[ (2. 00159734319) − 1 /(0. 0175)
10, 000 (57. 2341338963)
572, 341. 34

2. Betty deposits $2000 annually into an investment that earns 6.85% compounded annually. Due to a change in
employment, these deposits stop after 10 years, but the account continues to earn interest until Betty retires 25
years after the last deposit is made. How much is in the account when Betty retires?

Accumulation Period:
𝑛𝑡
Given: 𝐶 [ (1 + 𝑟/𝑛 ) − 1 /(𝑟/𝑛)
1(10)
C= 20,000 20, 000[ (1 + 0. 0685/1 ) − 1 /(0. 0685/1)
10
r= 6.85 % 20, 000[ (1. 0685) − 1 /(0. 0685)
t= 10 years 20, 000[ (0. 93974778671) /(0. 0685)
n= 1 20, 000[ (2. 00159734319) /(0. 0685)
20, 000 (13. 7189457913)
27, 437. 8915826

Future value after 25 years:

𝑛𝑡
Given: 𝑃 [ (1 + 𝑟/𝑛 )
1(25)
C= 27,437.89 27, 437. 89[ (1 + 0. 0685/1 )
25
r= 6.85 % 27, 437. 89(1. 0685)
t= 25 years 27, 437. 89[ (5. 24038460965)
n= 1 143, 785. 10

Present Value of an Annuity

−𝑛𝑡
PVordinary = 𝐶 [ 1 − (1 + 𝑟/𝑛 ) − 1 /(𝑟/𝑛) C= periodic payment
r= annual interest rate
n= compounding period
t= time

Example:
1. You decide to buy a TV set for Php 40,000 and agree to pay for it for 18 equal monthly payments at 18%
compounded monthly. How much are your payments? What is the total interest paid?

−𝑛𝑡
Given: PV=𝐶 [1 − (1 + 𝑟/𝑛 ) /(𝑟/𝑛)]
−12(1.5)
PV= 40,000 40, 000 = 𝐶 1 − [ (1 + 0. 18/12 ) ]
−12(1.5)
r= 0.18 / 18% 40, 000 = 𝐶 [ 1 − 0. 76491159 / 0. 015]
t= 18 months or 1.5 years 40, 000 = 𝐶 [ 15. 67256067]
n= 12 40, 00/ [ 15. 67256067 = 𝐶 = 2, 552. 23]
Total interest = 18(2552.23) - 40000
= 45940.14 - 40000
= 5940.14

Amortization
➢ The action or process of reducing or paying off a debt with regular payments
➢ A period in which a debt is reduced or paid off by regular payments

Example:
1. Benny purchased a house-and-lot worth Php 1,410,000, he made a down payment of Php 150,000 and
the remaining is through bank loan. He was approved for a 20-year mortgage with a rate of 5%
compounded monthly. Determine the monthly payment of Benny?

Mortgage = Selling Price – Down payment

Mortgage = 1,410,000 – 150,000
Mortgage = 1,260,000Mortgage = 1,260,000

−𝑛𝑡
PV=𝐶 [1 − (1 + 𝑟/𝑛 ) − /(𝑟/𝑛)]
−12(20)
1, 260, 000 = 𝐶[ 1 − (1 + 0. 05/12 ) / (0. 05/12)]
−12(20)
1, 260, 000 = 𝐶[ 1 − (1. 00416667) / (0. 00416667)]
1, 260, 000 = 𝐶 ( 88. 47454566)
1, 260, 000/ ( 88. 47454566) = 𝐶 = 14, 241. 38)

2. Neil’s refrigerator has stopped working and he needs to get a new one. He purchased a new for Php 36,000. He
paid a 10% down payment and obtain a loan for the balance. The interest charged on the loan was 7.5% APR
compounded monthly. He repaid the loan and interest in equal monthly installment for over a period of two years.

a. Monthly payment
b. Interest on the loan

Mortgage = 36,000 – 36,000(10%)

Mortgage = 36,000 – 3600
Mortgage = 32400

−𝑛𝑡
PV=𝐶 [1 − (1 + 𝑟/𝑛 ) − /(𝑟/𝑛)]
−12(2)
32, 400 = 𝐶[ 1 − (1 + 0. 075/12 ) / (0. 075/12)]
−24)
32, 400 = 𝐶[ 1 − 1. 00625) / 0. 00625]
32, 400/ 22. 22242338 = 𝐶 = 1, 457. 99

Interest = total payment – present value

Interest = 24(1457.99) – 32400
Interest = 34991.76 – 32400
Interest = 2591.76

Prepared by:
Sierilyn Ilao , DVM 1B