School of Information Technology &

Mathematical Sciences

Financial Maths Exercises

&
Computer Laboratory
Worksheets
for

MB521 and MB921

C. Turville, P. Martin
2
 MB521 Business Statistics

MB921 Quantitative Methods for Business

▬ Background notes for calculations involving logs

▬ Tutorial questions for weeks 1 – 3 in Financial Mathematics

▬ Computer Prac Worksheets for weeks 1 – 13.

3
POWERS AND LOGARITHMS

Rules of Indices

In any expression of the form 10n, the number 10 is referred to as the base and the number n is called the
index or exponent. The following rules are used for calculating with exponents:

1) 10 n10 m = 10 n + m

2) (10 n ) m = 10 nm

10 n
3) = 10 n −m
10 m

We should also note the following facts about powers of 10:

−m 1
4) 10 =
10 m

5) 10 0 = 1

6) 101 n = n 10

Consider the equation y = 10 x . If we know the value of x we can easily find the value of y. If x = 2, you
find that y = 10 2 = 100 . If x = 1.55, the value of y is 101.55 , which we can obtain from a calculator as
35.48.

How do we reverse the process and find the x-value corresponding to a particular y-value? If y = 100, we
obtain the equation 100 = 10 x and we can easily guess that the solution is x = 2. However, if the value of
y is 35.48, it is not such a simple matter to solve the equation 35.48 = 10 x .

We get around the problem by defining the solution of this equation to be the logarithm to the base 10 of
35.48. We can say that the logarithm to the base 10 of 35.48 is that power of 10 that gives the value 35.48.
From our earlier discussion, we know that the value is 1.55. We can write this in symbols as:

35.48 = 101.55 , 1.55 = log10 35.48

We can also write: 100 = 10 2 , 2 = log10 100

or in general terms: y = 10 x , x = log10 y

Rewriting an equation such as 35.48 = 101.55 in the form 1.55 = log10 35.48 does not actually help us to
obtain the value of x that solves the equation. However, your calculator has a key labelled [log] that will
find the logarithm to the base 10 of any positive number. The key labelled [10 x] can be used for finding
powers of 10. Make sure you can use your calculator to obtain the correct answers for the following:

4
101.55 = 35.48
log10 35.48 = 1.55

Raising a number to the power of 10 and taking the logarithm to the base 10 are inverse operations, like
squaring and taking the square root. If we carry out these two operations, one after the other, we will
obtain the number we started with.

Rules of Logarithms

Just as there are rules for calculating with powers, there are also rules for calculating with logarithms.

1) log10 (nm) = log10 n + log10 m

2) log10 n = a log10 n
a

n
3) log10   = log10 n − log10 m
m

There is also the very important rule that shows that the operations of taking logarithms and exponents are
inverses:

4) 10
log10 x
= x, log10 (10 x ) = x

We have illustrated the rules of exponents and logarithms using the number 10 as a base. In fact, any
other positive number can be used instead and the index laws and laws of logarithms will still be the same.
The most important base for exponents and logarithms is a mathematical constant named e. The number e
is approximately 2.71828.

We can write the logarithm of a number x to the base e as log e x . However, because of the special
importance of e, natural logarithms are usually written as ln x using a special symbol ln (for logarithm
natural). Using rule 4 above with natural logarithms, we obtain:

e ln x = x , ln(e x ) = x

We can solve an equation such as e x = 8.33 by rewriting it in logarithm form as x = ln 8.33 and
obtaining the solution x = 2.12. Alternatively, we can view the process as taking the natural logarithm of
both sides of the original equation and using the rule above to simplify the result. That is,

e x = 8.33
ln(e x ) = ln(8.33)
x = ln(8.33)
x = 2.12

Now try and solve 2 t = 9.15 for t using natural logarithms.

5
Exercises

1. Decide whether each of the following statements is true or false. Use your calculator to check your
answers.

a) log10 (7 − 5) = log10 7 − log10 5

7
b) log10   = log10 7 − log10 5
5
log10 7
c) = log10 7 − log10 5
log10 5

2. Use the index and logarithm rules and your calculator to solve these equations:

a) 10 m = 7
b) ln x = 9.26
c) e k = 0.00315
d) log10 r = 0.255
e) ln 2 + ln q = ln 7
f) log10 t − 2 log10 3 = log10 2
ln z
g) ln 3 + =1
2

3. If a principal of $P is invested for n years at a rate of r% interest per annum, the amount accumulated
if the interest is compounded yearly is given by the formula:
n
 r 
S = P 1 + 
 100 

How long will it take a principal of $25 000 to grow to $100 000 if the investment is compounded yearly
at a rate of 15% per annum?

Answers

1) false; true; false

2) m = 0.845; x = 10500; k = -5.76; r = 1.80; q = 3.5; t = 18; z = 0.821

3) n = 9.92 years

6
 FINANCIAL MATHEMATICS

Tutorial Questions for Weeks 1 - 3

7
Week 1 Tutorial Work

1. Use your calculator to evaluate the following:

(a) . ) 24
(101 (b) . ) .5
(103

(c) . ) −240
(1015 (d) . ) −10
5000 (1025

. ) −10
1 − (102 . ) 20 − 1
(103
(e) (f)
0.02 0.03

2. Express the following annual percentage rates as decimal rates per period.

Example 12% p.a. (quarterly) = 3% per quarter = 0.03

(a) 12% (monthly) (b) 15% (quarterly)

(c) 18% (daily) (d) 20% (monthly)

3. A man deposits $1000 at 10% simple interest. How much does he have after 4 years?

4. Calculate the accumulated amount using the compound interest formula

S = P (1 + i ) n

where i = interest rate per period (months, quarters, years etc)

n = number of periods (corresponding to period used for i)

(a) P = $1000, i = 10% , n = 3 years

(b) P = $1500, i = 8% payable quarterly for 18 months
(c) P = $2000, i = 12% payable quarterly for 9 months
(d) P = $300, i = 6% payable 6 times a year for 2 years
(e) P = $3000, i = 12% payable monthly for 1 year.

5. Calculate the principal (P) required to accumulate S.

1
(a) S = $1200, i = 5 % , n = 2 years
2
1
(b) S = $150 , i = 8 % , n = 3 years
4

8
6. Calculate the interest rate.

(a) P = $1000, S = 1500 , n = 2 years

(b) P = $100, S = 150 , n = 2 years

7. Calculate the number of periods

(a) P = $1000, S = $1331, i = 10%

(b) P = $150, S = $180 , i = 8% payable four times a year

8. $1200 is invested at 12% p.a. payable six monthly. What is the accumulated amount after 5 years?

9. I have $500 to invest and would like it to accumulate to at least $800 in 4 years time. If interest is
payable annually what is the minimum interest rate that would satisfy me? What if the interest were
payable quarterly?

10. Calculate the present value.

(a) $2000 due in 5 years at 10% p.a.

(b) $1000 due in 2 years at 8% p.a. payable quarterly.
(c) $900 due in 1 year at 12% p.a. payable monthly.
(d) $1000 due in 2 years plus $500 due in 4 years: i = 10% p.a.
(e) $500 due in 1 year plus $800 due in 3 years: i = 8% p.a.

11. Find the present value of each of the following purchasing schemes and hence state which is the
better: ( i = 10% p.a.)

(a) $1000 now.

(b) $66 in one year’s time plus $1210 in 2 years time.
(c) $100 now plus $1100 after one year.
(d) $1331 at the end of 2 years.

12. A man borrows $5000 today at 20% p.a. He promises to pay $1000 at the end of the first year,
$2000 at the end of the second year and a final payment (X) at the end of the third year. Draw a
diagram and use it to write down an equation for X. Solve the equation and hence find the final
payment. (Hint: use period 3 as the focal point).

