Sample Problems in Annuity

ORDINARY ANNUITY
1. A company invested €100,000 presently and expected a revenue of “x” at the end of years one
and two. What value of “x” is expected to have a net present worth of approximately 0, if the
company is given a discount rate of 20% compounded annually.
SOLUTION:

A[(1 + i)n − 1]
P=
( 1 + i) n i
x[(1 + .20)2 − 1]
100,000 =
(1 + .20)2 (.20)
x =€65454.55

2. A corporation will invest €500,000 in a fund at the end of each 6 months to accumulate
€10,000,000 to initiate a plant overhaul. If the fund is invested at 10% compounded semi-
annually, on how many years will the fund contain at least €30,000,000?
SOLUTION:
. 10
i=
2
A[(1 + i)n − 1]
F=
i
. 10 2n
500,000[(1 + 2 ) − 1]
30,000,000 =
. 10
2
n = 14.21 years

3. If interest is at the rate of 15% compounded semi-annually what sum must be invested at the
end of each 6 months to accumulate €50,000 at the end of 5 years?

A[(1 + i)n − 1]
F=
i
n = 5(2) = 10
. 15
i=
2
. 15 10
A[(1 + 2 ) − 1]
50,000 =
. 15
2
A = €3,534.30

4. A fisher man buys a diskette and is to pay for it by making 20 monthly payments of €100 each,
with interest on the unpaid balance at 8% nominal interest rate at what is the purchase price?
 i = 0.08
A[(1 + i)n − 1]
P=
( 1 + i) n i
. 08 20
100[(1 + 12 ) − 1]
P=
. 08 20 . 08
(1 + 12 ) ( 12 )
P = 1,866.59

5. A business made 8 annual end of year purchase of €2,000 of common stock. At the end of the
10th year she sold all the stock for €10,000. What interest rate did she obtained on her
investment?

A[(1 + i)n − 1]
F=
i
2,000[(1 + i)8 − 1]
10,000 =
i
i =14%

6. A BUILDING AND LOAN ASSOCIATION REQUIRES THAT LOANS BE REPAID BY UNIFORM

MONTHLY PAYMENTS WHICH INCLUDES MONTHLY INTEREST CALCULATED ON THE BASIS OF
NOMINAL 5.4% PER ANNUM. I F P5000 IS BORROWED TO BE REPAID IN 10 YEARS, WHAT MUST BE
THE MONTHLY PAYMENT ?
a) P54.02
b) P60.03
c) P55.07
d) P58.05
SOLUTION:

𝐴[(1 + 𝑖 )𝑛 − 1]
𝑃=
𝑖 (1 + 𝑖 )𝑛
5.4
𝑖= = 0.45% = 0.0045
12
𝑛 = 10(12) = 120 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
(1.0045)120 − 1
5,000 = 𝐴 [ ]
(1.0045)120 (0.0045)
𝐴 = 𝑃54.02 (𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑝𝑎𝑦𝑚𝑒𝑛𝑡)

7. A MAN BOUGHT A FORD FAIR LINE 1965, FOR P10,000 ON INSTALLMENT BASIS AT THE RATE
OF 5% PER ANNUM ON THE UNPAID BALANCE. I F HE PAID A DOWN PAYMENT OF P8,000 IN CASH
AND PROPOSES TO PAY THE BALANCE IN 20 MONTHLY PAYMENTS, WHAT SHOULD THESE
MONTHLY PAYMENT BE ?
SOLUTION:
 (1 + 𝑖 )𝑛 − 1
𝑃=𝐴 [ ]
(1 + 𝑖 )𝑛 𝑖
𝑃 = 10,000 − 8,000 = 2,000
(1.05)20 − 1
2000 = 𝐴 [ ]
(1.05)20 (. 05)
𝐴 = 𝑃160.49

