BUSINESS MATHEMATICS AND STATISTICS (SOB 1040)

Question One
a) (i) The internal rate of return (IRR) is a metric used in financial analysis to estimate the
profitability of potential investments. IRR is a discount rate that makes the net present
value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
(ii) The term payback period refers to the amount of time it takes to recover the cost of
an investment. Simply put, it is the length of time an investment reaches a breakeven
point.

b) Present value (PV) is the current value of a future sum of money or stream of cash flow
given a specified rate of return. Meanwhile, net present value (NPV) is the difference
between the present value of cash inflows and the present value of cash outflows over a
period of time.
Present value tells you what you'd need in today's kwacha to earn a specific amount in the
future. Net present value is used to determine how profitable a project or investment may
be. Both can be important to an individual's or company's decision-making concerning
investments or capital budgeting.
While PV and NPV both use a form of discounted cash flows to estimate the current
value of future income, these calculations differ in an important way. The NPV formula
also accounts for the initial capital outlay required to fund a project, making it a net
figure. That makes it a more comprehensive indicator of potential profitability.
Present Value = FV/ (1 + r) n
Net Present Value = cash flow / (1+i) t − initial investment

c) Economies of Scale Ignored, one pitfall in using the IRR method is that it ignores the
actual dollar value of benefits.
Impractical Implicit Assumption of Reinvestment Rate (it ignores reinvestment rate),
while analyzing a project with the IRR method, it implicitly assumes the reinvestment of
the positive future cash flows at IRR for the remaining time period of the project.
 Dependent or Contingent Projects (It ignores future costs), Finance managers often come
across a situation when the project under evaluation creates a compulsion to invest in
other projects. For example, if you invest in a big transporting vehicle, you will also need
to arrange a parking place it. Such projects are called dependent or contingent projects
and must be considered by the manager. IRR may permit the buying of the vehicle, but if
the total proposed benefits are wiped off by having to arrange the parking space, there’s
no point in investing.
Mutually Exclusive Projects (It ignores the size of the project), Sometimes investors
come across mutually exclusive projects, which means that if one is acceptable, the other
is not. The IRR method will give a percentage interpretation value, but that is
insufficient.
d) (i) IRR
t
Ct
0 = NPV = ∑ – C0
t =1 (1+ IRR)t

where:
Ct = Net cash inflow during the period t
C0 = Total initial investment costs
IRR = The internal rate of return
t = The number of time periods
0 = (−k100) + [k40 ÷ (1 + IRR)1] + [k75 ÷ (1 + IRR)2]
IRR = 8.882%

(ii) The project is viable, because the IRR is greater that the cost of capital.
Question Two
a) Dependent = Consumption
Independent = Income
b) Scatter Plot (Consumption and Income)

Source: Extracted from stata by Author using assignment data set.

From the scatter plot above it can be observed that there is a positive relationship between
consumption and income.
 c) Regression equation: Consumption = 445.9572 + 0.6908 Income
Let x = income and y = consumption

Ŷ = b0 +b1X, Y=Consumption and X=income

SPxy Σ (xi-x̄) (yi-ȳ)

b1 = =
SSx Σ(xi-x̄)2
48866489.35
b1 = = 0.6908
70743919.06
b0 =ȳ-b1x̄
x̄=3540.2449
ȳ=2891.3878
b0 = 2891.3878 -0.6908*3540.2449 = 445.9572
NB: refer to appendix for further computations.
d) b0 = 445.9572, means that the average consumption for every household without income
is 445.95.
b1 = 0.6908, means for a unit increase in income consumption increases by 0.6908.
e) Correlation coefficient:
R=SPxy/√ SSx∗SSy = 48866489.35/ √ 70743919.06∗52356591.63
=0.8029
correlation (R) equals 0.8029. It means that there is a very strong direct
relationship between Income and Consumption.
R- Square:

SSRegression Σ( ŷi - ȳ)2 33754615.42

R  =2
= = = 0.6447
SStotal Σ( yi - ȳ)2 52356591.63
R Square (R2) equals 0.6447. It means that 64.5% of the variability of Consumption is
explained by Income.
Question Three
a) (i) Proportion = Frequency of Sample Size/Sample Size = 81/300 = 0.27
s = √((Proportion x (1-Proportion))/Sample Size) = √ (0.27*0.73)/300 = 0.02562
α = (1-(Confidence Level/100))/2 =
z = 2.5758
Margin of Error (me) = s x z = 0.02562*2.5758 = 0.066
Upper Limit = Proportion + Margin of Error = 0.336
Lower Limit = Proportion - Margin of Error = 0.204
Confidence interval at 99% is (0.204 to 0.336)
(ii) me = 0.02
0.02 = √ (0.5*0.5)/n * 2.5758
n = 4146.716
the sample should be approximately 4147
b) H0 : p = 70%
H1 : p ≠ 70%
n = 150 x = 90
P’ = x/n = 90/150 = 0.6
ZC = (P’- Po) / √ (Po*(1-Po))/n = (0.6-0.7)/ √(0.3*0.7)/150 = 2.6726
α = 0.1
Zα = 1.28
Using the 10% significance level we reject Ho, and therefore conclude that there is a
change in the proportion of female applicants.
APPENDIX
Income(x
) Consumption(y) x-x̄ y-ȳ (x-x̄)^2 (x-x̄)(y-ȳ) (y-ȳ)^2
1096.755 1202871.7 944977.62 742375.58
4637 3753 1 861.6122 5 6 3
1148.755 1319638.2 315462.21 75411.860
4689 3166 1 274.6122 8 7 4
246765.63 - 164339.26
4037 2486 496.7551 -405.3878 1 201378.44 8
526720.46 - 93261.708
4266 2586 725.7551 -305.3878 8 221636.72 4
69540.503 1528654.7
3484 1655 -56.2449 -1236.3878 3163.4885 1 9
2213.755 4900711.6 3355194.3 2297080.3
5754 4407 1 1515.6122 5 4 4
53247.917 269893.99
3771 4061 230.7551 1169.6122 1 3 1367992.7
- 25678.427 36117.237 50799.660
3380 2666 160.2449 -225.3878 3 8 4
- 220190.77 95438.666 41366.597
3071 2688 469.2449 -203.3878 4 4 2
1827.755 3340688.7 1975094.5 1167722.7
5368 3972 1 1080.6122 1 4 3
1054.755 1112508.3 - 144694.87
4595 2511 1 -380.3878 3 401215.93 8
- 16461.768 7812.4031
3354 2803 186.2449 -88.3878 34687.162 4 9
-
1536.244 2360048.3 2854938.7 3453605.2
2004 1033 9 -1858.3878 9 1 2
-
1461.244 2135236.6 371722.80 64713.152
2079 2637 9 -254.3878 5 9 8
172852.30 - 64713.152
3956 2637 415.7551 -254.3878 5 105763.01 8
- 968738.01 458055.52 216585.80
2556 2426 984.2449 -465.3878 9 4 4
- 340174.61 37873.908
2957 3086 583.2449 194.6122 1 -113506.6 4
1089.755 1187566.1 853945.44
4630 3675 1 783.6122 8 2 614048.08
-
1171.244 1371814.6 590761.58 254407.05
2369 2387 9 -504.3878 1 5 3
4011 2988 470.7551 96.6122 221610.36 45480.707 9333.9171
 6 2 9
1341.755 1800306.7 - 87253.952
4882 2596 1 -295.3878 5 396338.03 4
-
2716.244 7377986.3 4249260.2 2447309.1
824 1327 9 -1564.3878 5 6 9
- 248247.97 288676.99 335690.22
3042 2312 498.2449 -579.3878 8 3 3
- 45047.896 100049.64 222206.45
3328 2420 212.2449 -471.3878 7 6 8
-
1484.244 2202982.9 2077034.1 1958286.2
2056 1492 9 -1399.3878 2 4 1
-
1504.244 2262752.7 33265.309
2036 2709 9 -182.3878 1 274355.85 6
- 146111.16 265426.17 482174.41
3158 2197 382.2449 -694.3878 2 7 7
1076.755 1159401.5 1672859.9 2413710.8
4617 4445 1 1553.6122 5 1 7
285963.01 - 353296.85
4075 2297 534.7551 -594.3878 9 317851.88 7
505172.81 559799.42 620332.97
4251 3679 710.7551 787.6122 5 2 8
-
1992.244 3969039.7 3744200.6
1548 1012 9 -1879.3878 3 7 3532098.5
182119.91 28427.115 4437.1851
3967 2958 426.7551 66.6122 7 4 9
- 215523.32 348827.93 564583.62
3076 2140 464.2449 -751.3878 5 2 6
-
1496.244 -
2044 3110 9 218.6122 2238748.8 327097.46 47791.294
- 805048.40 345787.19 148523.75
2643 2506 897.2449 -385.3878 7 7 6
103526.34 131473.07
3862 3300 321.7551 408.6122 6 5 166963.93
309976.24 594398.56 1139795.8
4097 3959 556.7551 1067.6122 4 4 1
-
1507.244 2271787.1 1361626.5 816109.51
2033 1988 9 -903.3878 8 9 7
- 643596.87 796138.01 984833.54
2738 1899 802.2449 -992.3878 6 3 6
- 383464.24 12005.768 375.88678
2921 2872 619.2449 -19.3878 4 4 9
 -
1564.244 1187868.4 576669.83
1976 2132 9 -759.3878 2446862.1 2 1
183830.93 - 21137.612
3969 2746 428.7551 -145.3878 8 62335.742 4
- 651644.32 608168.42 567593.17
2733 2138 807.2449 -753.3878 5 2 7
1689.755 2855272.3 2699573.4 2552364.7
5230 4489 1 1597.6122 1 4 4
1430.755 2047060.1 2789417.6 3800987.7
4971 4841 1 1949.6122 6 7 3
-
1419.244 2014256.0 2031489.7 2048871.0
2121 1460 9 -1431.3878 8 7 3
1461.755 2136727.9 3158285.9 4668245.0
5002 5052 1 2160.6122 8 7 8
2653.755 7042416.1 6904345.8
6194 5519 1 2627.6122 4 6973039.4 7
1569.755 2464131.0 2462337.0 2460544.2
5110 4460 1 1568.6122 8 8 3
Summation 70743919. 48866489. 52356591.
s 1 3 6