Answers
1. (a) 1.270; (b) 1.0149; (c) 0.028; (d) 3905.9; (e) 8.98; (f) 26.87.
2. (a) 0.01; (b) 0.0375; (c) 0.00049315; (d) 0.0167.
3. $1400
4. (a) $1331; (b) $1689.24; (c) $2185.45; (d) $338.05; (e) $3380.48.
5. (a) $1078.14; (b) $118.25.
6. (a) 22.47% p.a. (b) 22.47% p.a.
7. (a) n = 3 years; (b) n = 9.21 quarters.
8. $2149.02.
9. (a) 12.5%; (b) 11.92% (nominal).
10. (a) $1241.84 (b) $853.49; (c) $798.70; (d) $1167.95; (e) $1098.03.
11. (a) $1000; (b) $1060; (c) $1100; (d) $1100.
12. $4800.

9
Week 2 Tutorial Work
1. Calculate the effective rate of interest.
(a) i = 10% payable 6 times a year
(b) i = 2.25% payable 3 times a year
(c) i = 10% payable yearly for 2 years plus 12% payable quarterly for 6 years.
(d) i = 1.5% payable monthly.

2. A building society offers 10% payable six monthly whilst a bank offers 8% payable monthly.
Calculate the effective rates of interest in each case and hence state which is the better investment.

3. A retail store charges 1.87% per month on credit purchases. Calculate:

(a) the nominal rate of interest.
(b) the effective rate.

4. Which of the following purchasing schemes would you prefer ( i = 10% p.a.)
(a) $520 at the beginning of each year for 5 years.
(b) $3000 after 5 years.

5. Regular payments of $100 are made into a fund at the end of each year. The fund accumulates at
the rate of 10% p.a. for 5 years. Find the following:
(a) the accumulated amount at the end of 5 years.
(b) the present value of the series of payments.

6. A property is purchased with $4000 cash deposit and $1000 per year for 5 years. What is the
present value of the property if money is worth 12% p.a.

7. Find the present value and the amount of an ordinary annuity of:
(a) $500 per year for 10 years at 5%.
(b) $100 per quarter for 6 years at 6% payable quarterly.

8. A man buys a house for $8000 cash plus $2000 at the end of each year for 12 years. What is the
value of the house if interest is 7% effective.

9. A silver mine will produce profits estimated at $50,000 per year for 8 years starting 2 years hence.
Find the present value of the mine if money is worth 6.75% effective.

10. A divorce settlement includes a provision for the husband to pay maintenance for the children (aged
10 and 12) at the rate of $100 per month per child until the child is 15. The wife would prefer a
cash settlement now. If interest is estimated at 12% p.a. how much should the cash settlement be?

Answers
1. (a) 10.43%; (b) 2.27%; (c) 11.91%; (d) 19.56%. 2. Building Society is better
investment (e = 10.25%≥8.3%)
3. (a) 22.44% p.a. (b) 24.90% p.a. 4. (a) $2168.33; (b) $1862.76. 5. S =
$610.51; P = $379.08.
6. $7604.78 7. (a) $3860.87, $6288.95; (b) $2003.04, $2863.35. 8. $23,885.37
9. $282,416.13
10. $7506.25

10
11
Week 3 Tutorial Work
1. How many payments are required to repay a loan of $100,000 if payments of $4000 are made each
quarter. Interest is charged at the rate of 12% p.a. payable quarterly.

2. A man buys a car whose cash price is $2500. He pays $500 now and will pay the balance including
the interest in two equal instalments at the end of 6 months and 12 months respectively. Interest
accrues at the rate of 2% per month. What should the installments be?

3. An item is listed for sale at $1000. The item may be purchased on terms as follows: $200 cash
deposit and 4 equal quarterly payments. What should the payments be if money is worth 20% per
annum, compounded quarterly.

4. A man has debts as follows: $1000 due in 1 year; $2000 due in 3 years and $3000 due in 5 years.
These debts are to be consolidated into one and repaid by 5 equal payments at the end of each year.
Money is worth 15% p.a. What should the repayments be?

5. A man buys a car worth $5000 by 5 equal annual payments the first being due now. Interest is 7%
effective. Find the payments necessary.

6. A student borrows $2000 to meet his expenses in his final year. He promises to repay the loan with
interest. (9% payable twice a year) in 10 equal semi-annual instalments. The first instalment is due
3 years after the date of the loan. What will the payments be?

7. A man purchases a car on January 1, 1979 by paying a deposit of $3000 and agreeing to pay $500
every 3 months for the next 5 years. Interest is included at the rate of 10% p.a. payable quarterly.
He makes no payments at all until April 1, 1980 at which time under pressure of repossession he
agrees to fulfil his obligations by regular quarterly payments for the rest of the 5 year period starting
immediately. What should the payments be?

8. A couple pays a total of $1,000 yearly into an investment fund for their children’s education. The
fund pays 8% pa compounded quarterly. How much will be in the fund after 18 years?

9. A debt of $10,000 is to be amortised by equal payments at the end of each year for 5 years. Interest
on the debt is 5% p.a. Make out a schedule showing the composition of each payment and the
amount outstanding at the end of each year.

Answers
1. 47; 2. $1192.99; 3. $225.61; 4. $1096.65; 5. $1139.68; 6. $314.98; 7.
$659.04; 8. $38,347.58

12
MB 921 Extra Financial Maths Questions – NPV & IRR

1 Consider an initial investment (outflow or outlay) of $10,000 followed by annual returns over a
five-year period of (inflows) of $5500, $3750, $2000, $1800 and $1500. Determine the NPV of this
investment assuming
a) a stable interest rate of 10% p.a. compounded annually;
b) an interest rate of 9.5% p.a. for the first two years and 10.5% p.a. for the last three years.

2. A project has estimated initial start-up costs to be $550,000 with expected revenues over the
following 4 years of $400,000, $500,000, $450,000 and $280,000 respectively.
Project costs for the same 4 years are estimated to be $450,000, $120,000, $65,000 & $50,000
respectively. If the interest rate is assumed constant at 15% p.a., evaluate the NPV of the project
and state whether the project is viable.

3. The cash flow for a proposed project may be summarised as follows:

Initial
Costs for 1st Yr Costs for 2nd Yr
investment
700000 150000 50000
st nd
Return for 1 Yr Return for 2 Yr Return for 3rd Yr Return for 4th Yr Return for 5th Yr
50000 125000 200000 250000 250000

a) The project investors would like to earn at least 12% on this project. Calculate the NPV and
comment on an appropriate course of action.

b) Determine the IRR for the project as outlined above.

4. Consider the following competing projects, assuming an interest rate of 10% p.a.

Initial Outlay Return in 1st Yr

Project A $10,000 $12,000
Project B $15,000 $17,700

a) Determine the NPV and the IRR for each project.

b) Briefly describe the apparently conflicting results.
c) Evaluate the additional value (if any) of investment B over investment A by
determining both NPV and IRR for Project B – Project A.
d) Determine the NPV for both projects assuming interest rates of 10%, 14%, 18%, & 20%
e) Graph the NPV vs Interest rate for both projects and interpret the point of intersection.

5. Land is bought for $45000 with buying expenses of $2180, and interest rate is 9% p.a. The land is
kept for 4 years with annual costs of $500, and sold for $105000 at the end of the 4th year (selling
expenses are $5000).

a) Determine the NPV and the IRR for this project.

b) Calculate the NPV for interest rates of 8%, 12%, 16%, & 18%
c) Use the graph of NPV vs Interest rate to estimate IRR.

13
Computer Labs
for

MB521 & MB921

C. Turville & P. Martin

14
Lab 1 - Getting Started With Excel

To start Excel, move the mouse pointer to the Start menu on the bottom left of your screen and
click to select it. On the Start menu that pops up, move the pointer to the Programs item. Now
select Microsoft Excel by clicking on it.

The program will start and a blank worksheet will appear. Notice that this worksheet is
automatically entitled Book1. This document actually contains a stack of worksheets – a
workbook. Along the bottom edge of the worksheet you can see the tabs for the other sheets in
the workbook. We will begin by working on Sheet1 of this workbook.
Column Letter

Address of
Active Cell

Row Number
Active Cell (highlighted)

Worksheet Number

Notice that the worksheet is composed of small rectangular areas called cells. These cells are
arranged in columns and rows. Any cell in the sheet can be identified by the letter of its column
and the number of its row, eg A1. The current cell, or active cell, is surrounded by a highlight.
Notice that cell A1 is highlighted.

