8.

FINANCIAL MATHEMATICS

INTEREST AND
DEPRECIATION
The value of an investment increases over time as a result of interest, simple or compound,
being added to it. The value of assets such as office equipment, machinery and cars decrease
over time due to usage and age and the price of goods in shops may increase and decrease.
These all involve calculating percentage increases and decreases and in some cases lead to
formulas to calculate the final value.

CHAPTER OUTLINE
F1.1 8.01 Percentage increase and decrease
F1.1 8.02 Simple interest
F1.1 8.03 Simple interest graphs
F1.1 8.04 Compound interest
F1.1 8.05 Straight-line depreciation
IN THIS CHAPTER YOU WILL:
• calculate repeated percentage changes, for example, an increase of 15% followed by a
decrease of 8%, and examine the overall percentage change
• calculate simple interest using I = Prn, where P is the principal, r is the interest rate per period
and n is the number of periods
• use tables of values for fixed values of P, and hence draw and describe graphs of I against n for
different values of r
• calculate and graph compound interest using repeated application of simple interest
• calculate compound interest using A = P (1 + r)n, where A is the final amount, P is the initial
principal, n is the number of compounding periods and r is the interest rate per compounding
period
• calculate the straight-line depreciation of an asset

Shutterstock.com/pisaphotography
 TERMINOLOGY
compounded compound interest compounding period
depreciation final amount flat rate interest
future value inflation present value
principal quarterly salvage value
simple interest straight-line method of depreciation

WS
SkillCheck
Assignment
Homework 8

1 Express each percentage as a decimal.

a 2.5% b 84% c 106% d 18.75%

2 Copy and complete these conversions.

a 10% p.a. = _____ % per quarter
b 7.5% p.a. = _____ % per half year
c 5.4% p.a. = _____ % per month

3 Evaluate, correct to two decimal places:

a 2500 × (1.015)4 b 11 640 × (1.003)15 c 4460 × (1.0048)36

4 Find each amount.

a 3% of $25 780 b 2.5% of $85 400 c 11% of $13 400
d 4% of $8672 e 6.5% of $56 125 f 0.85% of $15 600

5 a Increase $28.50 by 3%.

b Decrease $2500 by 5%.
c Increase $88 by 10%.

6 If S = V − Dn, find:
a S if V = 75 000, D = 4300, n = 6
b V if S = 0, D = 5200, n = 8
c n if S = 12 000, V = 52 000, D = 4800.

324 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

8.01  Percentage increase and decrease
Percentage increase and decrease

EXAMPLE 1

a A TV priced at $1200 is discounted by 15%. What is the sale price?

b Saad’s annual salary of $92 000 increases by 2.5%. What is his new salary?

Solution

a Decreasing an amount by 15% is the same as finding 85% of that amount, because
100% − 15% = 85%
85% × $1200 = 0.85 × $1200
= $1020
The sale price of the TV is $1020.

b Increasing an amount by 2.5% is the same as finding 102.5% of it, because

100% + 2.5% = 102.5%
102.5% × $92 000 = 1.025 × $92 000
= $94 300
Saad’s new salary is $94 300.

Repeated percentage change

A retail store increases its prices by 10% at the start of summer but has a ‘10%’ clearance sale
at the end of summer. Do the increase and decrease cancel each other out, or will there be a
combined percentage change?
Suppose the original price was $100.
Increase $100 by 10%: 110% × $100 = 1.1 × $100 = $110
Decrease $110 by 10%: 90% × $110 = 0.9 × $110 = $99
The overall change is a decrease of $1, or 1%.

ISBN 9780170413565 8. Interest and depreciation 325

 EXAMPLE 2

Best Goodes are having a ‘20% off’ summer sale for one month. If paying by cash,
customers will receive a further 10% discount on the sale price. What percentage
discount is equivalent to the combined discounts if paying by cash?

Solution

Method 1: Using numbers

Let the original price be $100
Decrease $100 by 20%:
80% × $100 = 0.8 × $100
= $80
Decease $80 by 10%:
90% × $80 = 0.9 × $80
= $72
Combined discount = $100 − $72 = $28
Overall percentage discount = 28%

Method 2: Using percentages only

‘Decrease by 20%’ means 80%
‘Decrease by 10%’ means 90%
Overall change = 0.8 × 0.9
= 0.72
= 72%
Overall percentage discount = 100% − 72% = 28%

326 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 EXAMPLE 3

The price of petrol decreased by 8% at the beginning of the week but increased by 17%
towards the end of the week. What percentage change is equivalent to a decrease of 8%
followed by an increase of 17%?

Solution

Method 1: Using numbers

Decrease $100 by 8%:
92% × $100 = 0.92 × $100 = $92
Increase $92 by 17%
117% × $92 = 1.17 × $92 = $107.64
Combined change = $107.64 − $100 = $7.64 increase
Overall percentage change = 7.64%

Method 2: Using percentages only

‘Decrease by 8%’ means 92%.
‘Increase by 17%’ means 117%.
Overall change = 0.92 × 1.17
= 1.0764
= 107.64%
Overall percentage change = 107.64% − 100% = 7.64%

Exercise 8.01  Percentage increase and decrease

1 A school purchased 200 calculators at $23 and was given a 12% discount. Find the total Example

paid for the calculators. 1

2 If Australia’s population at the start of the year was 24 287 734, what will be the
population at the end of the year if the expected growth for the year is 1.4%. Answer to
the nearest whole number.