8. A BACK PAY CERTIFICATE IS OFFERED FOR SALE ON WHICH THE YEARLY PAYMENTS ARE
P500.00, PARTLY PRINCIPAL AND PARTLY INTEREST. THERE ARE 8 ANNUAL PAYMENTS STILL
DUE, THE FIRST OF THESE DUE ON ONE YEAR FROM NOW . HOW MUCH SHOULD ONE PAY FOR THIS
NOTE IN ORDER TO GET 10% INTEREST, COMPOUNDED ANNUALLY ON THE INVESTMENT ?
SOLUTION:
(1 + 𝑖 )𝑛 − 1
𝑃 = 𝐴[ ]
(1 + 𝑖 )𝑛 𝑖
(1.1)8 − 1
𝑃 = 500 [ ]
(1.1)8 (0.1)
𝑃 = 𝑃2667.46

9. AFACTORY OPERATOR BOUGHT A DIESEL GENERATOR SET FOR P5,000 AND AGREED TO PAY
THE DEALER A UNIFORM SUM AT THE END OF EACH YEAR FOR 5 YEARS AT 5% INTEREST
COMPOUNDED ANNUALLY , SO THAT THE FINAL PAYMENT WILL CANCEL THE DEBT FOR PRINCIPAL
AND INTEREST. WHAT IS THE ANNUAL PAYMENT?
SOLUTION:
(1 + 𝑖 )𝑛 − 1
𝑃 = 𝐴[ ]
(1 + 𝑖 )𝑛 𝑖
(1.05)5 − 1
5,000 = 𝐴 [ ]
(1.05)5 (0.05)
𝐴 = 𝑃1154.87

10. A PIECE OF MACHINERY COSTS P10,000 AND HAS AN ESTIMATED LIFE OF EIGHT YEARS AND
SCRAP VALUE OF P5,000. WHAT UNIFORM ANNUAL AMOUNT MUST BE SET ASIDE AT THE END OF
EACH OF THE 8 YEARS FOR REPLACEMENT IF THE INTEREST RATE IS 14%.
SOLUTION:
𝐹1 = 10,000(1.14)8 = 𝑃28,525.86
𝐹 = 28,525.86 − 5000 = 23,525.86
(1 + 𝑖 )𝑛 − 1
𝐹 = 𝐴[ ]
𝑖
(1.14)8 − 1
23,525.86 = 𝐴 [ ]
0.14
𝐴 = 𝑃1,777.85
 DEFFERED ANNUITY

1. Aaron loans P100,000 from a bank with interest at 6% compounded annually. He agrees
to pay her obligations by paying 5 equal payments, the first being due at the end of 10
years. Find the annual payments
((1: ) ;1)
P1=
(1: ) ( )

((1.06) ;)1
P1=
(1.06) (.06)

P1= 7.36 A
P1= P2(1 + i)n
7.36 A = 100,000(1.06)10
A= P24332.17

2. In 10 years, P 80,000 will be needed to pay for a building renovation. To generate the
sum, sinking fund with three annual payments is established now. For tax purposes no
further payments will be made after three years. What payments are necessary if money
is worth 10% per annum?

((1: ) ;1)
F=

((1.1) ;1)
F=
.1
F2= 3.31A
80000=3.31A(1.1)7
A= P 12,402.61

3. A rotary kiln cost P2000 a year to maintain. What expenditures for all rotary kiln is
justified if no maintenance will be required for 3 years, P500 per year for the next 7 years
and P3000 a year thereafter? Assume money cost 5% compounded annually and no other
cost to be considered.

((1: ) ;1)
P1=
(1: ) ( )
 500((1:.05) ;1)
P1=
(1:. 5) (.05)

P1=1361.62
1500((1:.05) ;1)
P2=
(1:. 5) (.05)

P2= P11582.60
P=P2 + P1
P= 1361.62 + 11582.60
P= P 12944.22

4. A machine is expected to have no maintenance charges until the end of 6th years, when
1000 is expected to spend at the end of each successive year until it is scrapped at the end
of fourteen years. What sum of money set aside at the time of installation of the machine
at 10% will take care of all maintenance expenses for the generator?

