ETF2700/ETF5970 MATHEMATICS FOR BUSINESS

Semester 2 2016
Assignment 3 Solutions
14 + 22 + 7 + 13 + 10 + 15 = 81 marks
Question 1
Show your working. (SYW)
(a)
A and B are non-singular nn matrices, ie, A-1 and B-1 exist.

[4.5 + 9.5 = 14 marks]

Prove that (AB)-1 = B-1A-1.

KAW p87: The inverse of a square matrix A, if existing, is denoted by A-1 such that AA1 = I = A1A.
So, if the inverse of AB is B-1A-1, then (AB)B-1A-1 = I = B-1A-1(AB)
(AB)B-1A-1
= ABB-1A-1
= AA-1
=I
B-1A-1(AB)
= B-1A-1AB
= B-1B
=I

because BB-1 = I
because AA-1 = I

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because AA-1 = I
because BB-1 = I

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So, because (AB)B-1A-1 = I = B-1A-1(AB), the inverse of AB is B-1A-1.

(b)

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M is a 33 matrix. So is M-1.
Because M-1 is the inverse of M, MM-1 = I3
-1

MM =

5 2
1
8 10 8
2 4 4

] [ ] [ ]
a d g
b e h
c f i

1 0 0
0 1 0
0 0 1

-5a + 2b + c
=1
(1)
-8a + 10b 8c = 0
(2)
-2a + 4b 4c = 0
(3)
Note the ease of starting each elimination process with equations that have 0 on the RHS.
2(3) (2)
-4a + 8b - 8c (-8a + 10b 8c) = 0
4a 2b = 0
b = 2a
b = 2a
(2)
-8a + 20a - 8c = 0
12a 8c = 0
c = 1.5a
(1)
-5a + 4a + 1.5a = 1
0.5a = 1
a=2
a = 2 b = 2a = 4, c = 1.5a = 3

-1

MM =

5 2
1
8 10 8
2 4 4

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] [ ] [ ]
a d g
b e h
c f i

1 0 0
0 1 0
0 0 1

-5d + 2e + f
=0
(4)
-8d + 10e 8f = 1
(5)
-2d + 4e 4f = 0
(6)
4(4) + (6)
-20d + 8e + 4f + (-2d + 4e - 4f) = 0
-22d + 12e = 0
e = 11d/6
(4)
-5d + 22d/6 + f = 0
(5)
-8d + 10(11d/6) 8(4d/3) = 1
d = -3 e = 11d/6 = -5.5, f = 4d/3 = -4

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e = 11d/6
f = 4d/3
d = -3
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MM-1 =

5 2
1
8 10 8
2 4 4

] [ ] [ ]

-5g + 2h + i
-8g + 10h 8i
-2g + 4h 4i
8(7) + (8)
2(9) (8)
12(11) + (10)
(11)
(7)

a d g
b e h
c f i

1 0 0
0 1 0
0 0 1

=0
(7)
=0
(8)
=1
(9)
-40g + 16h + 8i - 8g + 10h 8i = 0
-48g + 26h = 0 (10)
-4g + 8h 8i (-8g + 10h 8i) = 2 - 0
-4g + 8h 8i + 8g - 10h + 8i = 2
4g - 2h = 2
(11)
48g - 24h - 48g + 26h = 24 + 0
2h = 24
h = 12
4g - 2h = 2 = 4g 212
4g 24 = 2
g = 6.5
-5g + 2h + i
=0
-56.5 + 212 + i = 0
-8.5 + i = 0
i = 8.5

g = 6.5, h = 12, i = 8.5

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We wish to determine the inverse of matrix M

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without using any electronic calculation device. Obtain, and solve algebraically by elimination, a
set of simultaneous equations for a, b and c; for d, e and f; for g, h and i.
Deduct 1 mark if the proof begins with (AB)-1 = B-1A-1. ie, stating that it is true BEFORE proving it.
(Marker may write assumed to indicate this.)
0 marks for using a particular numerical example or a particular n value, eg, n = 2 or 3.
BTW, AB is conformable as both are n n matrices. A-1 and B-1 are also n n matrices.
0 marks if an electronic calculation device was used to calculate the inverse.
Gaussian elimination is solving by elimination.
However, deduct 3 marks if its not clearly based on these 3 sets of simultaneous equations:
- for a, b and c; - for d, e and f; - for g, h and i.
Deduct a further 3 marks if Excel was used to do the Gaussian elimination.
DEDUCT 3 MARKS if solved instead for a, d & g; b, e & h; c, f & i.
DEDUCT 3 MARKS for using M-1 = adjoint(M)/det(M) instead of the requested equations.
(BTW, Adjoint was not on our syllabus.)
BTW, it is a good idea to check your M-1 by calculating MM-1 and M-1M.

Note the rounding errors in Excel.

