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    17 views34 pages

    Ngi

    Uploaded by

    ch0k3 iii

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    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 34
    ANNUITIES _ An annuity isa series of equal payments occuring at equal period, of time. Symbols and Their Meaning value or sum of money at present P value or sum of money at some futare time — _ @ series of periodic, equal ‘amounts of money number of interest periods interest rate per interest period “S>su0 Ordinary Annuity An ordinary annuity is one where the payments are made at the end of each period. Finding P when A is Given P A (P/F, i%, 2) A(P/F, i%, 3) A (P/F, i%, n-1) A (P/F, i%, n) Figure 2-5. Cash flow diagram to find P given A Po = A(PF, 1%, 1)+A(PF, §%, 2) + A (P/F, 1%, 3)+... + A (P/F, 1%, n~1) + A (P/F, i%, n) Pe Agony Adem + acon 6.1, + Aho iron +A(1+ ie ‘Multiplying this equation by (1 + {) results in PePi = AtA(1+iy + A(14i8+,..¢A(1+ ie + A(l+iye! Subtracting the first equation from the second gives P+Pi s A+ SGT + Alen + Age Po AT = ALT + 1. + At Acti Poe A ~ Ader Solving for P gives 1- (144 (sip -1 Pow a PA=G = ap care oe sed eornnce orcas worth factor” and is designated by the functional symbol RB, read as “Pgiven A at i per cent in n interest periods.” Hence Equation (2-17) can be expressed as P = A(P/A,i%n) * (2-18) Finding F When A is Given 0 1 2 Ss FP, i, o-1 Figure 2-6, Cash flow diagram to find F given A pty . eA} AQR/A;1%) 1). «4 ACF/P, 1919-8) + ACPIP, 9%, megy + AQP, i%, n=1) Foe At A (iti) +... + AGP + ACL) + AC +i F Multiplying this equation by (1+i) results in Fe Fi = A(iei) + AC +... ACHP + ACHE + ACLaap Subtracting the first equation from the second gives - Peis 5) MUG + At + AT + ACL Fo oe AS Aeris... AGI — AG Kes -A A + hai Alsip Solving for F gives Feafe —] (2-19) The quantity in brackets is called the “uniform series compound amount factor” and i designated by the functional symbol FYA, i%, n, read as “F given Aati per cent in n interest periods.” Equation (2-16) cannow be written.as: 3 OF = AGMA, i%,n) (2-20) Finding A When P is Given % Taking Equation (2-14) and solving for A, we have * i - A= Pia] @3)) ~ The quantity in brackéts is called the “capital recovery factor."It will be denoted by the functional symbol A/P, i%, n which is read as‘A given P at i per cent in n interest periods.” Hence A = P(AP, i%, n) (2-22) Finding A When F is Given Taking Equation (2-19) and solving for A, we have As Repro 2) ‘The quantity in brackets is called the “sinking fund factor."It be denoted by the functional symbol A/F. ion shieh feed ao"A given F at i per cent in n interest periods.” Hence . A = KAMP, i%, ny (2-24) Relation between A/P, i%, n and AF, i%, n i joiti(leiy -i , (si Geta Ge oa tae AF, i%, n+i = A/P, i%,n (2-25) Thus, . ‘ sinking fund factor + i = capital recovery factor (2-12) What are the present worth and the accumulated amount of a 10-year annuity paying P10,000 at'the end of each year, with interest at 15% compounded annually? Solution A = P10,000 n= 10 i= 15% F Pp @ 200 P10,000 10,000 | P10,000 (F/A, 15%, 10) a P10,000 (P/A, 15%, 10) P = A(YA,i%, n) = P10,000 (P/A, 15%, 10) q 10.000 PL={16-"]. Pso,18 F = AAPA, i%,n) = P10,000 (FIP, 15%, 10) = 10,000 Ea] = P208,087 (2-13) What is the present worth of P500 deposited at the eng every three months for 6 years if the interest rate is 12% compound semiannually? Solution — : Solving for the interest rate per quarter, (ei o12¥ (eit -1- = (1+-222) “1 Yei (1.06)4 4) = 0.0296 or 2.96% per quarter :“AIPIA, 2.96%, 24) ty f=1 + goaser= a 0.0296 } P500 (17.0087) ~ “ Ce a P8,504 14%, with the principal and third financier is willing monthly installments of Solution interest payable at the end of one year, A to lend him P50,000 payable in 12 equal