((1: ) ;1)
F=

1000((1:.1) ;1)
F=
.1
F= 13579.48
13579.48
P=
1.1
P= P 3575.90

5. An annual deposit of P2000 is placed on the fundat the end of each year for 6 years. If the
fund invested has a rate of interest of 10% compounded annually, how much is the worth
of this fund at the end of 9 years?

((1: ) ;1)
F=

2000((1:.1) ;1)
F=
.1
F= 15431.22
P= F(1 + i)n
 P= 15431.22(1 + .1)3
P=P 20,538.95

6. A lot can be acquired at down payment of P100,000 and a yearly payment of P50,000 at
the end of each year for a period of 10 years, starting at the end of 5 years from the date
of purchase. If money is worth 15% compounded yearly what is the cash prize of the lot?

((1: ) ;1)
P1=
(1: ) ( )

50000((1:.15) ;1)
P1=
(1:.15) (.15)

P1= P250938.43
1 250938.43
P2= =
(1: ) (1:.15)

P2= P 143,474.86
P=P 100,000+P 143,474.86
P= P 243474.86

7. A money is compounded annually at the rate of 6%, find the present value of a sequence
1
of 12 semi-annual payments of P500 each, the first of which is due at the end of 4 years.
2

((1: ) ;1)
P1=
(1: ) ( )
.06
i= = .03
2
500((1:.06) ;1)
P1=
(1:.06) (.06)

P1= 4191.92
1 4191.92
P2= =
(1: ) (1:.06)

P2= 2630.06
8. Hero borrowed P500,000 with interest at the rate of 5% compounded semi-annually. He
agrees to discharge his obligation by paving a series of 8 equal semi-annual payments,
1
the first being due at the end of 5 2 years. Find the semi-annual payment.

((1: ) ;1)
P1=
(1: ) ( )

((1:05) ;1)
P1=
(1:.05) (.05)

P1= 6.46A
P1= P2(1 + i)n
6.46A = 500000(1 + .05)10
A= P 4,463,338.32

9. A company installed a machine it is expected that there is no maintenance expenses until

at the end of 11 years when P600 will be spent at the end of each successive year until it
become scrap at the age of 25 years. What sum of money set aside at his time at 4%
interest will take care of all maintenance expenses for the boiler?

((1: ) ;1)
F=

600((1:.04) ;1)
F=
.04
F= P2,498.75 ( sum of maintenance expenses at theend of 25 years)
2,498.75
P= (1: ) = = P937.32(amount set aside)
(1:.04)

10. Rizal technological University needs P 50,000,000 to pay building renovation for 6 years.
To generate this sum, a sinking fund consisting of four annual payments is established
now. What are the necessary payments if money is worth 15% per annum?

1 50,000,000
F= = = P37,807,183.36
(1: ) (1:.15)

