ENS191: ENGINEERING ECONOMY

JOHN LOGOS GUIANG

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Annuities
▪ a series of equal payments occurring at equal periods of time
▪ common application is in insurance payments, home mortgage
payments

• Ordinary Annuity
• Deferred Annuity
• Perpetuity

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Ordinary Annuity
▪ one where the payments are made at the end of each period
• Examples: interest payments from bonds, which are generally made semi-
annually, and quarterly dividends from a stock

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Ordinary Annuity
▪ one where the payments are made at the end of each period

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Ordinary Annuity
▪ one where the payments are made at the end of each period

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
How much will you have in 40 years if you save $3,000 each year and your account earns
8% interest each year?

Solution:

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Deferred Annuity
▪ a uniform series that do not begin until some time in the future

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
Suppose that a father, on the day his son is born, wishes to determine what lump amount
would have to be paid into an account bearing interest of 12% per year to provide
withdrawals of $2,000 on each of the son’s 18th, 19th, 20th, and 21st birthdays.

Solution:

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Annuity Due
▪ one where the payments are made at the beginning of each period

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Annuity Due
Compare the Present Values of the first 4 payments of the investments which earns 8% interest per year.

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Annuity Due
Compare the Present Values of the first 4 payments of the investments which earns 8% interest per year.

𝟏 + (𝟏 + 𝒊)−(𝒏−𝟏)
𝑷=𝑨+𝑨
𝒊

𝟏 + (𝟏 + 𝒊)−(𝒏+𝟏)
𝑭=𝑨 −𝑨
𝒊

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
A certain property is to be sold and the owner received two offers. The first bidder
offered to pay P400,000 each year for 5 years. Each payment is to be made at the
beginning of the year. The second bidder offered to pay P240,000.00 first year, P360,000
second year, and P540,000 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?

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
1st Bid:
𝟏 + (𝟏 + 𝒊)−(𝒏−𝟏)
𝑷=𝑨+𝑨
𝒊

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
2nd Bid: Solution:

𝑃0 = 240,000 present value

discrete compounding

360,000
𝑃1 = = 300,000
(1 + 0.2)1

deferred
annuity

1 − 1 + 0.2 −3
𝑃2 = 540,000 1 + 0.2 −1 = 947,916.67
0.2

𝑷𝒕𝒐𝒕𝒂𝒍 = 𝟐𝟒𝟎, 𝟎𝟎𝟎 + 𝟑𝟎𝟎, 𝟎𝟎𝟎 + 𝟗𝟒𝟕, 𝟗𝟏𝟔. 𝟔𝟕 = 𝟏, 𝟒𝟖𝟕, 𝟗𝟏𝟔. 𝟔𝟕

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Perpetuity
▪ an annuity in which the payment continue indefinitely

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
What amount of money invested today at 15% interest can provide the following
scholarships: P30,000 at the end of each year for 6 years; P40,000 for the next 6 years
and P50,000 thereafter?
Solution:

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
What amount of money invested today at 15% interest can provide the following
scholarships: P30,000 at the end of each year for 6 years; P40,000 for the next 6 years
and P50,000 thereafter?
Solution:

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
What amount of money invested today at 15% interest can provide the following
scholarships: P30,000 at the end of each year for 6 years; P40,000 for the next 6 years
and P50,000 thereafter?
Solution:

𝐴 deferred
𝑃= (1 + 𝑖)−𝑚 perpetuity
𝑖

50,000
𝑃50 = (1 + 0.15)−12 = 62,302.38
0.15

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology
 Time Value of Money

Example
What amount of money invested today at 15% interest can provide the following
scholarships: P30,000 at the end of each year for 6 years; P40,000 for the next 6 years
and P50,000 thereafter?
Solution:
𝑷𝒕𝒐𝒕𝒂𝒍
= 𝟏𝟏𝟑, 𝟓𝟑𝟒. 𝟒𝟖 + 𝟔𝟓, 𝟒𝟒𝟓. 𝟒𝟓
+ 𝟔𝟐, 𝟑𝟎𝟐. 𝟑𝟖 = 𝟐𝟒𝟏, 𝟐𝟖𝟐. 𝟑𝟏

Mindanao State University – Iligan Institute of Technology

Department of Materials and Resources Engineering and Technology