P4,600. Which offer is best for him? Compare the effective rate of each offer and select the one with the lowest effective rate, First Offer: Rate of discount, /d = 12:5% Rate of interest, i = <4 = ee = 14.29% per year Effective rate = 14.29% Another solution: Amount received = P50,000 (0.875) = P43,750 43,750 P50,000 : P50,000 - P43,750 _ 14 09 = —P50,000 — P43,750 . Rate of interest P43,750 14.39% per veer Effective rate = 14.29% 80,000 0 1 - P50,000 (1.14) Effective rate = 14% Third Offer: 50,000 P4,600 ( ~ P4,600 P4,600 P4,60 LP.” P50,000 PIA, i 2 = = BOO Loui = 10,8696 Try iz 1%; " 1 ~ (140.01), a et OU 11.2551 Tryin mh a0. 02)" «10.5789 1% 11.2581 . ~ | 0.8865 1%) Lite 10.8696 0.6798 2% 10.5753 = 0.3855 1% 0.6798 x = 057 1% + 0.57% = 1.57% per month Effective rate = (1+ 0.0157)? — 1= 20.26% ‘The second offer is the best (2-15) A chemical engineer wishes to set up a special fund by making uniform semiannual end-of-period deposits for 20 years. The fund is to provide P100,000 at the end of each of the last five years of the 20-year period. If interest is 8% compounded semiannually, what is therequired semiannual deposit tobe made? P100,000 (F/A. 8.16%, 5) 100,000 P100,000 100,000 P 100,000 P100,000 Bea O12 30 31 32 33 34 35 36 37 38 39 40 Period AA AAAAAAAAAA A(F/A, 4%, 40) 2 Tameeenie sete f | the withdrawals, 1 = (1+ 0:04)" - 1 = 0.0816 of 8.169, For » Using 20 years from today as the focal date, the equation otvatus is ‘A (RIA, 4%, 40) = P100,000 (F/A, 8.16%, 5) (95.0255) = P 100,000 (5.8853) A- P6,193.39 (2-16) Using a compound interest of 8%. find the uniform annuai cost for a proposed machine that has a first cost of P100,000 an estimated salvage value of P20,000 and an estimated economic life of 8 years. Annual maintenance will amount to P2,000 a year and periodic overhaul costing P6,000 each will : end of the second and fourth year. equivalent Solution 20.000 (P/F. 8%. 8) 2,000 P2,000 P2.000 2,000 wae P6,000 A (PIA. 8%. 8) P600 (P/F, 89,4) P2000 (P/A, 8%, 8) P100,000 Occur at the _ Let A = the equivalent uniform annual cost Using today as the focal date. the equation of value is A (P/A, 8%, 8) = P100,000 + P2000 (P/A. 8%. 8) + P6000 (P/F. 8%. 2) ‘+ P6000 (P/F. 8%. 4) - P20,000 (P/F, 8%. 8) A (6.7466) = P100.000 + P2000 (6.7466) + P6000 (0.8573) + P6000 (0.7350) — P20.000 (0.5403) A =P19.183 (2-17) A man purchased a house for P425,000. In the first month that he owned the house, he spent P75,000 on repairs and remodelling. Immediately after the house was. remodeled, he was offered P545,000 to sell the house. After some consideration, he decided to keep the house and have it rented for P4,500 per month starting two months after the purchase. He collected rent for 15 months and then sold the house for 600,000. If the interest rate was 1.5% per month, how much extra money did he make or lose by not selling the house immediately after it was remodeled? Solution P600,000 (P/F, 1.5%, 15) P600,000 P4,500 (R/A, 1.5%, 15) P4500 P4,500 4,500 4,500 16 425,000 P425,000 (F/P, 1.5%, 1) 7 The enly fot Cote a van Saks immediacy ‘ster east 6 erent se purchase) = P545,000 ~ P75,000 ~ PA25,000 (FP, 1p » Se aeW house was sold later (16 months after purchase) «= 600,000 (PIF, 1.5%, 16) + P4500 (P/A, 1.5%, 15) — P75,000 = P425,000 (F/P, 1.5%, 1) = P600,000 (0.7999) + P4,500 (13.3432) ~ P75,006 - P425,000 (1.015) = P33,610 Loss by not selling inimediately after remodelling =P38,625-—P33,610 =.P5,015 Another solution: Loss by not selling immediately after remodelling = P545,000 - P4,500 (P/A, 1.5%, 15) — P600,000 (P/F, 1.5%, 15) = P545,000 - P4,500 (13.3432) — P600,000 (0.7999) ‘= P5015 (2-18) Today, you invest P100,000 into a fund that interest compounded ann 25% ftom a bank at 20% annual, rnree years later, you borrow P80,000 Na ohh ual interest and invest in the fund. Two years ee it draw enough money from the fund to repay the bank loan and all interest due on it. Three years from this withdrawal you start taking P20.000 per year out of the fund. After five withdrawals, you withdraw the balance in the fund. How much was withdrawn? Solution P50,000 (1.20)* (F/P,25%,7) 20,000 (F/A,25%,5) 20,000 each Be O° 10 iF 50,000 (1.20)? P50,000 ‘F/P, 25%,9). 