((1: ) ;1)
F=
 ((1:.15) ;1)
P37,807,183.36=
.15
A=P 7,571,468.87
 ANNUITY DUE

PROBLEM 1
ENGR . SISON BORROWS P50,000.00 AT 15% EFFECTIVE ANNUAL INTEREST. HE MUST PAY BACK
THE LOAN OVER 30 YEARS WITH UNIFORM MONTHLY PAYMENTS DUE ON THE FIRST DAY OF
EACH MONTH. WHAT DOES E NGR . S ISON PAY EACH MONTH ?
SOLUTION:
(1 + 𝑖 )𝑛;1 − 1
𝑃 = 𝐴[ ]+𝐴
(1 + 𝑖 )𝑛;1 𝑖
0.15
𝑖= = 0.0125
12
𝑛 = 30(12) = 360
(1.0125)359 − 1
50000 = 𝐴 [ ]+𝐴
(1.0125)359 (0.0125)
𝐴 = 𝑃5613.26
PROBLEM 2
A MAN WISHES TO HAVE P10,000 WHEN HE RETIRES 20 YEARS FROM NOW. IF HE CAN EXPECT
TO RECEIVE 4% ANNUAL INTEREST, HOW MUCH HE SET ASIDE IN EACH OF 15 EQUAL ANNUAL
BEGINNING OF YEAR DEPOSITS?
SOLUTION:
(1 + 𝑖 )𝑛:1 − 1
𝐹 = 𝐴[ ]−𝐴
𝑖
(1.04)21 − 1
10,000 = 𝐴 [ ]−𝐴
(0.04)
𝐴 = 𝑃322.90
PROBLEM 3
A MAN OWES P5,000 TODAY AND AGREES TO DISCHARGE THE DEBT BY EQUAL PAYMENTS AT
THE BEGINNING OF EACH 3 MONTHS FOR 8 YEARS, WHERE THESE PAYMENTS INCLUDE ALL
INTEREST AT 10% PAYABLE QUARTERLY . FIND THE QUARTERLY PAYMENT.
SOLUTION:
(1 + 𝑖 )𝑛;1 − 1
𝑃 = 𝐴[ ]+𝐴
(1 + 𝑖 )𝑛;1 𝑖
0.10
𝑖= = 0.025
4
𝑛 = 8(4) = 32 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
(1.025)31 − 1
5000 = 𝐴 [ ]+𝐴
(1.025)31 (0.025)
𝐴 = 𝑃124.92
PROBLEM 4
INSTEAD OF PAYING P10,000 IN AN ANNUAL RENT FOR OFFICE SPACE AT THE BEGINNING OF
EACH YEAR FOR THE NEXT 10 YEARS, AN ENGINEERING FIRM HAS DECIDED TO TAKE OUT A 10-
YEAR P500,000.00 LOAN FOR A NEW BUILDING AT 6% INTEREST. T HE FIRM WILL INVEST
P100,000.00 OF THE RENT SAVED AND EARN 18% ANNUAL INTEREST ON THAT AMOUNT. WHAT
WILL BE THE DIFFERENCE BETWEEN THE FIRM 'S ANNUAL REVENUE AND EXPENSES?
 SOLUTION:
(1 + 𝑖 )𝑛;1 − 1
𝑃 = 𝐴[ ]+𝐴
(1 + 𝑖 )𝑛;1 𝑖
(1.06)9 − 1
500,000 = 𝐴 [ ]+𝐴
(1.06)9 (0.06)
𝐴 = 𝑃64,088.66(𝑎𝑛𝑛𝑢𝑎𝑙 𝑎𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 )
𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 = 10,000(1.18) = 𝑃11,800
𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 = 64088.66 − 11800
𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 = 𝑃52,288.66
PROBLEM 5
ON RETIREMENT, A WORKMAN FINDS THAT THE COMPANY PENSION CALLS FOR PAYMENT OF
P500 TO HIM OR TO HIS ESTATE IF HE DIES AT THE BEGINNING OF EACH MONTH FOR 20 YEARS.
FIND THE PRESENT VALUE OF THIS PENSION AT 15% COMPOUNDED MONTHLY .
SOLUTION:
0.15
𝑖= = 0.0125
12
𝑛 = 20(12) = 240
(1 + 𝑖 )𝑛;1 − 1
𝑃 = 𝐴[ ]+𝐴
(1 + 𝑖 )𝑛;1 𝑖
(1.0125)239 − 1
𝑃 = 500 [ ] + 500
(1.0125)239 (0.0125)
𝑃 = 𝑃38,445.78
PROBLEM 6
A MAN WILL DEPOSIT P1000 WITH A SAVINGS AND LOAN ASSOCIATION AT THE BEGINNING OF
EACH 3 MONTHS FOR 9 YEARS. I F THE ASSOCIATION PAYS INTEREST AT THE RATE OF 10%
QUARTERLY , FIND THE SUM TO HIS CREDIT JUST AFTER THE LAST DEPOSIT.
SOLUTION:
(1 + 𝑖 )𝑛:1 − 1
𝐹 = 𝐴[ ]−𝐴
𝑖
0.10
𝑖= = 0.025
4
𝑛 = 9(4) = 36
(1.025)37 − 1
𝐹 = 1000 [ ] − 1000
0.025
𝐹 = 𝑃58,733.95
PROBLEM 7
UNDER A FACTORY SAVINGS PLAN, A WORKMAN DEPOSITS P100 AT THE BEGINNING OF EACH
MONTH FOR 4 YEARS, AND THE MANAGEMENT GUARANTEES ACCUMULATION AT 10%
COMPOUNDED MONTHLY . HOW MUCH STANDS TO THE WORK MAN 'S CREDIT AT THE END OF 4
YEARS.
SOLUTION:
(1 + 𝑖 )𝑛:1 − 1
𝐹 = 𝐴[ ]−𝐴
𝑖
 0.10
𝑖= = 0.00833
12
𝑛 + 1 = 4(12) + 1 = 49
(1.00833)49 − 1
𝐹 = 100 [ ] − 100
0.00833
𝐹 = 𝑃5,920.67