Question 2 Show your working. (SYW) (You may use screenshots.)

[2 + 2 + 2 + 6 + 10 = 22 marks]
If you use software in this question, you must use only Excel. 0 marks for using software other than Excel.
IMPORTANT: you MUST display your Excel formulas AND you MUST also display the row and column
headings (see the Excel Appendix below) so that your formulas can be interpreted. Marks WILL be deducted if
you neglect to do this.

(a)

Faux Excel formulae (eg, DET(B12:F16) are not correct.

The coefficient matrix A has dimensions 65. (Not square, has no determinant.)
The largest possible square sub-matrix is 55. So, the maximum possible rank for A is 5.
The rank for A will be 5 if there is a 55 sub-matrix with determinant 0.

MDETERM formula

(b)

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For example B2:F6 is a 55 sub-matrix and the determinant of (B2:F6) is -518.

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So, A has rank 5.

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The augmented matrix (call it Augm) has dimensions 66. So, its maximum possible rank is 6.
This will be so if Augm has determinant 0.
=MDETERM(B2:G7)
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1.045031E-11 = 0.00000000001045031
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All elements of A and Augm are integers. So, the
determinant of any sub-matrix MUST have an integer
value because these integers are only being multiplied,
subtracted and added. There are no division calculations.
1.045031E-11 is the result of Excel rounding error.
Kaw p59:

So, the determinant of Augm = 0

Rank of Augm < 6.
However, we know that the 55 sub-matrix B2:F6 has determinant 0. So, rank(Augm) = 5.
(c)

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So far, we know that this system of equations

is consistent
because rank(A) = rank(augmented matrix) = 5.
has a unique solution
because rank(A) = number of unknowns, n, = 5.

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(d)

Yes. There is a unique solution. [See part (c).]

We have a system of 6 equations with 5 unknowns: AX = C. [65 51 61]
X is the column vector with elements x1, x2, x3, x4 and x5.
We know that the system is consistent and has a unique solution. [cf Lecture 9, Slide 30.]
However, A is not square. So, its not invertible: we cannot use X = A-1C.
There is one redundant equation.
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We already know that removal of the last row (B7:F7) of A leaves us with a 55 matrix (B2:F6) with a
non-zero determinant. So, remove the last row (B7:F7) to create matrix A1 (B2:F6). Correspondingly,
remove the last row of C to create C1 (I2:I6).
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We now must solve A1X = C1
by calculating X = A1-1C1.
[55 51 51]

Cells L2: L6 contain the formula =MMULT(MINVERSE(B2:F6),I2:I6)

x1 = -3, x2 = -2, x3 = -4, x4 = 3 and x5 = 2.

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Check
The question initially asked for a solution to the system of
equations AX = C. [65 51 61]
So, we must check that our solution vector X satisfies
AX = C. [65 51 61] (Lecture 9, Slides 4 & 8.)
(In particular, we must check that the calculated x values
satisfy the removed equation.)
Cells O2:O7 contain the formula =MMULT(B2:F7,L2:L6)
[65 51 61]

(e)

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Markers, remember that C is not a permissible Range Name in Excel. So, formulas using C are fictitious.
Is this system of equations ill-conditioned? Discuss. Provide suitable calculations
Maximum 1 mark for merely describing the procedure to check for ill-conditioning.
Make small (eg, +0.001)
changes to the elements
of C1.
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Results of calculating
X = A1-1C1
Formula: =MMULT(MINVERSE(B11:F15),I11:I15)

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Make small (eg, +0.001) changes

to the elements
of A1.
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Results of calculating
X = A1-1C1
=MMULT(MINVERSE(B20:F24),I20:I24)

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Make small (eg, +0.001)

changes to the elements
of C1 and A1.
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Results of calculating
X = A1-1C1

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=MMULT(MINVERSE(B20:F24),I20:I24)
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Changes to X are small.
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The system seems well-conditioned.
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An alternative approach to finding the unique solution in part (d) was to use Regression, with
the 65 coefficient matrix as the x values.
the 61 right-hand side vector as the y values.
the 5 unknowns (x1, x2, x3, x4 and x5) being treated as the regression coefficients which have to be
determined.

Question 3
[3 + 4 = 7 marks]
Show your working (SYW), including the formula(s) that you used. Do not use software.
A rocket travelled 0.5 km in its first minute of flight. Each minute thereafter, the distance
travelled was 40% more than the distance travelled in the previous minute.
(a)
Geometric sequence: a = 0.5, r = 1.4, n = 10. Tn = ?
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n1
Tn = ar
nth term of geometric sequence
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T10 = ar9 = 0.5 1.49

t10 ar 9 0.5 1.49

= 10.3305
the rocket travels 10.33 km in the 10th minute.
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(b)

a = 0.5, r = 1.4, Sn > 1,044 km. n = ?