3 Adash’s salary of $82 450 p.a. increased according to the increase in the Consumer Price
Index (CPI) which was 2.3%. What is his new salary?

4 The value of Lisa’s computer depreciated (decreased) by 33% this year. If its value was
$2199, calculate its current value.

5 A cafe adds an 11% surcharge on Sundays. Calculate the total to be paid if the bill for
lunch for two on a Sunday was $78.40.

ISBN 9780170413565 8. Interest and depreciation 327

 6 The price of a washing machine is $864 plus 10 % GST. What is the final price of the
washing machine?

7 The price of a TV, including 10% GST, is $3799. Calculate the amount of the GST.

Example
8 Homegoods Discounts are offering a 15% discount on all items in their store and if
2 payment is by cash, a further discount of 10% will be given. How much will Simon pay
for a TV marked at $3299 if he makes a cash payment?

Example
9 The Toy Factory stores increased the price of all toys by 15% at the beginning of the
3 financial year in July. The following January they discounted all toys by 8%. For a drone
originally priced at $89, calculate:
a the price after the 15% b the sale price after discount
c the overall change in price and the percentage change on the original price.

10 Which of the following overall percentage increases is equivalent to a percentage

increase of 9% followed by another increase of 4%? Select A, B, C or D.
A 13% B 1.3% C 3.36% D 13.36%

11 Naveen’s investment of $20 000 increased by 5.2%, 4.5% and 4.8% over three years.
a What is the value of Naveen’s investment at the end of the three years?
b What was the overall percentage change in Naveen’s investment, correct to one
decimal place?

12 What percentage change is equivalent to:

a an increase of 20%, followed by a decrease of 20%?
b a decrease of 20%, followed by an increase of 20%?
c an increase of 8%, followed by another increase of 8%?
d an increase of 10%, followed by a decrease of 15%?
e a decrease of 4%, followed by a decrease of 6%?
f a decrease of 5% followed by an increase of 2%.

13 An iceberg with a volume of 254 m3 has a mass of 234 t. It lost 3% of its mass in the first
year, 4% of its mass in the second year and 5% of its mass in the third year.
a What was the mass of the iceberg after 3 years?
b What is the percentage decrease (correct to one decimal place) of the iceberg from
its original mass?

WS
8.02  Simple interest
Interest is money earned on an investment with a bank, credit union or other financial
Homework
Simple interest
institution. Simple interest (or flat rate interest) is interest calculated as a percentage of
the principal (the amount of money invested).

328 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 Simple interest formula
The simple interest formula is: I = Prn
where I = interest
P = principal or initial amount
r = interest rate per period, expressed as a decimal
n = number of periods

EXAMPLE 4

Julia invested her inheritance of $33 250 at 4.36% p.a. p.a. means per annum
for 20 months. (or ‘per year’).

Calculate the simple interest Julia earned.

Solution
0.0436
P = $33 250, r = per month, n = 20 months
12
r and n are expressed in the same units (months).
I = Prn
0.0436
= $33 250 × × 20
12
= $2416.1666…
Interest earned is always rounded down
≈ $2416.16
to the nearest cent.

EXAMPLE 5

1
Carmel invested $3600 in a savings account. After 4 years, her investment grew to
2
$4185.12. What simple interest rate, as a percentage to two decimal places, did Carmel
receive on her investment?

Solution

Interest, I = $4185.12 − $3600     Final amount − principal

= $585.12
P = $3600   n = 4.5 years

ISBN 9780170413565 8. Interest and depreciation 329

 I = Prn
$585.12 = $3600 × r × 4.5
$585.12 = $16 200r
$585.12
r=
$16 200
= 0.036 11…
= 3.611…%
≈ 3.61%
Simple interest rate is 3.61%.

Exercise 8.02  Simple interest

Example
1 Which of the following is the simple interest earned when $7400 is invested at 5% p.a.
4 for 4 years? Select A, B, C or D.
A $148 B $14.80 C $1480 D $14 800

2 Calculate the simple interest earned from each investment.

1
a $2136 invested at 6% p.a. for 2 years
2
b $16 200 invested at 7.65% p.a. for 3 years
c $12 874 invested at 0.61% per month for 6 months
d $4510 invested at 0.0301% per day for 31 days
1
e $20 016 invested at 7  % p.a. for 5 months
2
f $8250 invested at 10.5% p.a. for 240 days

3 Kalena earned $262.44 in simple interest from investing an amount for 3 years at
5.4% p.a. What was the amount Kalena invested?

Example 4 Alan earned $5409.25 simple interest from an investment of $9835 over 5 years.
5 What was the interest rate per annum?

5 For how long must a principal of $15 750 be invested at 9.8% p.a. simple interest for it
to grow to $18 837?

6 Zoran earned $675 interest from $7500 invested for 9 months. What was the interest
rate per annum?

7 What principal would earn $3729.60 in interest if invested for 3 years at 16.8% p.a.?

330 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 8 For how long must a principal of $10 460 be invested at 5.3% p.a. for it to earn
$1247.36 simple interest? Select A, B, C or D.
A 2 years B 2.2 years C 2.25 years D 2.3 years

9 OzExpress Credit Union has the term deposit Term Interest rate
accounts shown in the table, in which the principal
1−6 months 8.75% p.a.
must be invested for a fixed period. Calculate the
simple interest earned on: 7−11 months 9.25% p.a.

a $6300 for 3 years 1−3 years 10.5% p.a.

b $13 750 for 8 months 4−5 years 12% p.a.