100,000. ; 100,000 (F/P,25%,12) Let Q = the amount withdrawn after 12 years Using 12 years from today as the focal date, the equation of value is ”.@ + P20,000(F/A,25%,5) + P50,000(1.20)4F/P,25%, 7) = P100,000(F/P, 25%, 12) + P50,000 (F/P, 25%, 9) + P20,000(8.2070) + P50,000(1.20)%4.7684) = P100,000(14.5519) ; ns +P50,000(7.4506) Q = P1,820,255 Deferred Annuity nical ‘A deferred annuity is one where the first payment i periods after un beginning of the annuity. ment is made severa) Finding P when A is Given im periods ae 1 periods a m 2 nl on t Figure 2-7. Cash flow diagram given A to find P P= A(PYA, i%, n) (P/F, i%, m) (2-26) poe AP GH Dire (2-21) (2-19) On the day his grandson was born, a man deposited to a trust campany a eafficient, amaunt of manay oe that the bay oald receive five annual payments of P10,000 each for his college tuition fees, starting with his 18th birthday. Interest at the rate of 12% per annum was to be paid on’all amounts on deposit, There was also 8 provision that the grandson could elect to withdraw no annual payments and receive a single lump amount on his 25th birthday. The grandsoe chose this option. (a) How much did the boy receive as the single payment? (b) How much did the grandfather deposit? Bolutyon Let P = the amount deposited X = the amount withdrawn 10,000 P10,000 P10,000 P10,000 P10,900 a ++ 18 19° 20 21 22 23 24 25 , P The P10,000 suppose withdrawals are represented by broken lines, . since they did not actually occur. Three Separate cash flow diagrams can be drawn. x (a) P10,000 (F/A, 12%, 5) 10,000 (F/A, 12%,5) (FIP, 12%, 3) > re 10,000 P10,000 P10,000 P: 4 4 4 17 18 19 20 21 22 23 24 25 X and the P10,000 suppose withdrawals are equivalent. Using 25 years of age as the focal date, the equation of value is X° =. P10,000(F/A, 12%, 5) (F/P, 12%, 3) P10,000 (6.3528) (1.4049) = 89,250 31 The other good focal dates are 17 and 22 years from tog, (b) P10,00KPIA, 12% 8) (PF, 129,17 P10,000 (PIA, 12%, 6) P and the P10,000 suppose withdrawals are equivalent! Using today as the focal date, the equation of value is P_ = P10,000(PYA, 12%, 5) (P/F, 12%, 17) = 10,000 (3.6047) (0.14565) = P5,250 Who othor geod foal doa‘ YF aud a yout in ind Another solution: : : X (PIF, 12%, 25) ‘This was what actually happened, P was deposited today.and X was withdrawn 25 years later. Using today as the focal date, the equation of value is 'P = X(PIF, 12%, 25) = P89,250 (0.058821) = P5,250 (2-20) If P10,000 is deposited each year for 9 years, how. much annuity can a person get annually from the bank every year for 8 years starting 1 year after the 9th deposit is made. Cost of money is 14%. A(P/A,14%,8) A A A A P10,000 P10,000 ! P10,000 P10,000 (P/A,14%,9) * Solution A(P/A,14%,8)(P/F,14%,9) P10,000 Pi Using today as the focal date, the equation of values‘ A(PYA, 14%, 8) (P/F, 14%, 9) = P10,000(P/A, 14%,9) ‘A(4.63886) (0.30751) = 10,000 (4.94687) : A = P34675 P10,000 P10,000 P10,000 10,000 'P10,000 10,000 (F/A,14%,9) from today as the focal date, the equation of value is Using 9 years ‘A(PIA, 14%, 8) = P10,000 (FYA, 14%, 9) " (A(4.63886) = 10,000 (16.08535) A A = P34675 [Another solution: A(F/A,14%,8) hea FIO 000. en 0 ie 000 a A oa mae P10,000(P/A,14%9) (F/P,14%8) Using 17 years from today asthe focal date, the equation of value # A(F/A, 14%, 8) = 10,000 (F/A, 14%, 9) (F/P, 14%, 8) ~ A(13,28276) = P10,000 (16.08535) (2.85259) A = P84,675 eg 2-21) A debt of P40,000, whose interest rate is 15% compounded semiannually, is to be discharged by a series of 10 semiannual payments, the first payment to be made 6 months after consummation of the loan. The first 6 payments will be P6,000 each, while the remaining 4 payments will be equal and of such amount that the final payment will liquidate the debt. What is the amount of the last 4 payments? Solution Using today as the focal date, the equation of value is P40,000 = P6,000.