CE21S5MODULE2

fAnnuity
Monday, September 6, 2021 6:11 PM
Annuity
An annuity is a series of equal payments occurring at equal periods of time.
Symbols and Their Meaning
P = value or sum of money at present
F = value of sum of the money at some future time
A = a series of periodic, equal amounts of money
n = no. of interest periods
Example: A loan of P100 is borrowed today and P30 will be deposited each year for 5
c
years.
Types of Annuity
1. Ordinary Annuity is one where the equal payments are made at the end of each payment
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Types of Annuity
1. Ordinary Annuity is one where the equal payments are made at the end of each payment
period starting from the first period.
2. Deferred Annuity is one where the payment of the first amount is deferred a certain number of
periods after the first.
3. Annuity Due is one where the payments are made at the start of each period, beginning from
the first period
4. Perpetuity is an annuity where the payment periods extend forever or in which the periodic
payments continue indefinitely.
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Ordinary Annuity
ORDINARY ANNUITY
• The amounts of all payments
• The payments are made at equal intervals of time.
• The first payment is made at the end of the first period and all payments thereafter are made at
the end of the corresponding period.
• Compound interest is paid on all amounts in the annuity.
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How much must you deposit each year to have $20,000 at the end of 15 years with money
worth 7%?
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What present investment at 4% is required to secure $56,000 a year for 9 years?
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If $46,000 is borrowed at 10% for 25 years, what equal end-of-year payments would be
required to repay the loan by the end of the 25th year?
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Money borrowed today is to be paid in 6 equal payments at the end of 6 quarters. If the interest
is 12% compounded quarterly. How much was initially borrowed if quarterly payments is P2000.
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A young woman, 22 years old has just graduated from college. She accepts a good job and
desires to establish her own retirement fund. At the end of each year thereafter she plans to
deposit P2,000 in a fund at 15% annual interest. How old will she be when the fund has an
accumulated value of P1,000,000?
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Deferred Annuity
DEFERRED ANNUITY
A deferred annuity is one where the first payment is made several periods after the beginning of
the annuity.
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A man acquires a loan of P 500,000. He will amortize his loan by 10 annual payments but will
commence 5 years after the loan was acquired. If the money is worth 10% compounded
annually, what was his annual amortization?
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A person buys a piece of lot for P100,000 downpayment and for 10 deferred semi-annual
a
payments of P8000 each, starting three years from now. What is the present value of the
investment if the rate of interest is 12% compounded semi-annually?
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Annuity Due
ANNUITY DUE
An annuity due is one where the payments are made at the beginning of each period.
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A man bought an equipment costing P60,000 payable 12 quarterly payments, each installment
payable at the beginning of each period. The rate of interest is 24% compounded monthly.
f
What is the amount of each payment?
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A man borrows Php 100,000 at 10% 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 the
man pay each month?
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PERPETUITY
It is an annuity in which the payments continue indefinitely.
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Capitalized Cost
The capitalized cost of any property is the sum of the first cost and the present worth of all
costs of replacement, operation, and maintenance for a long time or forever.
Case I. No replacement, only maintenance and or operation every period.
Capitalized cost = First cost + Present worth of perpetual operation and or maintenance
To illustrate the above principles please refer to the sample problem below.
Determine the capitalized cost of a structure that requires an initial investment of

P1,500,000 and annual maintenance of P150,000. Interest is 15%.
Therefore,
Capitalized cost = First cost + P
Capitalized cost - P1,500,000 + P1,000,000
Capitalized cost = P2,500,000
Case II. Replacement only, no maintenance, and or operation.

Capitalized cost = First cost + Present worth of perpetual replacement
Let
S = amount needed to replace a property every k periods
X = amount principal invested at rate i% the interest on which will amount to S every k
periods
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X = amount principal invested at rate i% the interest on which will amount to S every k
periods
Xi = interest on X every period, the periodic deposit towards the accumulation of S
P is the amount invested now at i% per period whose interest at the end of every period
forever is A.
X is the amount invested now at i% per period whose interest at the ned of every k periods
forever is S. If k = 1, then, X = P
Case III. Replacement, maintenance, and or operation every period
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Capitalized cost = First cost +Present worth of cost of perpetual operation and or
maintenance + Present worth of cost of perpetual replacement.
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Calculate the capitalized cost of a project that has an initial cost of P3,000,000 and an
additional investment cost of P1,000,000 at the end of every ten years. The annual operating
cost will be P100,000 at the end of every year for the first four years and P160,000 thereafter.
In addition, there is expected to be a recurring major rework cost of P300,000 every 13 years.
Assume i = 15%.
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Determine the capitalized cost of a research laboratory that requires P5,000,000 for original
construction; P100,000 at the end of every year for the first 6 years and then P120,000 each year
thereafter for operating expenses, and P500,000 every 5 years for replacement of equipment
with interest at 12% per annum.
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AMORTIZATION
It is any method of repaying a debt, the principal and interest included, usually by a series of
equal payments at an equal interval of time.
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A debt of P10,000 with interest at the rate of 20% compounded semi-annually is to be

amortized by 5 equal payments at the end of each 6 months, the first payment is to be made
after 3 years. Find the semi-annual payment.
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fAnnuity

Monday, September 6, 2021 6:11 PM

What present investment at 4% is required to secure $56,000 a year for 9 years?

What is the amount of each payment?

Determine the capitalized cost of a structure that requires an initial investment of

Case II. Replacement only, no maintenance, and or operation.

Case III. Replacement, maintenance, and or operation every period

A debt of P10,000 with interest at the rate of 20% compounded semi-annually is to be

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