Minimum investment: $1000
c $7800 for 5 years
d $14 240 for 2 months.

10 Kylie earned $80.58 interest from an investment of $2530 over 91 days. What was the
interest rate per day, correct to two significant figures?

11 For how long would $4720 need to be invested at 0.67% per month to earn $474.36
in simple interest?

12 An amount of $9020 was invested for 2 years with simple interest and grew to
$10 751.84. Calculate the monthly interest rate.

INVESTIGATION

INTEREST RATES
Choose a bank and collect information about the different types of accounts available,
and the interest rates and features of each.
Examples: savings account, investment account, fixed term deposit, cheque account,
Christmas club account and young saver account.
a Which type of account would you choose for saving your money?
b Compare and contrast the different types of account and suggest the type of person
each account would suit.

8.03  Simple interest graphs

Simple interest is represented by the linear function I = Prn. If the principal, P, and the
interest rate, r, are known, then the interest, I, is the dependent variable and the number of
periods, n is the independent variable.

ISBN 9780170413565 8. Interest and depreciation 331

 EXAMPLE 6

Rachel invests $20 000 in an account that earns 6% p.a. simple interest.
a Construct a graph that shows the simple interest, I, earned in dollars for n years,
for values of n from 0 to 8.
b What does the gradient of this graph represent?
c Use the graph to estimate:
1
     i the simple interest earned after 4 years
2
ii when $8000 in interest will be earned.

Solution

a I = Prn    where P = 20 000 and r = 0.06

∴ I = 20 000 × 0.06 × n
I = 1200n
This is a linear function with gradient 1200 and vertical intercept 0.
Construct a table of values to graph the line:

No. of years, n 0 2 8
Interest, I ($) 0 2400 9600

Simple interest earned from an

investment of $20 000 at 6% p.a.

10 000
(8, 9600)
9000

8000

7000
Interest, I ($)

6000

5000

4000

3000
(2, 2400)
2000

1000

0
1 2 3 4 5 6 7 8 9
Term, n (years)

332 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 b The gradient, 1200, represents the simple interest earned per year.
1
c      i $5400 interest      Reading from the graph at n = 4
2

ii 6.6 years           
 Reading from the graph at I = 8000

Exercise 8.03  Simple interest graphs

Questions 1 to 3 refer to the simple interest graph from Example 6.

1 According to the graph, what is the interest earned on an investment of $20 000 over Example
4 years at 6% p.a.? Select A, B, C or D. 6
A $3150 B $3300 C $4800 D $4900

2 Use the graph to estimate the simple interest earned when $20 000 is invested at
6% p.a. for:
1
a 9 years b 2 years c 7.6 years.
2

3 If $20 000 is invested at 6% p.a., how long will it take to earn simple interest of:
a $10 000? b $4200? c $8500?

4 Graph on the same axes the simple interest, I, earned for n years, for values of n from
0 to 10, when $4000 is invested in an account earning:
a 4% p.a. b 12% p.a.

5 a What is the gradient of the line you drew in Question 4b and what does it
represent?
b Use your graphs from Question 4 to estimate the simple interest earned from
an investment of $4000:
i  over 6 years at 4% p.a.       ii   over 8 years at 12% p.a.
c How do the two different interest rates appear on the graphs?

ISBN 9780170413565 8. Interest and depreciation 333

 6 This graph shows the simple interest earned Interest earned on a principal of $20 000
on a principal of $20 000 for up to 5 years at Principal P = $20 000
8000
three different interest rates per annum.
7000
According to this graph, how long will it take
r = 8%
a principal of $20 000 to earn $2400 if the 6000

Simple interest ($I)

interest rate is 8% p.a.? Select the correct
answer A, B, C or D. 5000
r = 6%
1
A     
1 B     2 years
years         4000
2
r = 4%
C     2 years 7 months       D     3 years 3000

7 Use the graph from Question 6 to estimate: 2000

a the interest earned at 6% p.a. after
1 1000
3 years
2
b the interest rate when $3000 interest is 0
1 1 2 3 4 5
earned after 2 years Period (n years)
2
c the number of months it takes to earn
$4500 interest at 6% p.a.
d the time it takes to earn $7400 in interest at 8% p.a.
e the interest earned after 21 months at 8% p.a.
f the interest rate if $1800 interest is earned after 27 months.

8 This graph shows the simple interest Simple interest earned

1
earned on a principal of $2000 at 5 % p.a.
2 1100
a Copy the graph shown and also draw 1000
the simple interest graph on: 900
     i   a principal of $2000 at 8% p.a. 800
Simple interest ($I )

ii   a principal of $2000 at 4.6% p.a. 700

b How much more interest is earned 600
over 8% p.a. than at 4.6% p.a. over 500
5 years? 400
c Use your graph to determine how 300
long it takes to earn $700 at:
200
i  8% p.a.      ii  5.5% p.a. 100
0
1 2 3 4 5 6 7 8 9
Period (n years)

9 The simple interest graph is a linear graph passing through the origin. Explain why the
vertical intercept of this graph is 0.

