ENGINEERING

ECONOMY
Part II
By: Alyssa Mia Aguilar
BSCE 4B
TOPICS ANNUITY
• Ordinary Annuity
• Annuity Due
• Deferred Annuity
• Perpetuity
CAPITALIZED COST
ANNUAL COST

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ANNUITY
-consists of a series of equal payments made at equal
intervals of time. When an annuity has a fixed time
span, it is known as annuity certain.
Annuities occur in the ff instances:
-payment of a debt by a series of equal
payments at equal interval of time.
-accumulation of a certain amount by setting
equal amounts periodically.
-retirement of an individual
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TYPES OF
ANNUITY
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ORDINARY
ANNUITY

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In ordinary annuity, each payment is unity.
-amount of all payments are equal
-payment are made at equal intervals of time
-first payment is made at the end of the first period
-compound interest is paid on all amounts in the annuity

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FORMULAS
IN FORMULAS
ORDINARY WHEN
ANNUITY EACH
PAYMENT
IS ₱A

Where:
A= amount of each payment of an ordinary annuity
P= present value of the n ₱A payments
F= future worth or accumulated amount of the n ₱A payment

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2 ANNUITY DUE
Each payment are at the
beginning of every
period starting from the
first.

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DEFERRED
ANNUITY
The first payment is made at a period later than the first. After
the first payment is made, the succeeding payments are paid
at the end of the periods extending to the end of the annuity.

Present value of Deferred Annuity

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PERPETUITY

Present Value

when periodic payment is equal to ₱A

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CAPITALIZED COST
-it is the sum of its first cost and the present worth of all costs for
replacement, operation, and maintenance for a long time or forever.

Capitalized Cost= First Cost + Cost of Perpetual Maintenance

ANNUAL COST
-it is the sum of the annual depreciation cost, interest of the first cost and
the annual operating and maintenance cost.
Annual Cost= Annual Depreciation Cost +Interest of First Cost + Annual
Operating Cost + Maintenance Cost
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 ORDINARY ANNUITY
SAMPLE EXAMPLE 1. A one-bagger concrete mixer can be purchased
PROBLEMS with a down payment of ₱8000 and equal installments of
₱600 each paid at the end of every month for the next 12
months. If money is worth 12% compounded monthly,
determine the equivalent cash price of the mixer.

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ORDINARY EXAMPLE 2. How much money would you have to deposit
for five consecutives years starting one year from now if you
ANNUITY want to be able to withdraw ₱50,000 ten years from now?
Assume the interest is 14% compounded annually.

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ANNUITY EXAMPLE 3. A farmer brought a tractor costing ₱25,000
payable in 10 semi-annual payments, each installment
DUE payable at the beginning of each period. If the rate of interest
is 26% compounded semi-annually, determine the amount of
each installment.

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 ANNUITY DUE
EXAMPLE 4. Mr. Ayala borrows ₱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 Mr. Ayala pay each month?

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DEFERRE EXAMPLE 5. A man invests ₱10,000 now for the college
education of his 2-year old son. If the fund earns 14%
D effective, how much will the son get each year starting from
his 18th to 22nd birthday?
ANNUITY

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DEFERRE EXAMPLE 6. A person buys a piece of property for
D ₱100,000 down payment and ten deferred semi-annual
payments of ₱8,000 each starting 3 years from now.
ANNUITY What is the present value of the investment if the rate of
interest as 12% compounded semi-annually?

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PERPETUITY EXAMPLE 7. It costs ₱50,000 at the end of each year to
maintain a section of Kennon road in Baguio City. If money
is worth 10% how much would it pay to spend immediately
to reduce the annual cost to ₱10,000?

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EXAMPLE 8. To maintain a bridge, ₱5,000 will be required at the end of 3 years and
annually thereafter. If money is worth 8%, determine the capitalized cost of all future
maintenance.

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 CAPITALIZED COST
EXAMPLE 9. A heat exchanger is needed in a chemical process. If interest is 9%
compounded annually, determine which of the following heat exchangers is cheaper
by comparing the capitalized costs:
Exchanger A costs ₱22,000 with scrap value of ₱1,000 and a useful life of 7
years;
Exchanger B costs ₱28,000 with scrap value of ₱1,500 and a useful life of 10
years.

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EXAMPLE 10. At 6%, find the capitalized cost of a bridge whose cost is ₱250M and
life is 20 years, if the bridge must be partially rebuilt at a cost of ₱100M at the end of
each 20 years.

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ANNUAL EXAMPLE 11. An engineering firm wants to purchase a
₱55,000 machine. It will require ₱3,500 in maintenance
COST cost starting from the 1st year maintaining constant yearly
throughout the life of the machine which is 8 years. The
estimated salvage value is ₱4,000 and expected to
generate ₱15,000 annually in return. Is it an acceptable
investment for the firm? Assume the Minimum Attractive
Rate of Return (MARR) is 12%

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Thank you for listening

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