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Continuous Income Flow in Finance

This document discusses using definite integrals to calculate values related to continuous income flows in business and economics. It introduces the concepts of total income, present value, and future value for continuous income streams, defining the integrals used to calculate each. Total income over a period is the integral of the income flow rate over that time. Present value is the integral of the income flow rate discounted to the present time. Future value is the present value compounded to a future time. Examples are provided to illustrate these calculations.

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Ashley Baron
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59 views1 page

Continuous Income Flow in Finance

This document discusses using definite integrals to calculate values related to continuous income flows in business and economics. It introduces the concepts of total income, present value, and future value for continuous income streams, defining the integrals used to calculate each. Total income over a period is the integral of the income flow rate over that time. Present value is the integral of the income flow rate discounted to the present time. Future value is the present value compounded to a future time. Examples are provided to illustrate these calculations.

Uploaded by

Ashley Baron
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Section 13.

4, Applications of Definite Integrals in Business and


Economics

In Math 1090, you learned about the present value and future value of investments (the term
annuity was used). Typically, money was being deposited (or withdrawn, for present value problems) on a regular schedule, and the interest involved was compounded on that same regular schedule.
For example, when setting aside $500 per month for a retirement plan with interest compounded
monthly, you would be interested in the future value (i.e. the value later, such as when you plan to
retire). An example involving present value would be to determine how much money you will need
to have when you retire, if you want to ensure that you can withdraw $4000 per month from an
account with fixed interest compounded monthly for 40 years after you retire.
Now, instead of looking at what happens when money is deposited in set intervals, we will look at
what happens when income is continuously coming in with a continuous income flow. Continuous
income flows are helpful for determining income in situations where the income varies over time.
The book uses the example of income from pumping oil from an oil field. Since the pump and oil
field both wear out over time, the function f (t) would be decreasing. For present and future value
problems, interest will be compounded continuously. For most of these examples, a calculator will
be necessary to get an answer that makes sense in the context of the question (i.e. an actual dollar
amount)

Total Income

If f (t) is the rate of continuous income flow, the total income for the first k years is
Z k
TI =
f (t) dt
0

Present Value

If f (t) is the rate of continuous income flow earning interest at a rate r, compounded continuously,
then the present value of the continuous income stream is:
Z k
PV =
f (t)ert dt
0

where t = 0 to t = k is the time interval.

Future Value

If f (t) is the rate of continuous income flow for k years earning interest at a rate of r, compounded
continuously, then the future value of the continuous income stream is
Z k
F V = erk
f (t)ert dt = erk P V
0

Examples
We did #3, 11, and 13 from the book.

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