334 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

8.04  Compound interest WS

Most savings accounts pay compound interest, rather than simple interest. Compound Compound
Homework
interest is interest that is added to the principal and reinvested (compounded). The principal interest

plus interest becomes the new principal on which interest is calculated. In other words, we
WS
earn ‘interest on our interest’ as well as on the original principal.
Simple and
Homework
compound

EXAMPLE 7
interest

A principal of $3000 is invested at 6% p.a., compounded yearly. Let An be the amount of

the investment after n years. Compound
interest

a Find A3, the amount of the investment at the end of 3 years.

b Calculate the compound interest earned after 3 years.
c Find A5, the amount of the investment after 5 years.
d Find a formula for An , the amount of the investment after n years.

Solution

a At the end of the 1st year:

A1 = $3000 + 6% × $3000 Principal + interest
= $3000 × 1.06 Increasing $3000 by 6%
At the end of the 2nd year:
A2 = A1 + 6% × A1 Increasing A1 by another 6%
= A1 × 1.06
= ($3000 × 1.06) × 1.06
= $3000 × 1.062
At the end of the 3rd year:
A3 = A2 + 6% × A2 This is the same as increasing
A2 by another 6%
= A2 × 1.06
= ($3000 × 1.062) × 1.06
= $3000 × 1.063
= $3573.048
≈ $3573.04 Rounding down to the nearest cent

b Compound interest earned = final amount − initial principal

= $3573.04 − $3000
= $573.04

ISBN 9780170413565 8. Interest and depreciation 335

 c A5 = $3000 × 1.065 Increasing $3000 by 6% five times
= $4014.676 733
≈ $4014.67

d Increasing $3000 by 6% n times:

An = 3000(1.06)n

Compound interest formula

The compound interest formula is A = P(1 + r)n.
Compound
interest
where A = final amount
P = principal or initial amount
r = interest rate per compounding period, expressed as a decimal
n = number of compounding periods
The compound interest (I) earned can be found from the formula I = A − P.
In the world of finance, the compound interest formula A = P(1 + r)n is written as
FV = PV(1 + r)n where FV is called future value and PV is called present value.

EXAMPLE 8

If $12 500 is invested at 4.8% p.a. with the interest compounded monthly, calculate the
final value and total interest earned over 2 years.

Solution

Because interest is compounded monthly, r and n must be expressed in months:

0.048
P = $12 500    r = = 0.004 per month     n = 2 × 12 = 24 months
12
Final value = $12 500(1 + 0.004)24
= $12 500(1.004)24
= $13 756.8537…
≈ $13 756.85
Compound interest = $13 756.85 − $12 500
= $1256.85

336 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 EXAMPLE 9

What present value must be invested at 4.5% p.a. for 8 years so that it grows to $10 000?

Solution

A = $10 000    r = 0.045   n = 8

A = P(1 + r)n
$10 000 = P(1 + 0.045)8
= P(1.045)8
$10 000
P=
(1.045)8
= $7031.8512…  Round the present value up to give the required final amount
= $7031.86
A present value of $7031.86 is needed.

EXAMPLE 10

Use the table below to calculate:

a the final balance when $2000 is invested at 8% p.a. compounded annually for 6 years
b the final balance when $14 000 is invested for 7 months at 2% per month
c the compound interest when $9600 is invested at 10% p.a. for 3 years compounded
half-yearly.

Compounded values of $1
Interest rate per period
Periods 2% 5% 8%
1 1.0200 1.0500 1.0800
2 1.0404 1.1025 1.1664
3 1.0612 1.1576 1.2597
4 1.0824 1.2155 1.3605
5 1.1041 1.2763 1.4693
6 1.1262 1.3401 1.5869
7 1.1487 1.4071 1.7138

ISBN 9780170413565 8. Interest and depreciation 337

 Solution

a For a principal of $1, when r = 8% and n = 6, A = $1.5869 (from the table).

So, for a principal of $2000, A = 2000 × $1.5869 = $3173.80

b For a principal of $1, when r = 2% and n = 7, A = $1.1487.

So, for a principal of $14 000, A = 14 000 × $1.1487 = $16 081.80.
10%
c For a principal of $1, when r = = 5% per half year and n = 3 × 2 = 6 half years,
2
A = $1.3401.
So, for $9600, A = 9600 × $1.3401 = $12 864.96.
Compound interest = $12 864.96 − $9600 = $3264.96.

Exercise 8.04  Compound interest

Example
1 A principal of $8000 is invested at 5% p.a., compounded annually.
7 a Find the amount of the investment at the end of 3 years.
b Calculate the compound interest after 3 years.
c Find the amount of the investment after 5 years.
d Find a formula for the amount after n years.

2 Calculate the final amount of each of the following investments.

a $7400 invested at 5% p.a. compound interest for 4 years
b $2840 invested at 6.5% p.a. compound interest for 5 years
c $4500 invested at 4.9% p.a. compound interest for 2 years
d $17 000 invested at 0.5% per month compound interest for 10 months
e $9250 invested at 0.82% per month compound interest for 6 months
f $9000 invested at 8.4% p.a. for 8 months, compounded monthly

3 An supermarket manager’s salary increases with the annual inflation rate of 2.7% p.a.

Calculate her salary in three years if it is currently $76 040 (to the nearest dollar).