PROBLEM 8
AT WHAT INTEREST RATE PAYABLE QUARTERLY WILL PAYMENTS OF P1000 AT THE BEGINNING OF
EACH 3 MONTHS FOR 7 YEARS DISCHARGE A DEBT OF P25000 DUE IMMEDIATELY ?
SOLUTION:
(1 + 𝑖 )𝑛;1 − 1
𝑃 = 𝐴[ ]+𝐴
(1 + 𝑖 )𝑛;1 𝑖
𝑖 27
(1 + 4) − 1
25000 = 1000 [ ] + 1000
𝑖 27
(1 + 4) 𝑖
𝑖 27
(1 + 4) − 1
24 =
𝑖 27
(1 + 4) 𝑖
𝑇𝑟𝑦 𝑖 = 0.0344
𝑖
= 0.0086
4
(1.0086)27 − 1
24 =
(1.0086)27 (0.0086)
24 = 24
𝑈𝑠𝑒 𝑖 = 3.44%
PROBLEM 9
ENGR . PETER AVENTAJADA LOAN AN AMOUNT OF P50,000 AT A LOCAL COMMERCIAL BANK AT
15% COMPOUNDED ANNUALLY . HOW MUCH IS HIS MONTHLY PAYMENT IF HE IS REQUIRED TO
PAY AT THE BEGINNING OF THE FIRST DAY OF THE MONTH FOR A PERIOD OF 30 YEARS?
SOLUTION:
𝐶𝑜𝑚𝑝𝑢𝑡𝑒 𝑓𝑖𝑟𝑠𝑡 𝑡ℎ𝑒 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑖 12
(1 + 𝑖 )1 = (1 + )
12
1
𝑖 12
(1.15) = (1 + )
12
𝑖
1.0117 = 1 +
12
𝑖
= 0.0117(𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)
12
𝑛 = 30(12) = 360
(1 + 𝑖 )𝑛;1 − 1
𝑃 = 𝐴[ ]+𝐴
(1 + 𝑖 )𝑛;1 𝑖
 (1.0117)359 − 1
50,000 = 𝐴 [ ]+𝐴
(1.0117)359 (0.0117)
𝐴 = 𝑃882.93 (𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑝𝑎𝑦𝑚𝑒𝑛𝑡)
PROBLEM 10
A MAN OWES P50,000.00 WITH INTEREST AT 9% PAYABLE SEMI -ANNUALLY . WHAT EQUAL
PAYMENTS AT THE BEGINNING OF EACH 6 MONTHS FOR 8 YEARS WILL DISCHARGE HIS DEBT?
SOLUTION:
(1 + 𝑖 )𝑛;1 − 1
𝑃 = 𝐴[ ]+𝐴
(1 + 𝑖 )𝑛;1 𝑖
0.09
𝑖= = 0.045
2
𝑛 = 8(2) = 16
(1.045)15 − 1
50,000 = 𝐴 [ ]+𝐴
(1.045)15 (0.045)
𝐴 = 𝑃4259.11 𝑒𝑞𝑢𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑎𝑡 𝑒𝑎𝑐ℎ 6 𝑚𝑜𝑛𝑡ℎ𝑠