We will begin working in Excel with a simple exercise for the monthly sales of Acme roller
skates. We need to enter the 12 months of the year and the number of units sold for each month.
You should enter the data in the cells as shown below. You may notice that September seems to
disappear behind the next cell. We will correct this shortly.

We would like to keep a total of the number of Acme roller skates sold for the year. Type Total in
cell A15. Click on cell B15 which will hold the total. Click on the AutoSum tool Σ in the toolbar

15
near the top of the screen. You will notice that Excel automatically suggests to sum cells B2 to
B14. To acknowledge that these cells are the ones we want to sum, click on the green tick button
in the formula bar. You should have obtained 5961 for the total units of Acme roller skates that
were sold over the year.
AutoSum Tool
Green Tick
Button

Formula Generated By
AutoSum

You should now save the information that you have generated. It is always a good idea to save
your work regularly. Select File > Save As. Notice that the program automatically assigns the
name Book1 to your file. In the File name text box, type the new name skates, and it will replace
the name Book1. Click on the Save button on the right-hand side. We will now exit from Excel,
so we can show you how to obtain the file you have just saved. Select File > Exit.
Restart Excel using the steps provided at the beginning of this lab sheet. Click on the File pull-
down menu. At the bottom of the File menu, Excel keeps track of the files you worked on
recently. Click on skates to reopen the file. If skates is not there, then you will have to click on
Open > skates. Sheet1 of the workbook will appear and you are ready to resume your work.

We will now improve the layout of the worksheet. You may have noticed that the month
September does not quite fit in the column. Click on the A at the top of column A. You should
notice that the entire column should be highlighted. Select Format > Column > Width.

Click on A
to highlight

When you click on width, a column width box should appear with the current width of the box
highlighted. Change the 8.43 to 10. Change column B to 10 using the same procedure we just
used for column A. We will do further formatting to this worksheet once we have finished
entering all of the information.

16
The selling price for each pair of Acme roller skates is $95.75. Go to cell G1 and type Sales
Price. In cell G2, record the selling price of 95.75.

We will record the monthly revenue in column C. Type Revenue in cell C1. In cell C2 we want
to enter a formula that will multiply the units sold for January by the sales price per unit. Click
on cell C2. Type the formula =B2*$G$2.

Click on the green tick button. You may be wondering why we used dollar signs in front of the G
and the 2 in the equation you just typed. This is known as absolute referencing. This simply
means that the program can’t readjust this cell if the equation is copied. We will discuss this in
more detail shortly.

Now we want to calculate the revenue for each of the other months. You could enter a formula
into each cell of column C, but there is an easier way to do this. With cell C2 highlighted, move
the pointer to the bottom right corner of the cell. The pointer will change to a solid plus sign (fill
handle). Drag the fill handle from cell C2 to cell C13. Release the mouse button.

Drag From Here. . . .

.

. . . . .To Here

Take a moment to inspect the formulae that AutoFill generated. Click on cell C4. The formula
for this is shown in the formula bar. It should contain =B4*$G$2. That is, Excel multiplied the
contents of B4 and G2 together to obtain the answer you see in cell C4. So when you copied the
formula from cell C2 down into the other rows, Excel adjusted the first part of the formula (B4,
B5, etc) but not the cell G2. This was desired and shows you when to use absolute referencing.

In cell c15 we want the total of all the monthly revenues. Use the AutoSum tool to do this. You
should have obtained the answer of 570765.8.

You may have noticed that the program has truncated some of your entries. For example
45768.50 appears as 45768.5. We would like to format column C as currency to work in dollars
and cents. Highlight the range C2:C15. Click on the Currency Style tool ($) in the toolbar.

17
It costs Acme $75 for each pair of rocket skates. Type Cost Price in cell G4 and 75 in cell G5.
Type Cost in cell D1. We want the cost for each month and the total costs for the year in column
D. Use a similar approach to column C, where we found the revenue for each month. It should
have totalled to 447075 if you did everything correctly. You should have noticed that AutoSum
did not work and you had to change the cell references in the formula. Format column D using
the Currency format.

In column E, we will record the profit (revenue – cost) for each month. Use an appropriate
formula in cell E2 to determine the profit for January. Copy this formula for the other months
and total them in cell E15.

Excel has functions (preprogrammed calculations) to assist you with certain operations. We have
already experienced the Sum function. In cells A18 to A24, copy the following headings.

The functions MAX, MIN, and AVERAGE can be used to determine the best, worst, and average
monthly profit. In cell B20, type =MAX(E2:E13). Click on the green tick and you should
obtain a series of hashes #####. This simply means that your column is not wide enough.
Previously, we adjusted the column width using Format > Column > Width. There is another
way to do this. Move your cursor to the top of column B. On the right hand side of the B, your
cursor should turn into a black cross with arrows pointing left and right. Now if you click on the
left mouse button (and keep it pressed) you should be able to adjust the column width by
dragging.

In cell B21, use the MIN function to determine the worst monthly profit. The range is simply the
best profit minus the worst profit. Write an appropriate formula into cell B22. Use the
AVERAGE function in cell B24 to calculate the average monthly profit.

Let’s spend some time formatting and tidying up the worksheet. Click on the 1 in row 1 to
highlight the entire row. We want to insert a row so that we can type in a title for the worksheet.
Select Insert > Rows. Type in a heading such as Monthly Profits for Acme Rocket Skates.
You’d expect the title of a report to be bigger and bolder and centred across the sheet.
Highlight A1:H1. Click on the Merge and Centre button on the toolbar.

18
With the title still highlighted, change the font size to 18. You do this by clicking on the button to
the right of the Font Size box to open it. Click on 18 to select the size. Click on the Bold tool
and the Italic tool as well.

To change the colour of the report title, follow these steps. Make sure that the title is still
highlighted. Click on the button to the right of the Font Colour button. A palette of colours
should appear. Click on the desired colour.

We will now use an AutoFormat to enhance the presentation of our worksheet. Highlight cells
A2:E16. Select Format > AutoFormat. A box with various formats should appear. Scroll down
and select List1.

There are many more ways to enhance your worksheet. We’ll let you discover them yourself!!

You need to be able to print out your computer labs each week and hand them into your tutor.
Before you print this document, you need to direct the computer to print to the correct lab.
Minimise Excel by clicking on the Minimise button on the top right.

You should now see some icons for different programs on your screen. Double click on the Pay
per Client icon. You should see how much credit you have (go to the info desk at the library if
you have no credit). Click on the lab that you want to print to. In fact, it is easier to do this step
when you first log on to the computer. Click on the Excel tab on the bottom of the page to get
back into Excel.

Excel has a way for you to inspect the appearance of the printed document before you produce
the actual output. Click on the Print Preview tool in the toolbar. A full-screen preview of the
sheet will appear.

If you’re not happy with the way your worksheet looks, you can make final adjustments to the
appearance of the document. We won’t do any now, except to show you the options you have. If
you click on the Setup button, the Page Setup dialog box will appear. Explore this box to see
what changes you can make.

19
In the row of buttons at the top of the preview screen, click on Print > OK. You will also need to
print out the formulas you used to create the document. To do this, select Tools > Options >
View and then select the Formulas checkbox under Windows options. Now click the Print
preview button. You should notice that the document no longer fits on one page. See if you can
find the option to change it to Landscape and Fit to 1 page. Print this sheet as well. Hand the
two printouts to your tutor.

The rest of the lab will be spent preparing a simple line graph to indicate periods of high and low
units sold. The ChartWizard enables you to quickly create a chart by simply guiding you through
four steps. After you create a chart, you can change it, move it to a new location, or save it.

We will create a line chart of the units sold over the various months. Highlight the data in the
range A2:B14. Click the ChartWizard button on the toolbar and select chart type: Line. The
Chart sub-type should be the top left graph. Click next. Step 2 gives you an opportunity to
change the range of the data as well as labelling the line series. Make sure that the data range
specifies A2:B14 and click next. With step 3 you get to add and delete some details from your
graph. Change the chart title to Monthly Units Sold. Add in appropriate labels for both the X
and Y-axes. See if you can remove the horizontal lines that run across the graph at the moment.
The legend would be more appropriate if there were several lines on the same graph. Remove the
legend. Click next. Step 4 gives you a couple of options as to where you want to place the
graph. Keep the default of and click finish.