Example
4 Calculate the final amount of each of the following investments and, hence, the amount
8 of compound interest earned.
a $12 900 invested at 10.8% p.a. for 1 year, compounded monthly
b $13 800 invested at 7.5% p.a. for 2 years, compounded half-yearly
c $13 800 invested at 7.5% p.a. for 2 years, compounded quarterly
d $6920 invested at 9% p.a. for 240 days, compounded daily

1 year = 365 days One quarter = 3 months

338 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 5 Paul wants to invest some money so that it will grow to $24 000 in 5 years’ time, when Example

he will travel through Europe. If the interest rate is 5.5% p.a., what present value should 9
Paul invest, to the nearest cent?

6 A sum of $8500 is invested at 7% p.a. for 5 years.

a Calculate the total interest earned if the interest is:
     i   calculated at a flat rate (simple interest)
ii  compounded yearly.
b         i   Why does one type of interest result in a greater amount than the other?
ii   By how much is it greater?

7 A principal of $21 000 is invested at 5% p.a. Calculate the future value of the investment
after 2 years if the interest is compounded:
a yearly b half-yearly c quarterly
d monthly e daily.

8 Judging from your results for Question 7, what happens to the amount of interest
earned as the frequency of compounding increases? Why?

9 Zara has $4000 in an account earning 4% p.a. interest, compounded yearly. By guessing
and checking, determine how long it will take Zara to double her money. Give your
answer to the nearest year.

10 How long, to the nearest year, will an investment of $2400 take to grow to $3265 at
8% p.a. interest, compounded yearly?

11 After 8 years, the value of Corrina’s investment grew to $6260.14. What was the initial
amount of Corrina’s investment if the interest rate was 8.75% p.a.?

12 Determine the sum to be deposited if $10 000 is required in 6 years time and terms of
3.75% p.a. (compounded quarterly) are available.

13 A principal of $10 000 is to be invested for 3 years. Which of the following is the best
investment option? Select A, B, C or D.
A 6% p.a. simple interest B 5.9% p.a. compounded annually
C 5.85% p.a. compounded half-yearly D 5% p.a. compounded monthly

14 Jack won $1 000 000 in the lottery. If he invests all his winnings in a term deposit
earning 7.4% p.a. interest compounded annually, how many years will it take for him to
double his money?

ISBN 9780170413565 8. Interest and depreciation 339

 Example 15 Use the table to answer these questions. Compounded values of $1
10 a When $3000 is invested for Interest rate per period
4 years, compounded annually at
Periods 1% 2% 5% 8%
5%, which of the following is the
1 1.0100 1.0200 1.0500 1.0800
final value? Select A, B, C or D.
2 1.0201 1.0404 1.1025 1.1664
A    $12 160 B    $3646.50
3 1.0303 1.0612 1.1576 1.2597
C    $3012.16 D    $3828
4 1.0406 1.0824 1.2155 1.3605
b If the final value of an investment
5 1.0510 1.1041 1.2763 1.4693
is $1469.30 after 5 years at 8% p.a.,
which of the following is the initial 6 1.0615 1.1262 1.3401 1.5869
principal? Select A, B, C or D.
A    $1000 B    $1 C    $100 D    $10
c Calculate the final value for each of these investments.
        i $16 000 compounded annually at 2% p.a. for 3 years
   ii $3800 at 8% p.a. for 6 years compounded annually
iii $4200 at 12% p.a. compounded monthly for 5 months
d Calculate the compound interest when $32 000 is invested at 4% p.a. for 3 years
compounded half-yearly.

WS TECHNOLOGY
Simple vs
Homework Compound interest as repeated simple interest
compound
interest:
Spreadsheet 1 Open a new spreadsheet and enter the data as shown below for an investment of
$5000 at 8% p.a. compounded annually. Enter 1 in cell A6 to show Year 1 and enter
WS
=B1 in cell B6, which is the investment of $5000.
A B C D E
Compounding
Homework
periods: 1 Investment $5,000
Spreadsheet
2 Annual interest rate 8%
3 Compounding periods per year 1
4
5 Compounding period Principal Interest Value of investment Interest earned
6 1 $5,000
7
8

2 In cell C6, enter =B6*($B$2/$B$3) to calculate the interest for Year 1 (using
I = P × r × 1).
3 In D6, enter =C6+B6 to calculate principal + interest.
4 In E6, enter =C6 to show the total compound interest earned after Year 1.

340 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 5 In A7, enter =A6+1 to show Year 2.
6 In B7, enter =D6 to show the new principal for Year 2.
7 Fill down from A7 and B7 down to row 30, the fill down from C6 and D6 down to
row 30.
8 In E7, enter =E6+C7 to calculate the total compound interest earned after Year 2,
then fill down to row 30 to calculate the total compound interest earned after
each year.