(P/A, 1.5%, 6) + A(P/A, 7.5%, 4) (P/F, 7.5%, 6) 40,000 = P6,000 (4.6938) + A(3.3493) (0,6480) A = P5454 Annuity Due An annuity di one where the payments are made a the begirining of each period Find P when A is Given P A A A A A Figure 2-8. Cash flow diagram given A lo find P P=A+A (PIA, i%, n-1), (2-28) P=A(1+P/A, i%,n-1) (2-29) Finding F When A is Given Figure 2-9. Cash flow diagram given A to find F F=A (V/A, i%,n+1)-A | (2:30) FeA[@Ai% n+ D-1) SIP, ; (2-22) Aman bought an equipment costing P60,000 payable in 12 quarterly payments, éach installment payable at the beginning of each period. The rate of interest is:24% compounded quarterly: What is the amount of each payment? Solution P = P60,000 n=12 i=-24%=8% P = A(1+P/A, 2%, n- 1) 60,000 = A (1 + P/A, 8%, 11) P60,000 = A(1 + 7.1390) A = P7.371.91 (2-23) A certain property is being sold and the owner received two bids. The first bidder offered to pay P400,000 each year for 5 years, each payment. is to be made at the beginning of each year. The second bidder offered to pay P240,000 first year, P360,000 the second year and P640,000 each year for the next 3 years, all payments will be made at the beginning of each year. If money is worth 20% compounded annually, which bid should the owner of the property accept? Solution First bid: 400,000 P400.000 400,000" P400,000 " 400.000 present worth of the first bid A (1+ P/A, 20%, 4) P400,000 (1 + P/A, 20%, 4) P400,000 (1 + 2.5887) P1,435,480 « nL 840,000 PS40,000 Ps40.000 Let P, present worth of the second bid ~ P, P240,000 + P360,000 (P/F, 20%. 1) + P540,000 @IA, 20%, 3) (P/F, 20%, 1) P240,000 + 360,000 (0.8333) + P540,000 (2.1065) (0.8333) = P 1,487,875 ‘The owner of property should accept the second bid- Perpetuity : A perpetuity is ah annuity in which the payments continue indef- A A A Figure 2-10. Cash flow diagram to find P given A Pos apes). ApsGsiry Pos -|> (2-32) (2-24) What amount of mon interest 5 i ey : provide the following Scholarships; Pa0,000 ay ag sir 6 years; P40,000 for the next 6 years and BB0,000 thereafter a 0.15 50,000 P56,000 eee ] P40,000 40,000 P40,000 Solution P50,000 O16 PF 15%, 12) P Using today as the focal date, the equation of value is P “= 30,000 (P/A; 15%, 6) + P40,000 (P/A, 15%, 6) (P/ F, 15%, 6) " P50,000, + “ois PF 15%, 12) = P30,000 (3.7845) + P40,000 (3.7845) (0.4823) + P50,000(0.1869) = 241,277 Capitalized cost One of the most important applications of perpetuity is in capital- ized 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 1. No replacement, only maintenance and or operation every Capitalized cost = First cost + Present worth of perpetual opera- tion and or maintenance. (2-25) Determine the capitalized cost of a structure that requires ‘8n initial investment of P1,500,000 and an annual maintenance of 150,000. Interest is 15%.’ : Bobetiou 150,000 P150,000 Capitalized cost = First cost + P P1,500,000 + P1,000,000 = 2,500,000 Case 2. Replacement only, no maintenance and or operation. Capitalized cost = First cost + Present worth of perpetual replacement LetS = amount needed to replace a property every k periods X = amount of 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 to- wards the accumulation‘of S s ap 2 3 klk Figure 2-11. Cash flow diagram to find X given S 40, 8 = Xi (F/A, im, k) ef pia i Xe Ger]: tity X=—_S_ - (+i oy (2-33) Difference between P.and X in a Derpetuity. S \s g ok ae x A Ss == X= TS (1+i¥-1 Pis the amount invested now at 1% per period whose interest at the end of every period forever is A while X is the amount invested now at i% per period whose interest at the end of every k periods forever isS.If = 1, then, X =P. (2-26) A new engine was installed by a textile plant at a cost of 300,000 and projected to have a useful life of 15 years. At the end ofits ‘Useful life, it is estimated to have a salvage value of P30,000. Determine its capitalized cost if interest is 18% compounded annually. Solution P30,000 30,000 —-P20,000 pa pone 0 15 30 45 P300,000 P300,000 300,000 300,000 Cash flow diagram for the engine P270,000 P270,000 270,000 X= _ _P270,000__ (vivo * T+ 0.18)" 1 = P2460 Capitalized cost’ = First cost + X = P300,000 + P24,604 = P324,604 Case 3. Replacement, maintenance and or operation every peirod Capitalized Com = First cost + Present worth of cost of perpetual operation and or maintenance + Present of cost of perpetual replacement 27 Determine the capitalized cost of requires P5,000,000 for original construction; POD. end of every year for the first 6 years and then P120,000 yee thereafter for operating expenses, and P500,000 every 5 yen foe replacement of equipment with interest at 12% Per annum? eRe Solution Operation: P120,000 -P120,000. 013 (PIF, 12%, 6) P120,000 P100,000 (P/A, 12%, 6) P120,000 P120,000 120,000 “p100,000 P100,000 P100,000 P100,000 P100,000 P100,000 Q Let-Q:= the present worth of cost of perpetual operation @ = 100,000 (PIA, 12%, 6) + —P420,000 (pyr, 12%, 6) P100,000 (4.1114) + PH (0.5066) " P917,740 te Replacement: P500,000 P500,000 P500,000 7 5 10 16 x LetX = the present worth of cost of perpetual : replacement = S_____P500,000__p,. = Tre aFei “r+ 0.12" i> POS5O10 Capitalized cost = First cost+Q+X = P5,000,000 + P917,740 + P655,910 = P6,753,650 Amortization Amortization is any method of repaying a debt, the principal and interest included, usually by a series of equal payments at equal interval of time. (2-28) A debt of P5,000 with interest at 12% compounded semian- nually is to be amortized by equal semiannual payments over the next 3 years, the first due in 6 months, Find the semiannual payment construct an amortization schedule. Az=——P__ _ _P5,000 _ PIA, 6%, 6 — — 4.9173 ~ Pv016.82 Amortization Schedule Outstanding Principal at beginning of period P1,100.87 6,100.92 — P5,000.05 (2-29) A debt of P10,000 with interest at the rate of 20% com- Pounded semiannually 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, the semiannual payment and construct an amortization schedule, Solution P10,000 A(PIA, 10%, 5) (P/F, 10%, 5) P(A/P, 10%, 5) (F/P, 10%, 5) P 10,000 (0.2638) (1.6165) P4,248.50 > unun Amortization Schedule Outstanding | Interest Period | principal at due at end beginning of period of period | 1 [Piqo.00 | pico] | _—| [2 -[ 1100000 [ ij000 [ | | [3 | 12,100.00 [3,210.00 [| | [4 [1331000 | 133100 | —*| di | 5 [is64i00 [aa6s1o [| «| | 6 [16,105.10 [1,610.51 | p 4248.50 | p 263799 | | 771346711 | 1,346.71 | 4248.50] 2,901.79 | , [8 Ft0565:32 [1,056.53 | 4248.50] 319187 | [9797335 [737.34 | 4248.50] 351116 | [10 [ssca1s[see20 | 2as.so] 390228 P11,242.41 21,242.50 P16,105.19 Uniform Arithmetic Gradient In cortain cases, economic thet tn eueaaioale problems P1000 at the end of the first year and increasing et a constant rete 500 each year for the next four years, P2500 P1500 o P1000 0 1 2 3 4 5 ‘This cash flow may be resolved into two components G is known as the uniform gradient amount P = P,+P, (2-34) P, = A(P/A, i%, n) (2-35) 1 Py = G(1+i)? + 2G(1+i)* + 3G (1+i)+ +... + (n-1) G(1+i? GP +ip-1 1 : Poe sper 4 -a] wr! @8, P, = GAPIG, if, n) (2-37) oo o : 1 p(l+iP-1 yp oa , pra, = + FES

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