ENGINEERING

ECONOMY

COURSE CODE: BES211

LEC: 3 Units
ANNUITY
 Annuities

An ANNUITY is a series of equal

payments occurring at equal periods of
time
Symbols and Their Meaning

𝐏 = value or sum of money at present

𝐅 = value or sum of money at some future time
𝐀 = a series of periodic, equal amounts of money
𝐧 = number of interest periods
𝐢 = interest rate per interest period
ORDINARY
ANNUITY
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

0 1 2 3 n-1 n

𝐀(𝐏/𝐅, 𝐢%, 𝟏)
𝐀 𝐀 𝐀 𝐀 𝐀
𝐀(𝐏/𝐅, 𝐢%, 𝟐)

𝐀(𝐏/𝐅, 𝐢%, 𝟑)

𝐀(𝐏/𝐅, 𝐢%, 𝐧 − 𝟏)

𝐀(𝐏/𝐅, 𝐢%, 𝐧)

Cash-Flow Diagram to Find 𝑷 given 𝑨

Finding 𝐏 when 𝐀 is given
𝐏 = 𝐀 𝐏/𝐅, 𝐢%, 𝟏 + 𝐀 𝐏/𝐅, 𝐢%, 𝟐 + 𝐀 𝐏/𝐅, 𝐢%, 𝟑 + . . . + 𝐀 𝐏/𝐅, 𝐢%, 𝐧 − 𝟏 + 𝐀 𝐏/𝐅, 𝐢%, 𝐧

𝐏 = 𝐀(𝟏 + 𝐢)−𝟏 + 𝐀(𝟏 + 𝐢)−𝟐 + 𝐀(𝟏 + 𝐢)−𝟑 + . . . + 𝐀(𝟏 + 𝐢)−(𝐧−𝟏) + 𝐀(𝟏 + 𝐢)−𝐧

Multiplying this equation by (𝟏 + 𝐢) results in:

𝐏 + 𝐏𝐢 = 𝐀 + 𝐀(𝟏 + 𝐢)−𝟏 + 𝐀(𝟏 + 𝐢)−𝟐 + . . . + 𝐀(𝟏 + 𝐢)−𝐧+𝟐 + 𝐀(𝟏 + 𝐢)−𝐧+𝟏

Subtracting the first equation from the second gives

𝐏 + 𝐏𝐢 = 𝐀 + 𝐀(𝟏 + 𝐢)−𝟏 + 𝐀(𝟏 + 𝐢)−𝟐 + . . . + 𝐀(𝟏 + 𝐢)−𝐧+𝟏

−𝐏 = −𝐀 𝟏 + 𝐢 −𝟏
− 𝐀 𝟏+𝐢 −𝟐
− ... − 𝐀 𝟏+𝐢 −𝐧+𝟏
− 𝐀(𝟏 + 𝐢)−𝐧

𝐏𝐢 = 𝐀 − 𝐀(𝟏 + 𝐢)−𝐧
Continuation:
Subtracting the first equation from the second gives

𝐏 + 𝐏𝐢 = 𝐀 + 𝐀(𝟏 + 𝐢)−𝟏 + 𝐀(𝟏 + 𝐢)−𝟐 + . . . + 𝐀(𝟏 + 𝐢)−𝐧+𝟏

−𝐏 = −𝐀 𝟏 + 𝐢 −𝟏
− 𝐀 𝟏+𝐢 −𝟐
− ... − 𝐀 𝟏+𝐢 −𝐧+𝟏
− 𝐀(𝟏 + 𝐢)−𝐧

𝐏𝐢 = 𝐀 − 𝐀(𝟏 + 𝐢)−𝐧
𝐏𝐢 = 𝐀 − 𝐀(𝟏 + 𝐢)−𝐧
Solving for P gives:

𝟏− 𝟏+𝐢 −𝐧 𝟏+𝐢 𝐧−𝟏

𝐏=𝐀
𝐢
=𝐀
𝐢 𝟏+𝐢 𝐧 Finding 𝐏 when 𝐀 is given
The quantity in brackets is called the “UNIFORM SERIES PRESENT WORTH FACTOR” and is
designated by the functional symbol 𝐏/𝐀, 𝐢%, 𝐧, read as “𝐏 given 𝐀 at 𝐢 percent in 𝐧 interest periods.”
Thus,

𝐏 = 𝐀(𝐏/𝐀, 𝐢%, 𝐧)
Finding 𝐅 when 𝐀 is given
𝐅

0 1 2 3 n-1 n

𝐀 𝐀 𝐀 𝐀 𝐀
𝐀(𝐅/𝐏, 𝐢%, 𝟏)

𝐀(𝐅/𝐏, 𝐢%, 𝐧 − 𝟑)

𝐀(𝐅/𝐏, 𝐢%, 𝐧 − 𝟐)

𝐀(𝐅/𝐏, 𝐢%, 𝐧 − 𝟏)

Cash-Flow Diagram to Find 𝑭 given 𝑨

Finding 𝐅 when 𝐀 is given
𝐅 = 𝐀 + 𝐀 𝐅/𝐏, 𝐢%, 𝟏 + . . . + 𝐀 𝐅/𝐏, 𝐢%, 𝐧 − 𝟑 + 𝐀 𝐅/𝐏, 𝐢%, 𝐧 − 𝟐 + 𝐀 𝐅/𝐏, 𝐢%, 𝐧 − 𝟏

𝐅 = 𝐀 + 𝐀 𝟏 + 𝐢 + . . . + 𝐀(𝟏 + 𝐢)𝐧−𝟑 + 𝐀(𝟏 + 𝐢)𝐧−𝟐 + 𝐀(𝟏 + 𝐢)(𝐧−𝟏)

Multiplying this equation by (𝟏 + 𝐢) results in:

𝐅 + 𝐅𝐢 = 𝐀 𝟏 + 𝐢 + 𝐀(𝟏 + 𝐢)𝟐 + . . . + 𝐀(𝟏 + 𝐢)𝐧−𝟐 + 𝐀(𝟏 + 𝐢)𝐧−𝟏 + 𝐀(𝟏 + 𝐢)𝐧

Subtracting the first equation from the second gives

𝐅 + 𝐅𝐢 = 𝐀 𝟏 + 𝐢 + . . . + 𝐀(𝟏 + 𝐢)𝐧−𝟐 + 𝐀(𝟏 + 𝐢)𝐧−𝟏 + 𝐀(𝟏 + 𝐢)𝐧

−𝐅 = −𝐀 − 𝐀 𝟏 + 𝐢 − . . . − 𝐀 𝟏 + 𝐢 𝐧−𝟐 − 𝐀(𝟏 + 𝐢)(𝐧−𝟏)
𝐅𝐢 = −𝐀 𝐀(𝟏 + 𝐢)𝐧
Continuation:
Subtracting the first equation from the second gives

𝐅 + 𝐅𝐢 = 𝐀 𝟏 + 𝐢 + . . . + 𝐀(𝟏 + 𝐢)𝐧−𝟐 + 𝐀(𝟏 + 𝐢)𝐧−𝟏 + 𝐀(𝟏 + 𝐢)𝐧

−𝐅 = −𝐀 − 𝐀 𝟏 + 𝐢 − . . . − 𝐀 𝟏 + 𝐢 𝐧−𝟐 − 𝐀(𝟏 + 𝐢)(𝐧−𝟏)
𝐅𝐢 = −𝐀 + 𝐀(𝟏 + 𝐢)𝐧
𝐅𝐢 = −𝐀 + 𝐀(𝟏 + 𝐢)𝐧

Solving for F gives:

𝟏+𝐢 𝐧−𝟏
𝐅=𝐀
𝐢 Finding 𝐅 when 𝐀 is given
The quantity in brackets is called the “UNIFORM SERIES COMPOUND AMOUNT FACTOR”
and is designated by the functional symbol 𝐅/𝐀, 𝐢%, 𝐧, read as “𝐅 given 𝐀 at 𝐢 percent in 𝐧 interest
periods.”
Thus,

𝐅 = 𝐀(𝐅/𝐀, 𝐢%, 𝐧)
Finding 𝐀 when 𝐏 is given
Taking the equation “Finding 𝐏 when 𝐀 is given” and solving for 𝐀, we have:

𝐢
𝐀=𝐏 −𝐧
𝟏− 𝟏+𝐢

The quantity in brackets is called the “CAPITAL RECOVERY FACTOR” and is designated by
the functional symbol 𝐀/𝐏, 𝐢%, 𝐧, read as “𝐀 given 𝐏 at 𝐢 percent in 𝐧 interest periods.”

Thus,

𝐀 = 𝐏(𝐀/𝐏, 𝐢%, 𝐧)
Finding 𝐀 when 𝐅 is given
Taking the equation “Finding 𝐅 when 𝐀 is given” and solving for 𝐀, we have:

𝐢
𝐀=𝐅
𝟏+𝐢 𝐧−𝟏

The quantity in brackets is called the “SINKING FUND FACTOR” and is designated by the
functional symbol 𝐀/𝐅, 𝐢%, 𝐧, read as “𝐀 given 𝐅 at 𝐢 percent in 𝐧 interest periods.”

Thus,

𝐀 = 𝐅(𝐀/𝐅, 𝐢%, 𝐧)
Relationship between 𝐀/𝐅, 𝐢%, 𝐧 and 𝐀/𝐏, 𝐢%, 𝐧
Finding 𝐀 when 𝐅 is given Finding 𝐀 when 𝐏 is given
𝐢 𝐢
𝐀=𝐅 𝐀=𝐏
𝟏+𝐢 𝐧−𝟏 𝟏− 𝟏+𝐢 −𝐧

SINKING FUND FACTOR CAPITAL RECOVERY FACTOR

−𝐧
𝐢 𝐢+𝐢 𝟏+𝐢 𝐧−𝐢 𝟏+𝐢
𝐧
+𝐢 = 𝐱 −𝐧
𝟏+𝐢 −𝟏 𝐢 𝟏+𝐢 𝐧−𝟏 𝟏+𝐢
𝐢 𝐢
+𝐢 =
𝐧
𝟏+𝐢 −𝟏 𝟏 − 𝟏 + 𝐢 −𝐧
𝐀/𝐅, 𝐢%, 𝐧 + 𝐢 = 𝐀/𝐏, 𝐢%, 𝐧
Thus,

SINKING FUND FACTOR + i = CAPITAL RECOVERY FACTOR

Ordinary Annuity Don’t Forget that!
Finding 𝐏 when 𝐀 is given Finding 𝐅 when 𝐀 is given
𝐫
𝟏− 𝟏+𝐢 −𝐧 𝐧
𝟏+𝐢 −𝟏 𝟏+𝐢 𝐧−𝟏 𝐢=
𝐏=𝐀 =𝐀 𝐅=𝐀 𝐦
𝐢 𝐢 𝟏+𝐢 𝐧 𝐢

Finding 𝐀 when 𝐏 is given Finding 𝐀 when 𝐅 is given 𝐧 = 𝐦𝐭

𝐢 𝐢
𝐀=𝐏 𝐀=𝐅 where:
𝟏− 𝟏+𝐢 −𝐧 𝟏+𝐢 𝐧−𝟏
r = nominal interest rate
m = frequency of conversion
t = time in years

