04/09/2023

ENGINEERING
ECONOMICS
ENGG 404
The Time Value of Money
(continuation)

Kristine Mariel B. Bejasa, REE

Lecturer

EQUATION OF VALUES
If cash flow occurs during different periods, a comparison of such
should be made on the same focal date. Equation of values is obtained
by setting the sum of the values on a certain comparison or focal date
of one set of obligations equal to the sum of the values on the same
date of another set of obligations on the same date.

Steps:
1. Make a time diagram.
2. Choose a comparison date.
3. Bring all the values to the comparison date. All payments=All debts
4. Solve the resulting equation.

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EQUATION OF VALUES
EXAMPLE #1: A student plans to deposit P 1,500 in a bank now and another
P3,000 for the next two years. If he plans to withdraw P5,000 three years
after his last deposit for the purpose of buying shoes, what will be the
amount of money left in the bank one year after his withdrawal? The effective
rate is 10%.
3,000 SOL’N: Using year 6 at focal point,
1,500
1,500 (1 + 0.1) + 3,000 (1 + 0.1) = 5,000 (1 + 0.1) +𝑥 (1 + 0.1)
1,500 (1.1) + 3,000 (1.1) = 5,000 (1.1) +𝑥
0 1 2 3 4 5 6
𝑷𝒉𝒑 𝟏, 𝟓𝟒𝟗. 𝟔𝟒 = 𝒙

X
𝐹 = 𝑃 (1 + 𝑖)
P = 𝐹 (1 + 𝑖) 5,000

EQUATION OF VALUES
EXAMPLE #2: A man purchased a lot worth P1,000,000 if paid in cash. On an
installment basis, he paid a P200,000 down payment; P300,000 at the end of
one year; P400,000 at the end of three years, and a final payment at the end
of five years. What was the final payment if interest was compounded at
20%?
SOL’N: Using today as the focal point,
1M
800,000 (1 + 0.2) =
300,000 (1 + 0.2) + 400,000 (1 + 0.2) +𝑥 (1 + 0.2)
0 1 2 3 4 5 800,000 = 250,000 + 231,481.4815 + 0.401877𝑥
𝒙 = 𝑷𝒉𝒑 𝟕𝟗𝟐, 𝟓𝟕𝟕. 𝟏𝟑

200k 300k
400k
X

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ANNUITY
An annuity is a series of equal payments occurring at equal periods of time.
Examples of annuities are regular deposits to a savings account, monthly home
mortgage payments, monthly insurance payments and pension payments.

ORDINARY ANNUITY
It is a series of uniform cash flows where the first amount of the series
occurs at the end of the first period and every succeeding cash flow occurs at the
end of the period.
P (present equivalent value)
-occurs one interest period before the first A(uniform
amount).

F (future equivalent value)

-occurs at the same time as the last A and n intervals
after P.

A (annual equivalent value)

-occurs at the end of each period.

ANNUITY
Finding P when A is given:

(1) Factor out A

(2) Multiply eq(1) by 1/(1 + 𝑖)

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ANNUITY
Finding P when A is given:
(3) Subtract eq (1) from eq (2)

Simplify:
Uniform series present worth factor used to calculate
the equivalent P value in year 0 for a uniform end-of-
period series of A values beginning at the end of period
1 and extending for n periods.

ANNUITY
Finding A when P is given:
Rearranging the previous formula:

Capital recovery factor (CRF) calculates the equivalent

uniform annual worth, A, over the n years for a given P
in year 0.
Finding A when F is given:
Substitute the formula of getting P in compound interest and simplify.

Sinking fund factor determines the uniform annual series,

A, that is equivalent to a given future amount F.

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ANNUITY
Finding F when A is given:
Rearranging the previous formula:

Uniform series compound amount factor (USCAF). It

yields the future worth of the uniform series when
multiplied by the given uniform annual amount.

F occurs in the same period as the last

A.s

ANNUITY
EXAMPLE #3: Determine the present equivalent value of P5,000 paid every 3
months for a period of seven years if the rate of interest is 12% compounded
quarterly.
GIVEN: A = P5,000
P n = 7(4) = 28 quarters
i = 12/4 = 3% /quarter

0 1 2 3 … 28 REQUIRED: The present value, P

1+𝑖 −1
𝑃=𝐴
𝑖 1+𝑖
5,000 1 + .03 −1
𝑃 = 5,000
0.03 1 + .03
𝑷 = 𝑷𝒉𝒑 𝟗𝟑, 𝟖𝟐𝟎. 𝟓𝟒

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ANNUITY
EXAMPLE #4: A micro-brewery is considering the installation of a newly designed
boiler system that burns the dried, spent malt, and barley grains from the brewing
process. The boiler will produce process steam that powers the majority of the
brewery’s energy operations, saving P600,000 per year over the boiler’s expected
life of 10 years. If the interest rate is 15% per year, how much money can the
brewery afford to invest in the new boiler system?
GIVEN: A = P600,000
A =600,000 n = 10 yrs
i = 15%/yr

REQUIRED: The present value, P

0 1 2 3 … 10 1+𝑖 −1
𝑃=𝐴
𝑖 1+𝑖
1 + 0.15 − 1
𝑃 = 600,000
P 0.15 1 + 0.15

𝑷 = 𝑷𝒉𝒑 𝟑, 𝟎𝟏𝟏, 𝟐𝟔𝟏. 𝟏𝟖

ANNUITY
DEFERRED ANNUITY
It is where the first payment is made several periods after the
beginning of the annuity.