Now, drag the graph so its top left corner is in cell C18. You can now edit and format your chart.
When the chart is active (designated by a dark border around it) you should be able to increase
the size of your graph. Move your cursor over to the bottom right corner of your chart. Your
cursor should change to an arrow. Left click your mouse and drag until you get the chart to a size
that you like. There are numerous editing and formatting that you can perform on your chart. We
will deal with some of these in upcoming computing practicals. We will now print the chart you
have created. Make sure that your chart is active. Select File > Print. You should note that only
the graph will be printed when the chart is active. Hand this printout together with the other two
printouts to your tutor.

20
Lab 2 Compound and Simple Interest

Login to the university computer network and open Microsoft Excel.

1. Simple Interest

The formula shown below is used to calculate accumulated returns on an investment subject to
simple interest.

S = P(1 + ni)
where: S = accumulated amount (future value)
P = principal (present value)
n = number of time periods
i = interest rate per period (expressed as a decimal)

Type in the headings: Principal (P), Interest Rate (i), Time Periods (n), and Accumulated Amount
(S) into cells A1 – D1 respectively. Make sure you adjust the columns to fit in the titles. Later in
the lab, we will enter appropriate values into cells A2 – D2. Enter the formula for S into cell D2
as follows: =A2*(1+C2*B2).

Suppose $10,000 is invested at 12% per annum simple interest. We want to determine the value
of the investment after 5 years? Enter the appropriate values into cells A2 – D2 to answer this
question. By changing the value in cell C2, write down the value of the investment after 10, 15,
and 20 years in the last row of the table below:

Investment Period 5 years 10 years 15 years 20 years

Principal 10,000 10,000 10,000 10,000
Accumulated Amount

2. Compound Interest

Change to a new sheet by clicking on the bottom left tab entitled Sheet2. Type the headings:
Principal (P), Annual Interest Rate (i), Frequency (r), Years (n), Accumulated Amount (S) into
cells A1 – E1 respectively. The formula for compound interest is given by:
S = P(1 + i) n
You have to be careful when using this formula. The i refers to the interest per period and the n
refers to the number of times per year that interest is compounded. Using the knowledge gained
so far in lectures and tutorials manually calculate the accumulated amount of a $10,000
investment at 12% p.a. compounded quarterly for 5 years.
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
You should have obtained an answer of $18,061.11.

21
Lets do the same calculation using Excel. Type in the appropriate values in cells A2 – D2 for the
above question about compound interest. Write down the appropriate equation into cell E2 to
calculate the accumulated amount of a $10,000 investment at 12% p.a. compounded quarterly for
5 years. Make sure you include adjustments to convert the annual interest rate to the interest rate
per period as well as converting the number of years to the number of times interest will be paid.
What equation did you use?

………………………………………………………………………………………………

Again, suppose you wish to invest $10,000 at 12% per annum payable quarterly for 5, 10, 15, and
20 years. Complete the following table by changing the value in D2:

Investment Period 5 years 10 years 15 years 20 years

Principle 10,000 10,000 10,000 10,000
Accumulated Amount

3. Effective Rates of Interest

The effective rate of interest for a given nominal rate may be calculated using the following
formula:
e = (1 + i) n − 1
where e = effective interest rate
i = interest rate per period
n = number of times per year that interest is compounded

Start a new sheet. Type the headings: Annual Interest Rate (i), Frequency (r), and Effective
Interest Rate (e) into cells A1 – A3 respectively. Enter the above equation for the effective
interest rate into cell B3. Again, be careful about the i in the above equation. What equation did
you use?

………………………………………………………………………………………………

Investigate the effective interest rates in each of the following cases:

Nominal Interest Rate Effective Interest Rate

5.75% pa payable monthly
10% pa payable quarterly
15.85% pa payable daily

4. Comparing Simple and Compound Interest over Time

Spreadsheets such as Excel offer excellent opportunities for graphical comparisons between
investment growth over time under both simple and compound interest schemes.

22
Change to a new sheet (insert > worksheet), locate cell A1 and give the sheet the title above in a
14 pt bold typeface. We will use cells A4, B4, and C4 for P, i (per annum) and r respectively as in
part 2 above. Place the appropriate titles to these cells using A3 – C3.

Suppose we are interested in loans over a 25-year period as well as the value of our investment at
the end of each year (from year 1 to year 25). Place the numbers 1 to 25 (representing years) in
cells A7 – A31. One way to do this is as follows. Type 1 in cell A7. Type =A7+1 in cell A8.
Highlight cells A8 – A31 and select Edit > Fill > Down.

In cells B7 to B31, we will give the yearly value of our investment under a compound interest
scheme. Type the heading Compound in cell B6. In cell B7, type the following:
=$A$4*(1+$B$4/$C$4)^($C$4*A7). Don’t worry if you get #DIV/0! We haven’t placed values
into some of the referenced cells. Explain why absolute and relative cell referencing have been
used in the above formula.

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

Copy the equation in cell B7 to cells B8 – B31. Now investigate the growth over time of $10,000
invested at 12% per annum compounded quarterly for 25 years by typing in the appropriate
values in cells A4 to C4. The final accumulated amount at the end of 25 years should be
$192,186.

Now consider the same investment using simple interest calculations over the same time period.
Type Simple into cell C6. What formula will you type into cell C7 to determine the accumulated
amount after the first year?
………………………………………………………………………………………………

Highlight cells C7 – C31 and use Edit > Fill > Down. Check your answers after 5, 10, 15, and
20 years using the table from the section on simple interest.

Obtain a graph of these two series of numbers using the Chart icon or Insert > Chart from the
menu. Highlight the two column series of cells B6 – C31 and obtain a line graph on the sheet
comparing the growth of the investment over time in each case. Spend some time exploring the
chart options to make your graph more presentable. Make sure you include a title and label your
axes for your graph.

Investigate the effect on this graph of changes to P, i, and r. Comment on the results. Note the
dynamic updating of your graph as the input data changes.

………………………………………………………………………………………………………

………………………………………………………………………………………………………

23
Lab 3 Financial Functions

Login to the university computer network and open Microsoft Excel.

This lab involves exploring some of the financial equations that can be used in Excel. Before you
start, make sure that you have the data analysis toolpak activated. To do this, select Tools > Add-
Ins. Make sure that the Analysis Toolpak is checked.

Click on the function button fx on the toolbar. For the function category, select Financial.
Within this financial menu are a variety of financial equations that you can use in this course.
Find EFFECT under the function name menu. When you click once on this, you will notice at
the bottom of the pop-up menu that Excel describes what this function does. In your own words,
write down what you think EFFECT determines from the financial work we have done in
lectures. Include the variables that you need to put into the equations. If you don’t understand
the variable names from the abbreviated versions, then click OK. By putting the cursor into the
variable boxes, a definition will appear below.

………………………………………………………………………………………………………
………………………………………………………………………………………………………
Write down what the following functions accomplish and the variables needed.
FV
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
IPMT
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
NOMINAL
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
NPER
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

PMT
………………………………………………………………………………………………………
………………………………………………………………………………………………………

24
………………………………………………………………………………………………………
PV
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
RATE
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
The following examples are taken from your lecture notes. See if you can use the above
functions to determine their answers. Make sure you use the pop-up menu hints to determine
what numbers you should put into the variables of each function. If you need more help for how
to use a function, use the help icon on the bottom left of the pop-up menus.