Sn = a(rn - 1)/(r 1)
Sum of geometric sequence

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0.5(1.4n 1)

1044
0.4
1044

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1.4 1 > 0.41044/0.5

1.4n 1 > 835.2
1.4n > 836.2
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n ln(1.4) > ln(836.2)
n > ln(836.2)/ln(1.4)
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n > 19.998
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it takes 20 minutes for the rocket to travel a total distance more than 1,044 km.
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Question 4
Show your working (SYW), including the formula(s) that you used.
(a)
L = $24,500, A0 = $937.50
Monthly payments, t = 3 years, n = 312 = 36.
R=?
A0 = L(1 + Rt)/n
Payment for flat rate loan.
R = [nA0/L 1]/t
R = [36937.50/24,500 1]/3
= 0.1258503
Annual flat rate: 12.585%
[%, correct to 3 decimal places.]
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(b)

[3 + (3+6+1) = 13 marks]

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L = $50,000, R = 0.0995.
(i)
r = 2nR/(n + 1)
Monthly payments, t = 4 years, n = 412 = 48.
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n = 48, R = 0.0995. r = ?
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r = 2480.0995/(48 + 1)
= 0.1949387
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Approximate annual effective rate: 19.494%
[%, correct to 3 decimal places.]
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(ii)

A0 = $1,456.25 monthly.
m = 12, t = 4 years, n = 412 = 48.
EAR aka APR
= (1 + i/m)m - 1
To use this formula, we need to treat the monthly payment of $1,456.25 as if it
came from a
compound interest loan with interest of i per annum, compounded monthly.
This necessitates solving the equation A0 = L(i/m)/[1 (1 + i/m)-n] for i.
1,456.25 = 50,000(i/12)/[1 (1 + i/12)-48]
Because this is very difficult to solve algebraically, use Solver.

Enter the values of L,

m, t.
Guess a value for i.
Calculate i/m and n.
Calculate A0.
Set Objective cell F15
to a Value Of
1456.25.
By Changing cell F10.

i = 0.175204397777 (or monthly rate of interest i/12 = 0.014600366481)

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[Deduct 3 marks if Excel commands are not fully shown.]
EAR aka APR

= (1 + i/m)m - 1
= (1 + 0.175204397777/12)12 - 1
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= 1.189981413743 - 1
= 0.189981413743
Annual effective rate: 18.998 %
[%, correct to 3 decimal places.]
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[Lecture 11, Slide 41.]
(iii)

i/m = 0.175204397777/12
Nominal rate = i/m m = i = 0.175204397777
Nominal rate: 17.520%
[%, correct to 3 decimal places.]
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Question 5
Show your working (SYW), including the formula(s) that you used.
(a)

(b)

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[2 + (3+1+2) + 2 = 10 marks]

P1 = $100, P0 = $50, t = 1, i = ?
Pt = P0(1 + i)t
100 = 50(1 + i)1
1 + i = 100/50 = 2
i=21=1
Answer: 100%
Not 100%.
Since the calculation is exact, this rate should be reported as a whole number. Reporting it as
100.000% implies, incorrectly, that the calculation has been rounded to 3 decimal places.

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(i)

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P1 = $100, P0 = $50, m = 12, t = 1. i/m = ?

Pt = P0(1 + i/m)mt

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100 = 50(1 + i/m)121

(1 + i/m)12 = 100/50 = 2
1 + i/m = 21/12
i/m = 21/12 - 1
i/m= 0.0594630
Answer: 5.946% per month
(ii)

(iii)

Nominal rate = i/mm = i

12 0.0594630= 0.7135571
Answer: 71.356% nominal.
(Not 100%.)

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EAR aka APR = (1 + i/m)m - 1

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m = 12. From (b)(i), i/m= 0.0594630
Effective annual rate
= (1 + 0.0594630)12 1
=21=1
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Answer: 100%
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This is obvious from (a) where we saw that the money doubled in a year.
Since the calculation is exact, this rate should be reported as a whole number. Reporting it
as 100.000% implies, incorrectly, that the calculation has been rounded to 3 decimal places.

Part (c) is not about the Money magazine article in (a) and (b).
(c)
i/m is the interest rate per month. m = 12.

Nominal rate = i/1212 = i

Effective annual rate = (1 + i/12)12 1. This takes into account the compounding and shows the
percentage by which money will grow in a year..
Because of monthly compounding, Effective annual rate > Nominal rate.
For the more mathematically-inclined, we can show that (1 + i/12)12 1 > i, by using the Binomial
expansion.
(1 + i/12)12 1
= 112 + 12C1111(i/12)1 + 12C2110 (i/12)2 + + (i/12)12 1
= 1 + 12(i/12) + 66(i/12)2 + + (i/12)12 - 1
= 12(i/12) + 66(i/12)2 + + (i/12)12
= i + 0.4583i2 + + (i/12)12
= i + positive terms
(All terms are positive because i > 0.)
> i.
Q.E.D.
eg, i/m = 1% per month. m = 12.
Nominal rate
= 121% = 12% per annum.
Effective annual rate
= (1 + 0.01)12 1 = 0.12682 12.68%
(i)

Effective annual rate.