SINKING FUND FACTOR + i = CAPITAL RECOVERY FACTOR

𝐢 𝐢
𝐧
+𝐢 = −𝐧
𝟏+𝐢 −𝟏 𝟏− 𝟏+𝐢
Example Problem:
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% 𝟏− 𝟏+𝐢 −𝐧
𝟏 − 𝟏+. 𝟏𝟓 −𝟏𝟎
𝐏=𝐀 = 𝟏𝟎, 𝟎𝟎𝟎
𝐢 𝟎. 𝟏𝟓
P F

𝐏 = 𝐏𝟓𝟎, 𝟏𝟖𝟕. 𝟔𝟖𝟔

0 1 2 3 9 10

𝟏+𝐢 𝐧−𝟏 𝟏 + 𝟎. 𝟏𝟓 𝟏𝟎 − 𝟏
𝐅=𝐀 = 𝟏𝟎, 𝟎𝟎𝟎
P10,000 P10,000 P10,000 P10,000 P10,000 𝐢 𝟎. 𝟏𝟓

P10,000 (𝐏/𝐀, 𝟏𝟓%, 𝟏𝟎) P10,000 (𝐅/𝐀, 𝟏𝟓%, 𝟏𝟎)

𝐅 = 𝐏𝟐𝟎𝟑, 𝟑𝟎𝟕. 𝟏𝟖𝟐
Example Problem:
What is the present worth of P500 deposited at the end of every three months for 6 years if the interest
rate is 12% compounded semi-annually?
Solution:
Solving for the interest rate per quarter,
A = P500
Take Note! 𝟏𝟐
n = every 3 months for 6 years = ( 𝟑 ) 𝟔 = 𝟐𝟒
For two or more NOMINAL RATES to be EQUIVALENT, 𝐢 = 𝟎. 𝟎𝟐𝟗𝟓𝟔
their corresponding EFFECTIVE RATES must be EQUAL.
𝟐 −𝐧
𝟒 𝟎. 𝟏𝟐 𝟏− 𝟏+𝐢
𝟏+𝐢 −𝟏 = 𝟏+ −𝟏 𝐏=𝐀
𝟐 𝐢
𝟐
𝟒
𝟎. 𝟏𝟐
𝟏+𝐢 = 𝟏+ −𝟏 + 𝟏 −𝟐𝟒
𝟐 𝟏 − 𝟏 + 𝟎. 𝟎𝟐𝟗𝟓𝟔
= 𝟓𝟎𝟎
𝟏+𝐢 𝟒 𝟎. 𝟎𝟐𝟗𝟓𝟔
= 𝟏. 𝟏𝟐𝟑𝟔
𝟏
𝟏+𝐢 = (𝟏. 𝟏𝟐𝟑𝟔)𝟒
𝟏 𝐏 = 𝐏𝟖, 𝟓𝟎𝟖. 𝟎𝟒𝟕
𝐢 = (𝟏. 𝟏𝟐𝟑𝟔)𝟒 −𝟏

𝐢 = 𝟎. 𝟎𝟐𝟗𝟓𝟔
Example Problem:
A businessman needs P50,000 for his operations. One financial institution is willing to lend him the money
for one year at 12.5% interest per annum (discounted). Another lender is charging 14%, with the principal
and interest payable at the end of one year. A third financer is willing to lend him P50,000 payable in 12
equal monthly installments of P4,600. Which offer is best for him?
Solution:
Compare the effective rate of each offer and select the one with the LOWEST EFFECTIVE RATE.

