Financial Mathematics
Financial mathematics applies compound interest and discounting to management decisions. The exam tests simple and compound interest, annuities, present value, net present value (NPV), and internal rate of return (IRR).
Core formulas
Simple interest: I = Prt. Compound amount: A = P(1+i)^n, where i is the rate per period and n the number of periods. Ordinary annuity: PV = R[1−(1+i)^−n]/i; FV = R[((1+i)^n−1)/i]. NPV = Σ C_t/(1+i)^t − initial outlay. Accept a project if NPV > 0. IRR is the discount rate that makes NPV = 0.
Worked example: invest RM1000 now; receive RM600 at the end of year 1 and RM600 at the end of year 2; cost of capital 10%. NPV = −1000 + 600/1.1 + 600/1.21 = −1000 + 545.45 + 495.87 = RM41.32. Since NPV is positive, accept.
Traps: using the nominal rate when compounding is more frequent than annual (convert to the periodic rate); treating an annuity due as an ordinary annuity; omitting the initial negative cash flow; and assuming IRR is unique when cash flows change sign more than once.