Find the present value for payments of $200 at the end of each month for 3 years into an account
that earns 4.5% compounded monthly. Write down your answer and the function you used to
obtain that answer. Note that you can type 0.045/12 in the Rate box to do your per period
calculations for you.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Find the amount accrued for payments of $200 at the end of each month for 3 years into an
account that earns 4.5% compounded monthly. Write down your answer and the function you
used to obtain that answer.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Bank A offers an interest rate of 15% p.a. compounded daily. Bank B offers a 15.5% interest rate
compounded bi-annually. Determine the effective interest rates of both and decide which bank
offers the higher effective interest rate. Show the functions used.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
A house valued at $120,000 is bought by $40,000 cash payment plus regular monthly payments
for 20 years to pay off the balance plus interest. Interest is quoted at 8.5% reducing monthly.
Find the repayments and show the function used.
………………………………………………………………………………………………………
25
………………………………………………………………………………………………………
A television may be purchased for $40 per month, payable at the beginning of each month for 2
years. If the interest to be charged is 9.6% compounded monthly, what is the equivalent value of
the TV now. Show the function used.
………………………………………………………………………………………………………
………………………………………………………………………………………………………

26
Lab 4 Amortisation Schedules

Login to the university computer network and open Microsoft Excel.

In this lab, we will set up an amortisation schedule for a loan using Excel. A $10 000 loan is to
be repaid by monthly payments over 24 months with interest at 12% p.a. compounded monthly.

In cell A1, type Loan. In cell B1, type the heading Interest. In cell C1, type Frequency. Place
the loan amount, nominal interest rate, and the number of periods per year into cells A2 – C2
respectively. In columns A4 to E4, type in the headings: Time end of period, Amount
Outstanding, Reduction in principal, Interest paid, and Repayment.

Enter the numbers 0 to 24 in cells A5:A29. Obviously, at time 0 the amount outstanding will be
$10 000. In cell B5, type =$A$2. We will start with the repayment column in the table.
Manually calculate the monthly repayments of the loan.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

Now use one of the financial functions that you explored in lab 3 to determine the repayment in
cell E6. Make sure you refer to the cells A2, B2, and C2 in your equation rather than just
entering the numerical values. You should have obtained the repayment amount of -$470.73.
Write down the equation you used.
………………………………………………………………………………………………………

We need to adjust the answer of -$470.73 to get it to be positive instead of negative. Write down
the adjusted equation you used to do this.
………………………………………………………………………………………………………

Copy the contents in cell E6 to cells E7 to E29 because the repayments will be the same for each
month.

27
Use another financial function in cell D6 to determine the interest paid per month. If you entered
the correct function and values you should obtain the answer of -$100. Write down the equation
you used.
………………………………………………………………………………………………………

Now copy this formula to cells D7 to D29. You should notice that the interest reduces each
month. Why does the interest reduce each month and not stay constant?
………………………………………………………………………………………………………

What equation can be used to find the reduction in principal in cell C6?
………………………………………………………………………………………………………

Copy this equation into cells C7 to C29.

The amount outstanding for a particular month is simply the previous months balance minus the
reduction in principal. See if you can determine the appropriate Excel commands to do this.
………………………………………………………………………………………………………

To check that you have entered everything correctly, the final balance of the amount outstanding
should be zero.

Determine the total interest and the total of the payments at the end of the loan.
………………………………………………………………………………………………………

28
Lab 5 Charts

Login to the university computer network and open Microsoft Excel.

Section 1 – Histograms in Excel

A firm is interested in the duration of STD telephone calls placed by its employees. This firm
instituted a program to encourage employees to reduce the cost of STD calls. Employees were
urged to reduce the number of calls of longer duration (longer than 14 minutes) wherever
possible. You are given the job of collecting and summarising some relevant data on the firm’s
calls. The times of a sample of 30 STD calls placed in a week are shown below.

Duration of STD calls (in minutes) of a Melbourne firm

11.8 3.6 16.6 13.5 4.8 8.3

8.9 9.1 7.7 2.3 12.1 6.1
10.2 8.0 11.4 6.8 9.6 19.5
15.3 12.3 8.5 15.9 18.7 11.7
6.2 11.2 10.4 7.2 5.5 14.5

In cell A1 type Time of calls and then enter the above times in cells A2:A31. We are usually not
interested in the individual observations but how these are distributed. We want to be able to
answer questions like: do 75% of STD calls last more than 14 minutes? Do most calls last about
10 minutes?

This information is easily obtained by initially forming a frequency distribution. An example of

the class limits for a frequency distribution is shown below.

Frequency distribution of telephone call durations

Class Limits Frequency

2 up to 5 3
5 up to 8 6
8 up to 11 8
11 up to 14 7
14 up to 17 4
17 up to 20 2

Total 30

Rather than manually counting the frequency of observations in the above table, we would like
Excel to do this for us (particularly for large data sets). Class intervals in Excel are specified as
an ordered list of class maximum values and not as ranges. In cell C1 type Boundaries. To
represent the class limits from the table above, type 4.99, 7.99, 10.99, 13.99, 16.99, and 19.99
into cells C2:C7.

The information in a frequency distribution is often grasped more easily if the distribution is
graphed. The most common graphical presentation is the histogram. To do this in Excel you

29
need to Add-In the Analysis Toolpak. Select Tools > Add-Ins > Analysis ToolPak. Press Enter,
then select Tools > Data Analysis > Histogram. Enter A1:A31 in the Input Range. Enter C1:C7
in the Bin Range. Select the Labels check box. Select the New Worksheet Ply option button
and enter histogram as the name of the new sheet. Select the Cumulative Percentage box.
Select the Chart Output check box. Click the OK button.

You should obtain a histogram (rough in appearance), a frequency distribution, and a cumulative
percentage. We will use the cumulative percentage in another exercise. Notice that the
histogram has several errors: there is an additional class (more) in both the frequency distribution
and the histogram. There are also gaps between the bars and the secondary y-axis exceeds 100%.
We will now correct these faults.

Click the histogram sheet tab. Select the range A8:C8. Select Edit > Delete. In the Delete
dialog box, select the Shift cells up option button and then click OK. Right click on one of the
histogram bars. Select Format Data Series from the shortcut menu. In the Format Data Series
dialog box, click the Options tab and change the value in the Gap width to 0. Click the OK
button.

Right click on the secondary (right) Y-axis. Select Format Axis from the shortcut menu. In the
Scale tab of the Format Axis dialog box, change the value in the Maximum box to 1. Click the
OK button. Right click on the legend box and delete it. Play around with the size of the chart
area of the histogram until you are happy with its presentation.

We want to add another column to the Frequency table generated by Excel. We want to add the
column Relative Frequency between Frequency and Cumulative%. Insert a column between
columns B and C of the histogram sheet. Label it Relative Frequency. Place an appropriate
formula into cell C2 to determine the relative frequency of the phone calls less than 5 minutes.
Hint: relative frequency = frequency/total. Now drag this equation down to cell C7. To check
you’ve done it properly, the relative frequency in cell C7 should be 0.0667.

Now answer the following questions from the work you have done.

The smallest number of calls is found in what time interval category? Think carefully about what
the numbers on the x-axis mean. This is a real weakness in Excel’s depiction of histograms.

………………………………………………………………………………………………………
Describe the shape of the histogram of call duration.

………………………………………………………………………………………………………
What proportion of calls last between 11 and 14 minutes?

………………………………………………………………………………………………………
What proportion of calls last less than 14 minutes?

………………………………………………………………………………………………………

30
What proportion of calls last more than 14 minutes?

………………………………………………………………………………………………………

We can easily generate a relative frequency histogram. Make sure you are in the histogram sheet.
Select Insert > Chart. In the Step 1 dialog box, just click on Next as the default graph is the one
we want. In the Step 2 dialog box, select the data range tab. Enter histogram!C2:C7. Select the
Series in Columns option. Select the Series tab. In the Category (X) axis labels edit box, type
=histogram!A2:A7. Click the Next button.

In the Step 3 dialog box, type in appropriate titles for the heading and both axes. Click on the
legend tab and remove the tick from show legend. Click the Next button. In the Step 4 dialog
box, select the as new sheet option button and enter Rel Freq Hist in the edit box to the right of
the option button. Click the Finish button. See if you can remember how to remove the gap in
between the boxes of the histogram.

