Business mathematics is a branch of mathematics that deals with the application of calculated techniques to business problems. It plays an important role in the decision-making process in various industries such as finance, marketing, production, and operations management.
Here are some specific ways that business mathematics can support decision-making:
- Forecasting: Business mathematics can be used to forecast future sales, revenue, and expenses. These forecasts can help managers make better decisions about resource allocation, pricing, and product development.
- Optimization: Business mathematics can be used to optimize production processes, supply chain management, and inventory control. By minimizing costs and maximizing efficiency, businesses can make better decisions about how to allocate resources.
- Risk analysis: Business mathematics can be used to analyze risks associated with different business decisions. For example, financial modeling can be used to evaluate the risk of a new investment, or statistical analysis can be used to assess the risk of a marketing campaign.
- Financial analysis: Business mathematics can be used to analyze financial data, such as balance sheets and income statements. By using tools like ratio analysis and trend analysis, managers can make better decisions about financial planning, investment, and risk management.
Overall, business mathematics provides a powerful set of tools for analyzing data, making predictions, and optimizing operations. By incorporating mathematical analysis into the decision-making process, Marc Hurr has helped businesses make more informed and effective decisions.
According to Marc – ‘Suppose a company is considering two investment opportunities – Project A and Project B.
Project A – Initial Investment $100,000 – expected cash flow – $30,000/year for 5 years
Project B – Initial Investment $150,000 – expected cash flow – $40,000/year for 5 years
To determine which project is more profitable, I will use a financial technique called the net present value (NPV) analysis.
NPV = Difference between current cash inflow and outflow values.
NPV calculating formula – NPV = ∑ (CFt / (1+r) t) – Initial Investment
Here CFt = cash flow in year t, r = discount rate (the rate of return required by the investors), and t = year.
To apply this formula to our example, we will first need to calculate the present value of the cash flows for each project. 10% is assumed to be a discount rate in this example.
For Project A: NPV = (-$100,000) + ($30,000 / (1+0.1) ^1) + ($30,000 / (1+0.1) ^2) + ($30,000 / (1+0.1) ^3) + ($30,000 / (1+0.1) ^4) + ($30,000 / (1+0.1)^5) NPV = -$6,944.10
For Project B: NPV = (-$150,000) + ($40,000 / (1+0.1) ^1) + ($40,000 / (1+0.1) ^2) + ($40,000 / (1+0.1) ^3) + ($40,000 / (1+0.1) ^4) + ($40,000 / (1+0.1) ^5) NPV = $9,063.79
The NPV of Project B is positive, which means that it is expected to generate a profit for the company. On the other hand, the NPV of Project A is negative, which means that it is expected to generate a loss.
Therefore, based on the NPV analysis, the company should choose Project B over Project A, as it is more profitable.’
In this way, business mathematics helps businesses make profitable business decisions.