A B C D E
1 Investment $5,000
2 Annual interest rate 8%
3 Compounding periods per year 1
4
5 Compounding period Principal Interest Value of investment Interest earned
6 1 $5,000.00 $400.00 $5,400.00 $400.00
7 2 $5,400.00 $432.00 $5,832.00 $832.00
8 3 $5,832.00 $466.56 $6,298.56 $1,298.56
9 4 $5,298.56 $503.88 $6,802.44 $1,802.44

26 21 $23,304.79 $1,864.38 $25,169.17 $20,169.17

27 22 $25,169.17 $2,013.53 $27,182.70 $22,182.70
28 23 $27,182.70 $2,174.62 $29,357.32 $24,357.32
29 24 $29,357.32 $2,348.59 $31,705.90 $26,705.90
30 25 $31,705.90 $2,536.47 $34,242.38 $29,242.38

9   Select column D and use Insert Chart to draw a line graph to show the value of
the investment growing.
10  C
 hange the values for the interest rate (B2) and number of compounding periods
per year (C2). What effect do the changes you made have on:
a the compound interest earned? b  the graph?

ISBN 9780170413565 8. Interest and depreciation 341

 INVESTIGATION

COMPOUND INTEREST GRAPH

Blake invests $20 000 in an account that earns 6% p.a. interest, compounded annually.
1 If you graphed the size of his investment growing over 10 years, what do you think
the graph would look like? Give reasons for your answer.
2 Copy and complete this table using the
No. of years, n Amount, A ($)
formula A = P(1 + r)n, rounding your values
0
to the nearest whole dollar.
1
3 Use the table to construct a graph that shows
2
the amount of the investment, A, growing over
10 years. 3

4 What is the vertical intercept of this graph 4

and what does it represent? 5

5 Comment on what the shape of the graph 6

shows. 7

6 Use the graph to estimate: 8

1 9
   i the value of the investment after 8 years
2 10
ii when the value of the investment reaches
$35 200.

WS
8.05  Straight-line depreciation
Straight-line
Homework
A new vehicle loses around 30%-40% of its value in the first year. Loss in value can occur
depreciation
formula
through age, wear and tear, or simply by becoming outdated when a new model is released.
practice

EXAMPLE 11

a A boat was purchased for $37 800 and decreased in value by 11% in its first year.
To the nearest dollar, what was its value after 1 year?
b A new Porsche was purchased for $239 850 and was valued at $175 600 twelve months
later. What is the percentage decrease in price, to the nearest unit, in the first year?

Solution

a Purchase price = $37 800

11% decrease in value = 89% of price 100% − 11% = 89%

342 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 Value after 1 year = 89% × $37 800
= $33 642

b Decrease in value = $239 850 − $175 600

= $64 250
64 250
Percentage decrease = × 100%
239 850
= 26.7875…
≈ 27%

Depreciation is the loss in value of an asset over time. According to the results of a survey by
an insurance company, a new car depreciates around 50% in the first 2 or 3 years of its life,
and depreciation accounts for about 37% of the costs of running a small car, and about 49%
of the costs of running a large four-wheel-drive.
There are two methods for depreciating an item:
• Straight-line method of depreciation, where the item’s value decreases by the same
amount each period
• Declining balance method of depreciation, where the item’s value decreases by the
same percentage each period.
The formula for the straight-line method of depreciation is a linear function (of the form
y = mx + c) and its graph is a straight line.

Straight-line depreciation formula

S = V0 − Dn
where     S = salvage (current) value of the asset after n periods
V0 = initial value of the asset
D = amount of depreciation per period
n = number of periods.

You will learn more about the declining balance method of depreciation in Year 12.

ISBN 9780170413565 8. Interest and depreciation 343

 EXAMPLE 12
Straight-line
depreciation A motorcycle is purchased for $16 000 and depreciates by $2400 each year.
a Use the straight-line depreciation formula to find the value of the motorcycle after 3 years.
b When, to the nearest month, will the motorcycle be worth half its purchase price?
c After how many months, to the nearest month, will the motorcycle have a $0 salvage
value?

Solution

a V0 = 16 000, D = 2400, n = 3, S = ?
S = V0 − Dn
= 16 000 − 2400 × 3
= 8800
The value after 3 years is $8800.

b V0 = 16 000, S = 8000, D = 2400, n = ?

S = V0 − Dn
8000 = 16 000 − 2400 × n
2400n = 16 000 − 8000
2400n = 8000
8000
n=
2400
1
= 3.3333… years     Or 3 years
3
= 3 years and 4 months
The motorcycle will be worth half its purchase price after 3 years and 4 months.

c S = V0 − Dn
0 = 16 000 − 2400 × n     
Salvage value is $0
2400n = 16 000
16 000
n=
2400
2
= 6.666… years       Or 6 years
3
= 6 years and 8 months
The motorcycle will have a $0 salvage value after 6 years and 8 months.

344 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 EXAMPLE 13

Office furniture was purchased for $85 000 and depreciated by $5600 per year. The
depreciation schedule shows the accumulated depreciation and value for the first 8 years
of its life.

Period (years) Accumulated depreciation ($) Value at end of year ($)

0 0 85 000
1 5600 79 400
2 11 200 73 800
3 16 800 68 200 V0 = 85 000
D = 5600
4 22 400 62 600
n=8
5 28 000 57 000
6 33 600 51 400
7 39 200 45 800
8 44 800 40 200

1 Use the table to find:

a  by how much the office furniture has depreciated after:
i    
3 years      ii    7 years.
b  the salvage value at the end of:
i    
3 years      ii    7 years.
c  the furniture’s value after 10 years by continuing the table for a further 2 years.
2 Construct a straight-line graph with year on the horizontal and value on the
vertical axis.
3 Use the graph to find:
1
a  the value, to the nearest $1000, after 4 years
2
b  after how many months the value is $38 000.