Open the file Rods.xls and obtain histograms for each supplier using the boundary values as
given. Put all of the output onto a single XL worksheet page labelled Histograms, so you can
compare the results. What do you notice about the distributions?

Section 2 – Pie Charts in Excel

The student placement office at a university in NSW conducted a survey of last year’s graduates
from the Faculty of Economics and Commerce to determine the general areas in which graduates
found jobs. The data collected are shown below:

Area Number of Graduates

Accounting 75
Marketing 62
Economics 50
General Management 38
Other 25

Total 250

Is this data quantitative or qualitative?

………………………………………………………………………………………………………
What are the two types of charts that can be used to depict this type of data?

………………………………………………………………………………………………………

Enter the student placement data in two columns using sheet 2. By using Insert > Chart, see if
you can use Excel to draw a pie chart.

31
Lab 6 – Summary Statistics

Login to the university computer network and open Microsoft Excel.

Section 1 - Measures of Central Location

Example 3.7 of your textbook provides a sample of the ages of 10 people in a swimming pool.
This data is shown below:

7 10 17 8 14 11 6 17 8 42

Enter this data into column A, along with an appropriate heading in cell A1. Excel can provide
you with some descriptive statistics for these ages. Make sure you select Tools > Add-Ins >
Analysis ToolPak. Now select Tools > Data Analysis > Descriptive Statistics. Type A1:A11
in the input range and click Labels in First Row. To store the output on the same sheet, under
output options click the circle for Output Range and type C1. Select the box for summary
statistics and click OK.

Write down the median, mode, and mean for the ages of the 10 people in the swimming pool.

………………………………………………………………………………………………………
Which measure do you think is more appropriate to indicate the central location of this data set?
Why?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
The 42 year old was entered incorrectly. It should have been 12. Make this correction and rerun
the descriptive statistics. Write down the effect that the change has on the median and mean.

………………………………………………………………………………………………………
………………………………………………………………………………………………………

Section 2 - Measures of Spread

Referring to the descriptive statistics output from the preceding exercise, write down the range
and how it was calculated.

………………………………………………………………………………………………………
Write down one advantage and one disadvantage in using the range as a measure of spread.

………………………………………………………………………………………………………
………………………………………………………………………………………………………

32
Write down the variance and standard deviation of the ages data.

………………………………………………………………………………………………………
How do we use these measures to interpret some useful information about the ages data? Let’s
assume that the data have a mound-shaped distribution. Should we use Chebyshev’s theorem or
the empirical rule to interpret the standard deviation?

………………………………………………………………………………………………………
Approximately 68% of the data will fall between what two ages?

………………………………………………………………………………………………………
What proportion of people will have ages between 3.06 and 18.94 years?

………………………………………………………………………………………………………

Standard deviations and variances are very useful in comparing two samples. Example 3.10 of
your textbook examines unit trusts that are becoming an increasingly popular investment
alternative among small investors. Financial magazines regularly report the average annual rate
of return achieved by each of a number of unit trusts over the past 10 years. The annual
(percentage) rates of return over the past 10 years for two unit trusts are as follows:

Trust A: 8.3, -6.2, 20.9, -2.7, 33.6, 42.9, 24.4, 5.2, 3.1, 30.5
Trust B: 12.1, -2.8, 6.4, 12.2, 27.8, 25.3, 18.2, 10.7, -1.3, 11.4

Enter these two trusts in the first two columns of sheet 2 with appropriate headings. Get Excel to
provide the descriptive statistics for both of these trusts.

Which trust provided the highest mean rate of return?

………………………………………………………………………………………………………
Which trust has the higher level of risk? Why?

………………………………………………………………………………………………………

Now open Rods.xls and compare the basic statistics for each of the suppliers. Assuming the
target was 49.75 for each supplier, what recommendations can you make on the basis of this
data? You should refer to means, standard deviations, skewness (differences between mean and
median), and any other statistics you feel might be useful.

33
Lab 7 – Probability Distributions

Section 1 - Simulating the Tossing of Two Dice

The aim of this exercise is to obtain a probability model for the total obtained when two dice are
tossed.

Before we do this, we will examine random numbers generally. In cell A1, type =RAND().
Alternatively, you could use Excel’s function wizard and select Insert > Function > Math &
Trig > RAND. Write down the random number in cell A1

………………………………………………………………………………………………………
Generate another random number in cell A2. What happened to the random number in cell A1?

………………………………………………………………………………………………………

Although it is useful in a spreadsheet to automatically recalculate cells, it is often a problem with

random numbers. This can be overcome by using Excel’s cut and paste facilities. Copy cells
A1:A2. Select Edit > Copy. Leaving the same cells highlighted, select Edit > Paste Special >
Values. Click in cell A1 and then hit enter. The random numbers are now regarded simply as
numeric rather than having a formula attached.

We don’t want a random number in the interval 0 to 1. In order to simulate a roll of a die, for
example, we need to generate a random integer (whole number) from 1 to 6. Click on cell B1
and type =A1*6+1. The random number in cell B1 should be a number between 1 and 6.9999.
This random number should be an integer. Click on cell C1 and type =INT(B1). You should
now have a random number between 1 and 6 inclusive.

Now that we have demonstrated how to simulate the roll of a die, clear all of the numbers from
your worksheet. One way to model the total obtained when two dices are rolled would be to
actually roll the dice a large number (say 1000) times and count the number of times that the
individual totals appear. It is quicker and easier to do a computer simulation.

Click on cell A1 and type Rolling Two Dice.

Click on cell A3 and type =INT(RAND()*6+1). Click on cell B3 and type =INT(RAND()*6+1).
The numbers in the two cells represent a single roll of the two dice. Highlight cells A3 and B3
and drag down to cells A1002:B1002. To change the random numbers to their values, select Edit
> Copy, Edit > Paste Special > Values. The first column represents 1000 rolls of the first die
and the second column represents 1000 rolls for the second die. Use an appropriate function to
obtain the total for the two die in column C. Column C should now represent the totals for the
1000 rolls of both dice.

In cell E3, type Total and below it in cells E4 to E14 type in the numbers 2, 3, 4, … , 12. These
are the possible totals from the sum of two dice.

To count the number of times that the total 2 appears, the COUNTIF function is used. Click on
cell F4. Select Insert > Function > All > COUNTIF. For the range type $C$3:$C$1002 and for
34
the criteria type E4. Drag the contents of cell F4 down to cell F14. To express these results as
probabilities divide by 1000. Do this in column G with the heading Probability.

You know have a probability model for the total of two dice.

Which total had the highest probability of occurring?

………………………………………………………………………………………………………
Did others around you obtain a similar result?

………………………………………………………………………………………………………
What is the sum of the numbers in column G?

………………………………………………………………………………………………………
Is this a proper probability distribution?

………………………………………………………………………………………………………

Display an appropriate graph to show the totals and the corresponding probabilities.

Describe the shape of the probability distribution.

………………………………………………………………………………………………………

It is possible to determine the expected value and the variance for the total of two die (random
variable) from your probability distribution. In your lecture notes, we worked with a summary
table to calculate these values. In cells E17 – H17, type in the headings x, p(x), x p(x), x2 p(x).
Copy the contents of E4:E14 to cells E18:E28. Copy the contents of G4:G14 to cells F18:F28.
You will need to Paste Special > Values. Use appropriate formulae in cells G18 and H18. Copy
the formulae from these cells down to cells G28 and H28.

Remembering that E (X) = ∑ x.p( x ) and Var (X) = ∑ x p( x ) − [E (X)] , calculate the expected
2 2

value and variance for rolling two die. Hint: use the sum function.

What does the expected value represent in this experiment?

………………………………………………………………………………………………………
What is the variance and standard deviation of this experiment?

………………………………………………………………………………………………………

35
Section 2 - Binomial Distribution

Twenty percent of a certain brand of lottery tickets are known to be winning tickets. A customer
is interested in the number of winning tickets from 5 that are bought.

Define success and failure as shown in the lecture.

………………………………………………………………………………………………………
What is the probability of success (p) for one trial (ticket)?

………………………………………………………………………………………………………
What is the fixed number of trials (n)?