1− 1+𝑖
𝑃=𝐴 (1 + 𝑖)
𝑖
Where: *m = deferred period
n = number of annuities
*counting of m is up to the period before the first A

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ANNUITY
EXAMPLE #5: What lump sum of money must be deposited in a bank account at the present time
so that P5000 per month can be withdrawn for five years with the first withdrawal scheduled for
six years from today? Let i=9% compounded quarterly
GIVEN: m = 71 months
P n = 60 months
i = 9%/12 =2.25% per quarter

0 … 71 72 73 … 131 REQUIRED: The present value, P

1− 1+𝑖
𝑃=𝐴 (1 + 𝑖)
𝑖
5,000
1 − 1.0225
𝑃 = 5000 (1.0225)
0.0225

𝑷 = 𝑷𝒉𝒑 𝟑𝟑, 𝟕𝟑𝟒. 𝟑𝟐

ANNUITY
EXAMPLE #6: A debt of P40,000, where the interest rate is 15% compounded semi-annually, is to
be discharged by a series of 10 semi-annual payments, the first payment is to be made six
months after consummation of the loan. The first 6 payments will be at P6,000 each while the
remaining 4 payments will be equal and such amount that the final payment will liquidate the debt.
What is the amount of the last 4 payments?
P

0 1 2 3 4 5 6 7 8 9 10

6,000 A

6,000 (P/A, 7.5%, 6)

A (P/A, 7.5%, 6) (P/F, 7.5%, 4) A (P/F, 7.5%, 4)

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ANNUITY
EXAMPLE #6: A debt of P40,000, where the interest rate is 15% compounded semi-annually, is to
be discharged by a series of 10 semi-annual payments, the first payment is to be made six
months after consummation of the loan. The first 6 payments will be at P6,000 each while the
remaining 4 payments will be equal and such amount that the final payment will liquidate the debt.
What is the amount of the last 4 payments?
P

2 3 GIVEN: P = P40,000
0 1 4 5 6 7 8 9 10
i = 15%/2 =7.5% per 6 mos

6,000 A REQUIRED: The remaining 4 payments, A

6,000 (P/A, 7.5%, 6)
A (P/A, 7.5%, 6) (P/F, 7.5%, 4) A (P/F, 7.5%, 4)

Using today as focal date:

(1.075) −1 1 − (1.075)
40,000 = 6,000 +𝐴 (1.075)
0.075(1.075) 0.075

𝑨 = 𝑷𝒉𝒑 𝟓, 𝟒𝟓𝟒. 𝟎𝟎

ANNUITY
ANNUITY DUE
It is a series of uniform cash flows that occur at the beginning of
each period.

Finding F and P when A is given:

1 − (1 + 𝑖) ( ) (1 + 𝑖)( )
−1
𝑃=𝐴 +1 𝐹=𝐴 −1
𝑖 𝑖

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ANNUITY
EXAMPLE #7: What are the present worth and the accumulated amount of a 10-year
annuity paying P10,000 at the beginning of each year, with interest at 15%
compounded annually?
Ans. P = P57,715.84, F = P233,492.76

ANNUITY
EXAMPLE #8: A man bought a car in an installment basis. If he pays P100 at the
beginning of each month at a rate of 15% compounded monthly for 3 years, find
the cash price and the accumulated amount of money for the car. (

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ANNUITY
PERPETUITY
It is an annuity where the payment period extends forever, which
means that the periodic payments continue indefinitely. The
existence of the perpetuity formula makes it possible for financial
experts to assign value to stocks, estates, land, and an array of
additional investments

Years 0 1 2 3 .. ..

𝐴
𝑃=
𝑖

ANNUITY
EXAMPLE #9: Consider the perpetuity paying P100,000 a year. If the relevant
interest rate is 8%; what is the Present Value? If the interest rate goes down to
6%, what is the PV?
Ans. P @8%= P1,250,000; @6% = P1,666,666.67)

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CONTINUOUS COMPOUNDING
CONTINUOUS COMPOUNDING
𝑃 = 𝐹𝑒

𝐹 = 𝑃𝑒
ANNUITY WITH CONTINUOUS COMPOUNDING
1−𝑒
𝑃=𝐴
𝑒 −1

𝑒 −1
𝐹=𝐴
𝑒 −1

r = annual continuous compounding rate or nominal rate

CONTINUOUS COMPOUNDING
EXAMPLE #10: A present loan of P12,000 is to be repaid by equal payments every
6 months over the next 8 years. If the interest rate is 7% compounded
continuously, what is the amount of each payment?

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CONTINUOUS COMPOUNDING
EXAMPLE #11: Compare the accumulated amounts after 5 years of P1,000
invested at the rate of 10% per year compounded (a) annually, (b)semiannually,
(c)quarterly, (d) monthly, (e) daily, and (f) continuously

References:
• Sullivan, William, et al.(2014), Engineering Economy 16th
Edition, Pearson Education, Inc.

• Blank, Leland T.(2014).Basic of Engineering Economy, 2nd

edition, Mc Graw-Hill, New York

• Sta. Maria, Hipolito B. (2000),Engineering Economy Third

Edition

THANK YOU!
CONTACT INFORMATION
Kristinemarielb.bejasa@g.batstate-u.edu.ph

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