Solution

1 a  i    
$16 800       ii    $39 200
b  i    $68 200            ii    $45 800
c  Continue the table for two more years as shown:

9 50 400 34 600
10 56 000 29 000

Value after 10 years is $29 000.

ISBN 9780170413565 8. Interest and depreciation 345

 2 Value of office furniture over 10 years

90 000

80 000

70 000

60 000

Value ($)
50 000

40 000 b

30 000

20 000 a

10 000

0 1 2 3 4 5 6 7 8 9 10
Year

3 a $60 000        b  8.4 years = 101 months

Exercise 8.05  Straight-line depreciation

Example
1 A supermarket refrigerator was bought for $64 000 and decreased in value by 35% in the
11 first year. What was its value at the end of the first year? Select A, B, C or D.
A $41 600 B $21 000 C $54 400 D $19 200

2 A computer purchased for $5860 depreciated by 12% in the first year. Its value at the
end of the first year was:
A $703.20 B $6446 C $5156.80 D $5274

Example
3 A photocopier was purchased for $11 700. It was expected to last 6 years and be
12 worthless at the end of this time.
a What is the annual depreciation?
b What was the value after:
i    1 year ?        ii    3 years?

4 A pizza oven was purchased for $32 200 and depreciated to $5000 at the end of 5 years.
a What was the annual depreciation?
b What was the value after:
i    2 years?              
ii    3 years?

5 A technology classroom was purchased for $46 000. After 3 years it depreciated to half
its purchase price. What was the value after 6 years?

346 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 6 New machinery was purchased for $180 000. It had an expected life of 15 years with a
final scrap value of $5000.
a What is the yearly depreciation?
b What is the value after 5 years?

7 A baker’s van cost $78 000 and is estimated to be worth $35 000 after 5 years.
a What is the annual depreciation?
b Complete the table of values:

No. of years, n 0 1 2 3 4 5
Value, $V 78 000 35 000

c Draw a straight-line graph showing the depreciation over 5 years.

d On your graph, what is the vertical intercept and what does it represent?
1
e Use the graph to find the value of the van after 2 years.
2
f After how many years is the value $40 000?

8 This is the depreciation schedule for an electric scooter. Example

13
Year Accumulated depreciation ($) Value at end of period ($S)
0 0 5600
1 850 4750
2 1700 3900
3 2550 3050
4 3400 2200

Use the schedule to find:

a the purchase price
b the depreciation in the:
i    second year        ii    in the first two years
c the salvage value at the end of:
i    
2 years          ii    4 years
d the value after 6 years by continuing the schedule for a further 2 years.

9 For the scooter in Question 8 above:

a draw a straight-line graph to represent the depreciation over 6 years.
b what is the vertical intercept and what does it represent?
c when does the value fall below $1000?
d when is the value of the scooter $3500?
e what is the value after 18 months?

ISBN 9780170413565 8. Interest and depreciation 347

 10 The graph on the right shows the Office furniture depreciation
depreciation of some office furniture 20 000
over its useful life. 18 000
16 000
a What is its purchase price? 14 000

Value ($)
12 000
b What is the furniture worth after: 10 000
i    
3 years      ii    8 years. 8000
6000
c What is the yearly depreciation? 4000
2000
0
0 1 2 3 4 5 6 7 8
Year

TECHNOLOGY
Straight-line depreciation
1 Complete this depreciation schedule for the first 10 years of the life of the office
furniture in ­Example 13.

A B C D E F
Accumulated Value at end
1 Year
depreciation($) of year ($)
2 0 0 =$F$4
3 =A2+1 =$F$5 =C2-$F$5
4 =A3+1 =B3+$F$5 =C3-$F$5 V0 = 85000
5 D= 5600
6
7

2 Use the chart option to draw the line graph as shown in the Technology section on
page 341.
3 Change the purchase price in cell F4 to V0=230000 and the depreciation amount in
F5 to D=10050 and the spreadsheet will recalculate cell values. Draw the appropriate
line graph.
4 What does the vertical intercept on the graph represent?
5 Compare the table and the graph and give two reasons why:
a the graph is a better mathematical representation of depreciation
b the table is a better mathematical representation of depreciation.
6 Modify your spreadsheet to show that the difference between the simple interest
and compound interest earned on a principal of $5000, invested at 4.5% p.a. over
10 years, is $514.85.

348 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 SAMPLE HSC PROBLEM

Brittany invests $15 000 in an account that earns 6.5% p.a. interest.
a Calculate the simple interest that the account will earn over 3 years.
b Calculate the interest the account will earn if interest is compounded annually
over 3 years.
c Explain why more interest is earned when compounded annually over the 3 years.

Study tip
Useful exam tips
• Make yourself familiar with the format of the exam: the number of sections and
questions, the types of questions (for example, multiple-choice, and short answer), the
time allowed, and the number of marks allocated.
• Don’t worry if you are nervous. This is normal and will help you perform better.
However, being too casual or too anxious can harm your performance.
• Calculate the average amount of time you should spend on each question or section.
• Spend the reading time of the exam browsing through the paper to see what work lies
ahead of you.
• Easier questions are usually at the beginning, with harder ones at the end. Do an easy
question first to boost your confidence. It will also save time.
• Put a mark next to the harder questions and allow more time for working on them.
Leave them if you get stuck and come back to them later.
• Show all working. Even if you get the wrong answer, you may be awarded some
marks for correct working.
• Attempt every question. It is better to do most of every question and score some marks
than to ignore some questions completely and score nothing for them.
• Don’t leave multiple-choice questions unanswered. Even if you guess, there is a chance
of being correct. Some students like to leave multiple-choice questions till last so that,
if they run out of time, they can make quick guesses. However, some multiple-choice
questions can be quite difficult.