………………………………………………………………………………………………………

Start a new worksheet in Excel. In cell A1, type the heading Binomial Probabilities for Lottery
Tickets. In cells A3 – A4, type Number of trials and Probability of success respectively.
Using your answers from the questions above, type in the appropriate numbers in cells B3 and B4
according to the headings in cells A3 and A4.

Now we will create binomial probability tables to help calculate various probabilities for various
situations. In cell A6, type Binomial Probabilities Table. Put the headings X and P(x) in cells
A7:B7.

What are all of the values that X (the number of successes) can take if we are examining only 5
tickets?

………………………………………………………………………………………………………

Place all of these values in column A under the heading X. In column B under P(x), we will get
Excel to calculate the probability that a particular number of successes will occur. For example,
the probability of 0 successes (no winning tickets) from 5 tickets sampled will go into cell B8. In
cell B8, select Insert > Function > Statistical > BINOMDIST > OK. In the top box, we have
to place the cell reference for the number of successes i.e. A8. In the second box, type the cell
reference for the number of trials. You will have to use absolute referencing ($ signs) here. Fill
in the cell reference for the third box. For the fourth box, you enter True if you want to compute
the probability of X or fewer successes or False if you want the probability of exactly X
successes. In this column, we are entering the probability of obtaining exactly X successes.
Once you have entered something into all four boxes, click OK. If you’ve entered everything
correctly, you should obtain 0.32768 in cell B8. Copy B8 down to B9:B13.

Now answer the following probability questions based on your Excel output.

What is the probability that all tickets will win?

………………………………………………………………………………………………………

36
What is the probability that at most 3 of the tickets will win?

………………………………………………………………………………………………………
What is the probability that fewer than 2 tickets will win?

………………………………………………………………………………………………………
What is the probability that at least 1 ticket will win?

………………………………………………………………………………………………………
What is the probability that more than 2 tickets will lose?

………………………………………………………………………………………………………

37
Lab 8 Normal Distribution

Section 1 – Normal Probability Sheet

Login to the university computer network and open Microsoft Excel.

We will develop a normal probability sheet to answer various probability questions.

Type in the following headings into their appropriate cells as shown below. Make sure you enter
the headings in the same cells as shown as we will be adding more equations in the other cells.

We will use the above template to help answer questions that involve probabilities with the
normal distribution. For example, consider the monthly food expenditures for families located in
Brisbane. The food expenditures are normally distributed with an average of $450 and a standard
deviation of $80. We are initially interested in what percentage of families would spend less than
$350 on food.

Enter the appropriate mean and standard deviation in B3 and B4. Enter the appropriate value into
B6 that will answer the question posed. In cell A7, we want to write P(X<350). We don’t simply
type this into the cell, as the 350 will change depending on the number that is typed into cell B6.
To overcome this problem, we can type in an expression. In cell A7, type =”P(X<”&B6&”)”.

In cell B7, we will place a function to calculate the appropriate percentage. Select Insert >
Function > Statistical > NORMDIST > OK. Enter three appropriate cells into the boxes for X,
Mean, and Standard_dev. Enter True for the final box. This will determine the proportion of
families that spend less than $350. If you have entered everything correctly, you should have
obtained 0.10565.

What is the major difference between how the function NORMDIST and the Z-tables at the back
of your book calculate probabilities?
………………………………………………………………………………………………………
………………………………………………………………………………………………………

Now we will answer the question: What proportion of people will spend more than $600 a month
on food? Enter the appropriate number into cell B9. Again, we want to write P(X<contents of
cell B9) into cell A10. Enter an appropriate expression to do this. See if you can place an

38
appropriate equation into cell B10 to determine this probability. Hint: use the function
NORMDIST and the complement rule. You should obtain the number 0.030396 in this cell.

The last category will answer questions such as: what proportion of families spend between $300
and $400? Enter these numbers into cells B12 and D12. Enter the appropriate expressions into
cells A13 and B13. Use the formats in the previous steps of this worksheet. The equation in cell
B13 should involve the difference of two NORMDIST functions. Your final worksheet should
like the one shown below:

Once you have this worksheet it is easy to answer normal probability questions. Answer the
following exercise from your textbook using this worksheet.

The time required to assemble an electronic component is normally distributed, with a mean of
12 minutes and a standard deviation of 1.5 minutes. By simply changing the figures in your
worksheet that you have just finished, find the probability that a particular assembly takes:

a) more than 14 minutes ………………………………………………………

b) more than 8 minutes ………………………………………………………

c) less than 14 minutes ………………………………………………………

d) less than 10 minutes ………………………………………………………

e) between 10 and 15 minutes ………………………………………………………

39
Computer Lab 9 – Confidence Intervals

A new clothing company wants to estimate the monthly clothing expenditure of families within 5
km of its store. A random sample of 10 families reveals the following monthly family clothing
expenditures:

110 362 246 85 510 208 173 425 316 179

The clothing company wants to estimate the mean expenditure with a 95% confidence interval
rather than simply using a point estimate such as the mean. An interval estimate seems more
realistic.

Open Excel and in cell B1 type Expend, then enter the data above into cells B2:B11. In cells
A12:A14 type the headings n, Mean and Stdev. In cell B12 type =count(B2:B11). In cell B13
type =average(B2:B14). And finally, in cell B14 type =stdev(B2:B14). Describe what has been
calculated by these cell formulae.

………………………………………………………………………………………………………
………………………………………………………………………………………………………
The standard error of the mean (s.e.m.) represents the expected variation of sample means based
on samples of size n, and is equal to the sample standard deviation divided by the square root of
the sample size. In cell A15 type s.e.m., and in cell B15 type =B14/sqrt(B12). Write down the
value for the standard error of the mean for this data.

………………………………………………………………………………………………………

An appropriate t-statistic is required in order to determine the 95% confidence interval. Type t in
cell A16, and in cell B16 type =tinv(0.05,9). Write down the value of the resulting t-statistic.

………………………………………………………………………………………………………
The following formula is used to determine the confidence interval: x ± t ( s.e.m) . The information
in cells B13, B15 & B16 may be used to determine the lower and upper values for the confidence
interval required. Type Lower into cell A17 and Upper into cell A18. In B17 and B18 type the
appropriate cell formulae to determine the lower and upper confidence limits. Write down the
cell formulae used and the results obtained.

………………………………………………………………………………………………………
………………………………………………………………………………………………………
What assumptions need to be made in order to calculate such a confidence interval, and how do
you interpret the result?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
Excel provides a simpler method for calculating confidence intervals. Select Tools > Data
Analysis > Descriptive Statistics. Type B1:B11 in the input range, check that the data is
40
grouped by Columns and click Labels in First Row. Under Output Options type C1 in the
Output Range section. Select the box for Summary Statistics and select 95% Confidence Level
for Mean. Click OK. From the output determine values for the following:

Mean = ………………….
StDev = ………………….
s.e.m = ………………….
95%CI = ………………….
Check that the 95%CI value = t × s.e.m ………………………………………………………
Explain how the upper and lower CI limits can be determined from this output.

………………………………………………………………………………………………………
………………………………………………………………………………………………………
Now determine the 80%, 90%, and 99% confidence intervals for the monthly expenditure data.

80% CI = …………………………………………
90% CI = …………………………………………
99% CI = …………………………………………

What happens to the width of the confidence interval as the confidence level increases? What do
you think would happen if you wanted to be 100% confident?

………………………………………………………………………………………………………
………………………………………………………………………………………………………

Now we will compare two distributions with the same mean and standard deviation but with
different sample sizes. Open the file Expend.xls and select the worksheet labelled 2Groups.
Using Tools > Data Analysis > Descriptive Statistics, obtain output that includes the 95%
Confidence Level for Mean for both groups. Complete the comparison table below:

Statistic Group 1 Group 2

Sample size
Mean
StDev
s.e.m
95% C.I Value

What happens to the standard error and to the width of the confidence interval as the sample size
increases?

