Annuity Due

An annuity due is one where the payments are made at the beginning of
each period
An annuity due is series of uniform cash flows that occur at the beginning
of each period.

Finding P When A is Given

P

0 1 2 3 n-1 n

Cash flow diagram given A to find P

P = A + A (P/A, i%, n-1)
P = A (1 + P/A, i%, n-1)
( ) ( )
P=A +A

( ) ( )
P=A + 1

Finding F When A is Given F

0 1 2 3 n-1 n

A AAAA
Cash flow diagram given A to find F

F = A (F/A, i%, n+1) - A

F = A [(F/A, i%, n+1) -1
( ) ( )
F=A -A

( )( )
F=A − 1

Engineering Economy Page 78

Example
A man bought an equipment costing P60, 000 payable in 12 quarterly
payments, each 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= = 6%
4

P= A (1 + P/ A, 6%, n-1)

P60,000 = A (1+ P/ A, 6%, 11)

( . 6)
P60,000 = A 1 +
. 6

P60,000 = A ( 8.8869)

A= P6,751.53
Example
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 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?

Solution
First bid:
P1

0 1 2 3 4

400k 400k 400k 400k 400k

Let P1= present worth of the first bid

Engineering Economy Page 79

 P1= A (1 + P/ A,20%, 4)
= P400,000(1 + P/ A, 20%, 4)
( . )
= P400,000 1 + .
=P 400,000 (3.5887)
=P1,435,480

Second bid:
P2

0 1 2 3 4

240,000
360,000
540,000 540,000 540,000
LetP2= present worth for the second bid
P2=P240,000 + P360,000( P/F, 20%,1)+ P540,000 (P/A,20%, 3)(P/F,20%,1)
( . )
= P240,000 + P360,000 (1+.20)-1 + P540,000 .
(1+.20)-1
=P240,000 + 360,000(0.8333) + P540,000 (2.1065)(0.8333)
=P1,487,875

The owner of the property should accept the second bid.

Problem:
Suppose that P 400 is deposited each year into a bank account that pays
8%interest annually. If 12 payments are made into the account, how much would
be accumulated in his fund by the end of the 12 year? The first payment occurs
at time zero (now).
Solution
F = A (F/A, i%, n+1)
( . )
F = 400 .
−1
F = P 8198.12

Engineering Economy Page 80