ISBN 9780170413565 8. Interest and depreciation 349

 8. CHAPTER SUMMARY

This chapter, Interest and depreciation, examined the mathematics of calculating interest
PS and depreciation. You have applied percentage increase and decrease in various contexts and
Interest and
also calculated simple interest and compound interest in a variety of situations involving
depreciation
crossword
investments. Digital technology and graphs have been used to compare simple interest and
compound interest graphs for different rates and periods. Depreciation of assets has been
calculated using the straight-line method.
Make a summary of this topic. Use the outline at the start of this chapter as a guide.
An incomplete mind map is shown below. Use your own words, symbols, diagrams, boxes
and reminders. Gain a ‘whole picture’ view of the topic and identify any weak areas.

% increase and
Simple interest
decrease

INTEREST AND
DEPRECIATION

Simple interest Compound

graphs interest

Straight-line
depreciation

350 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 8. TEST YOURSELF

1 Rami, a marketing manager, earns $72 000 per annum. If her salary is increased by 6.4%, Exercise

calculate her new salary. 8.01

2 A shop buys scooters for $145 and then sells them for $260. What is the percentage
profit?

3 A mobile phone has a price of $1159 after a 10% GST is added. What was the mobile
phone’s price before the GST?

4 If a buyer of a $55 000 car received a 10% discount for paying cash and then a further
3% discount in the sale, how much did he pay for the car?

5 Melanie owned $2400 of shares in XYZ Mining. After the stock market crash the shares
dropped 18% in value but, in the new year, they gained 5%.
a What was the share price after these two percentage changes?
b What was the overall percentage change?

6 Calculate the simple interest earned from each investment. Exercise

a $7200 invested at 6.25% p.a. for 3 years 8.02

b $4050 invested at 3% p.a. for 16 months

c $10 300 invested at 0.75% per month for 2 years.
1
d $12 600 invested at 3.4% p.a. for 3 years
2

7 An investment of $8900 earned $2002.50 in simple interest after 5 years. What was the
annual interest rate?

8 For how long must a principal of $4000 be invested at 6.6% p.a. for it to earn $2376 in
simple interest?

ISBN 9780170413565 8. Interest and depreciation 351

Exercise
9 The graph below shows the simple interest earned in dollars for n years on an
8.03 investment of $25 000 at 4.5% p.a.
Simple interest earned on an
investment of $25 000 at 4.5% p.a.

11 000
10 000
9000

Simple interest ($I)

8000
7000
6000
5000
4000
3000
2000
1000
0
1 2 3 4 5 6 7 8 9 10
Years (n)
Use the graph to estimate:
a the simple interest earned after:
1
i   4 years  ii   6 years  iii   10 years
2
b when $10 000 in interest will be earned.

10 a Construct a graph that shows the simple interest, I, earned in dollars on a principal
of $4800 invested at 3% p.a. for n years, for values of n from 0 to 6.
b What is the gradient of this graph and what does it represent?
c Use the graph to estimate when $500 in interest will be earned.

Exercise
11 For each investment, calculate the final amount and the compound interest earned.
8.04 a $7200 at 6.25% p.a. for 3 years
b $4050 at 3% p.a. for 16 months, compounded monthly
c $10 300 at 0.75% per month for 2 years, compounded monthly

12 What principal must be invested at 5.8% p.a., compounded annually, for it to grow to
$15 000 in 8 years? (Give your answer to the nearest cent.)

13 A loaf of bread currently costs $3.60. Calculate its cost in 4 years’ time if the inflation
rate is 2.8% p.a.

352 NCM 11.  Mathematics Standard (Pathway 2) ISBN 9780170413565

 14 Use the table to calculate the final amount and compound interest earned when $9000 is
invested at 10% p.a. for 2 years, compounded half-yearly.

Compounded values of $1
Interest rate per period
Periods 1% 5% 10%
1 1.010 1.050 1.100
2 1.020 1.103 1.210
3 1.030 1.158 1.331
4 1.041 1.216 1.461
5 1/051 1.276 1.611

15 Max bought a new tractor for $130 000. He wants to claim its depreciation as a tax Exercise

deduction. If his tractor depreciated at $13 000 p.a., use the straight-line method of 8.05
depreciation formula to find:
a the value of the tractor after 8 years
b the depreciation in the 9th year.

16 A new van cost $67 000, including registration and insurance. It depreciates by the same
amount each year and after 6 years is expected to be worth $16 000 as a trade-in on
another van.
a What is the yearly depreciation of the van?
b Draw up a depreciation schedule showing the value of the van for the first 6 years
and the accumulated depreciation.
c What will be the trade-in value of the van after 5 years?
d What is a linear function that can be used to model the depreciation of the van?
Qz

Chapter quiz

ISBN 9780170413565 8. Interest and depreciation 353