41
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

Finally we will compare two distributions with the same mean and sample sizes, but different
standard deviations. Open the file Expend.xls and select the worksheet labelled 2Samples.
Using Tools > Data Analysis > Descriptive Statistics, obtain output that includes the 95%
Confidence Level for Mean for both samples. Complete the comparison table below:

Statistic Sample 1 Sample 2

Sample size
Mean
StDev
s.e.m
95% C.I Value

What happens to the standard error and to the width of the confidence interval as the standard
deviation increases?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

42
Lab 10 – Hypothesis Testing

Section 1

Water is considered safe for swimming if the average bacterial contamination is less than or equal
to 15 parts per million. In checking a certain popular lake, the local health inspector tested 10
samples of water for bacteria and obtained the following data:

16.3 13.9 17.9 17.5 13.9 15.4 16.9 14.0 17.8 16.1

The health inspector will only close the lake if there is enough evidence to show that the mean
bacterial contamination is significantly greater than 15 parts per million. State the null and
alternative hypothesis.

H0: …………………………………………………………………………………………………
H1: …………………………………………………………………………………………………

Open a new XL spreadsheet and in cell B1 type Bacteria. Type the data into cells B2:B11.
Select Tools > Data Analysis > Descriptive Statistics. Type B1:B11 in the input range, check
that the data is grouped by Columns and click Labels in First Row. Under Output Options
type D1 in the Output Range section. Select the box for Summary Statistics then click OK.
Check the values for the sample mean and s.e.m (cells E3 and E4). We can use these values to
calculate a test statistic and then determine an appropriate p-value for this test statistic.

In cell G2 type t-statistic and in cell H2 type p-value. In G3 type the formula =(E3-15)/E4.
This formula calculates the difference between the sample mean and the hypothesised mean and
divides the result by the standard error. In H3 type the formula =TDIST(G3,9,1). This formula
calculates the probability of the test statistic being greater than the value in G3 (i.e. this is a 1-tail
probability, based on 9 degrees of freedom {n-1}). If this probability is < 0.05 then the sample
mean is significantly more than the hypothesised value. Write down the following:

Test Statistic: t = ………………………………

What does the test statistic mean? ……………………………………………………………….

………………………………………………………………………………………………………
What is the p-value? What do you conclude?

………………………………………………………………………………………………………
………………………………………………………………………………………………………

43
Section 2
The meat department of a local supermarket chain packages mince in a tray intended to hold 0.5
kg of meat. The weights of mince are known to be normally distributed. Twenty trays of mince
are weighed and the results are shown below:

0.54 0.50 0.48 0.59 0.70 0.64 0.42 0.53 0.57 0.64
0.62 0.45 0.50 0.57 0.46 0.59 0.58 0.50 0.51 0.49

Type the data into an Excel spreadsheet with an appropriate label. The supermarket wants to
investigate whether the average amount of mince was indeed 0.5 kg. Write down suitable null
and alternative hypotheses (Hint: it matters if the weights are either less OR more than 0.5kg).

H0: …………………………………………………………………………………………………
H1: …………………………………………………………………………………………………

Perform an appropriate t-test on this data similar to that done in section 1 above (be careful in
typing the formula in H3.

What is the test statistic? ………………………………

What is the p-value? ………………………………

What do you conclude? ………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

Section 3
Labels on paint cans often indicate the drying time and the area that can be covered in one coat.
One manufacturer claims that 5 litres of its paint will cover 40 square metres of surface area. To
test this claim, a random sample of ten 5-litre cans of white paint were used to paint ten identical
areas using the same kind of equipment. The actual areas (in square metres) covered by these 10
cans of paint are shown below:
31.0 31.1 41.2 36.8 44.7 37.6 30.3 41.0 36.5 35.0
Does the data provide sufficient evidence to support the manufacturer’s claim? Write down
suitable hypotheses, calculate the required statistics and make an appropriate conclusion.

………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

44
Lab 11 – Correlation and Regression

A company that has the distribution rights to home video sales of previously released movies
would like to be able to estimate the number of units that it can be expected to sell. Data are
available for 30 movies that indicate the box office gross (in millions of dollars) and the number
of units sold (in thousands) of home videos (Levine, Berenson, and Stephan, 1999). Open the Excel
worksheet videos from the student data area. Select Tools > Add-Ins > Analysis ToolPak.

Label each variable as quantitative or qualitative.

………………………………………………………………………………………………………
Draw a scatterplot of the two variables. Go through the steps associated with insert > chart.
The home videos sold should be on the y-axis and box office gross should be on the x-axis. What
sort of relationship does there appear to be between the two variables?

………………………………………………………………………………………………………
Find the correlation coefficient between the 2 variables (Tools > Data Analysis > Correlation).
Explain what the correlation between home videos sales and box office sales tells you.

………………………………………………………………………………………………………
Click on the chart you generated earlier. You should notice a chart menu appears on the tool-bar.
Select Chart > Add Trendline. Notice that Excel gives you a few options for the type of
trendline. We will only work with linear trendlines (regression equations) in this course. Select
OK. Examining the fitted regression plot, do you think that the linear regression line is a good fit
to the observed values? Explain.

………………………………………………………………………………………………………
………………………………………………………………………………………………………
We will now perform the regression analysis on the data. Select Tools > Data Analysis >
Regression. Input the appropriate x and y range (including labels – don’t forget to tick the box).
Type OK. Write down the regression equation.

………………………………………………………………………………………………………
Write down the value of the intercept B0. Interpret its meaning in this problem. Does it make
sense?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
Write down the value of the intercept B1. Interpret its meaning in this problem.

………………………………………………………………………………………………………
………………………………………………………………………………………………………

45
Write down the value for R2. What does it tell you?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
Test if there is a linear relationship between gross office sales and home video sales? Hint: look
for the p-value associated with the slope B1. Write down the hypotheses, p-value, and your
conclusion.

………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Predict the average video unit sales for a movie that had a box office gross of $20 million.

………………………………………………………………………………………………………
We will now evaluate the appropriateness of the linear regression analysis using residual analysis.
Perform the regression analysis again, but this time tick the residual plots and normal probability
boxes. Evaluate whether the assumptions of regression have been seriously violated.

………………………………………………………………………………………………………
………………………………………………………………………………………………………

46
Lab 12 – Time Series

Note: Save your work frequently during this exercise

Run Excel, and open the file airline.xls from the student data area. It contains data from
Mendenhall and Reinmuth (p 690) on passenger miles (in millions) flown by international air
carriers each month over a five year period.

We will first graph the data. Highlight the block of cells from B3 to C63. Click on the icon for
the Chart Wizard. Work through the steps of the chart wizard. You want to select an appropriate
line graph, and use the first column as the x-axis. Make sure you include an informative title, axis
labels, and legend.

Write a brief summary of the characteristics of the time series. Mention trend and seasonal
patterns if any.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
In column D, create a three-point moving average.
Hint: Click on cell D5 and type in the formula =(C4+C5+C6)/3. What value results?
………………………………………………………………………………………………………

Highlight column D by clicking on the D header at the top of the column. Format the column
(Format/Cells/Number/Number) to show 1 decimal place.

Highlight D5 and all the cells below it as far as D62. Select Edit/Fill/Down (or Ctrl-D). What
happens? Click on D8. What does it contain?
………………………………………………………………………………………………………
Now create a 5 point moving average in column E. In which cells should this series start and
end?
………………………………………………………………………………………………………

Use the chart wizard to draw a time series graph showing the original data and the two moving
average series. Make sure it has appropriate title, legend and axes labels. Also ensure you can
distinguish between the lines in black and white.
Which of the two moving averages gives the smoother series?
………………………………………………………………………………………………………
Go back to Excel. Now create an exponentially smoothed series in column F using the weighting
constant W = 0.1.
Hint: Let F4=C4. Then let F5=0.1*C5+0.9*F4. Copy this formula down to F63.

47
Explain in your own words what this has done.
………………………………………………………………………………………………………
………………………………………………………………………………………………………

Create another exponentially smoothed series in column G with W = 0.3.

Produce a plot showing the original data plus the two exponentially smoothed series.

What would be your prediction on the passenger miles (in millions) flown by international air
carriers for the next month?
………………………………………………………………………………………………………

48