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The bank wants to attract customers. So, the higher rate (effective annual rate) is more likely to
do so.
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It does NOT mean that the bank is paying more interest to customers.

(ii)

Effective annual rate.

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The investor wants to know the annual % growth of the investment. The effective annual rate
provides this.
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It does NOT mean that the bank is paying more interest to customers.

Question 6

Show your working. (SYW)

[(1.5+3+3) + 1.5 + 1 + 2 + (0.5+0.5+2) = 15 marks]

All monetary values are $m.

(a)

The 3 investments have the same initial outlay (investment) of $100m.

(i)
Sum of returns (not sum of discounted returns).
A: $450m.
B: $250m.
C: $240m.
(ii)

NPV
A:

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=investment+NPV(rate, values) values: cash flows after the initial.

=B5+NPV($B$2,B6:B20)
$67.264m
=C5+NPV($B$2,C6:C20)
$4.087m
=D5+NPV($B$2,D6:D20)
$42.545m

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=IRR(values, guess)
values: all cash flows.
[Excel will calculate the values below if guess is left out of the formula.]
=IRR(B5:B20,$B$2)
29.370%
=IRR(C5:C20,$B$2)
16.958%
=IRR(D5:D20,$B$2)
31.805%

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(b)

Yes, because C has some very high returns early in the investment period,
whereas A and C have returns much more evenly spread through the term of the investment.

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(c)

We know that, if the IRR < the cost of capital, the project is ineffective and has a negative NPV.
The IRR for B (16.958%) is less than 21%.
So, for a cost of capital of 21%, the NPV for B would be negative.
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For cost of capital i,
NPV = initial outlay + return_1/(1 + i)1 + return_2/(1 + i)2 + return_3/(1 + i)3 +

B:
C:
(iii)

IRR
A:
B:
C:

and, if i increases, NPV decreases.

We know that, for investment B, NPV = 0 when i = IRR = 0.16958
So, for i > 0.16958, NPV < 0.
(d)

Note: all 3 investments have the same initial outlay and are of similar scale.
The sum of returns can help to guide decisions, but can be misleading because it does not take into
account
the time value of money.
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the investors preferences for when to receive the returns. (eg, it might be important
for cash flow to receive returns early.)
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For example, B is quite inferior (much lower NPV & IRR) to C, despite B having a higher sum of
returns.
An important contributor to high values of NPV and IRR is to get large returns early.
Sum of
NPV
IRR
Returns
A
$450m
$67.264 29.370
m
%
B
$250m
$4.087 16.958
m
%
C
$240m
$42.545 31.805
m
%

(e)

(i)

because it has the highest NPV.

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(ii)

because it has the highest IRR.

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(iii)

0 marks for merely quoting the NPV and IRR values given in (a)(ii) & (iii).
Note
All 3 investments have the same outlay, have positive NPV and have an IRR > cost of
capital.
The investments are of similar scale. So, an oft-quoted disadvantage of IRR (that it does not
differentiate between the scales of competing projects) is inapplicable.
B has lowest NPV & IRR, but these measures give contradictory indications for A and C.
In this situation, given that both have IRR > the cost of capital, NPV is usually the preferred
measure because itreflectsthegrowthofthecompanysfinances.
The NPV method assumes that funds may be reinvested at the cost of capital, while the IRR
method assumes funds are reinvested at the IRR value (which may not be possible).
Reinvesting at the cost of capital is more realistic. So, NPV is preferred
The decision may be affected by
o stability of the workforce/work environment
o state of the economy
o the need for returns in the early years of the investment.
o long term rate of return
o the risk of the individual investments.
Arguments for A
Consistent returns.
Highest NPV; only slightly smaller IRR than C.
Arguments for B
?
Arguments for C
The relatively large early returns are advantageous if the investment turns bad. The initial
outlay is returned relatively quickly.
Highest IRR and relatively high NPV.

Although A has higher NPV, calculation of NPV is very sensitive to any change in the
discount rate. On the other hand, IRR reports the rate of return expected to be yielded by
the investment and doesnt depend on any assumed rate for cost of capital.

Discussion marker judgement.

Its sufficient to discuss only 1 investment alternative.

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Square brackets [ ] placed around your work by the marker indicate sections that are not contributing to
your marks tally. This is (a)
a convenience to help the marker in allocating marks
and
(b)
an indication to you of what is most relevant to the question that was asked.
(Often, such bracketed responses are correct statements, but do not address the question that was asked.)