First Offer Another Solution:

Rate of discount, 𝐝 = 𝟏𝟐. 𝟓% Amount received = 𝐏𝟓𝟎, 𝟎𝟎𝟎 − 𝐏𝟓𝟎, 𝟎𝟎𝟎(𝟏𝟐. 𝟓%) = 𝐏𝟒𝟑, 𝟕𝟓𝟎
𝐝 𝐏𝟒𝟑, 𝟕𝟓𝟎
Rate of interest, 𝐢= Rate of interest
𝟏−𝐝
0 1
𝟎. 𝟏𝟐𝟓 𝐏𝟓𝟎, 𝟎𝟎𝟎 − 𝐏𝟒𝟑, 𝟕𝟓𝟎
= =
𝟏 − 𝟎. 𝟏𝟐𝟓 𝐏𝟒𝟑, 𝟕𝟓𝟎
𝐏𝟓𝟎, 𝟎𝟎𝟎 = 𝟎. 𝟏𝟒𝟐𝟖 𝒐𝒓 𝟏𝟒. 𝟐𝟖%
= 𝟎. 𝟏𝟒𝟐𝟖 𝒐𝒓 𝟏𝟒. 𝟐𝟖%

Effective Rate = 𝟏𝟒. 𝟐𝟖% Effective Rate = 𝟏𝟒. 𝟐𝟖%

Continuation:
Second Offer “Another lender is charging 14%, with the principal and interest payable at the end of one year”

𝐏𝟓𝟎, 𝟎𝟎𝟎

0 1

𝐏𝟓𝟎, 𝟎𝟎𝟎 (𝟏. 𝟏𝟒)

Effective Rate = 𝟏𝟒 %
Continuation:
Third Offer “A third financer is willing to lend him P50,000 payable in 12 equal monthly installments of P4,600”

P50,000
𝐏 = 𝟓𝟎, 𝟎𝟎𝟎
𝐀 = 𝐏𝟒, 𝟔𝟎𝟎
𝐧 = 𝟏𝟐
0 1 2 3 11 12

−𝐧
𝟏− 𝟏+𝐢
𝐏=𝐀
𝐢 P4,600 P4,600 P4,600 P4,600 P4,600

𝟏− 𝟏+𝐢 −𝟏𝟐 By Calculators Solve Function

𝐏𝟓𝟎, 𝟎𝟎𝟎 = 𝐏𝟒, 𝟔𝟎𝟎
𝐢
𝐢 = 0.01556
𝐏𝟓𝟎, 𝟎𝟎𝟎 𝟏− 𝟏+𝐢 −𝟏𝟐 We know that:
= Effective rate = 1 + i m
−1
𝐏𝟒, 𝟔𝟎𝟎 𝐢
Thus,
𝟏− 𝟏+𝐢 −𝟏𝟐
𝟏𝟎. 𝟖𝟔𝟗𝟔 = Effective rate = 1 + 0.01556 12
−1
𝐢
Effective rate = 𝟎. 𝟐𝟎𝟑𝟔 𝐨𝐫 𝟐𝟎. 𝟑𝟔%
Continuation:
If your Calculator Does Not Have Solve Function!
LINEAR INTERPOLATION
𝟏𝟏. 𝟐𝟓𝟓𝟏
−𝟏𝟐
𝟏− 𝟏+𝐢
𝟏𝟎. 𝟖𝟔𝟗𝟔 =
𝐢
𝟏𝟎. 𝟖𝟔𝟗𝟔
𝟏− 𝟏+𝐢 −𝟏𝟐
= 𝟏𝟎. 𝟖𝟔𝟗𝟔
𝐢
𝟏𝟎. 𝟓𝟕𝟓𝟑
𝐓𝐫𝐲 𝐢 = 𝟏% 𝐨𝐫 𝟎. 𝟎𝟏
𝟏𝟏. 𝟐𝟓𝟓𝟏 − 𝟏𝟎. 𝟓𝟕𝟓𝟑 𝟎. 𝟎𝟏 − 𝟎. 𝟎𝟐
𝟏 − 𝟏 + 𝟎. 𝟎𝟏 −𝟏𝟐 = 𝟏% 𝐨𝐫 𝟎. 𝟎𝟏 𝐱 𝟐% 𝐨𝐫 𝟎. 𝟎𝟐
= 𝟏𝟏. 𝟐𝟓𝟓𝟏 𝟏𝟎. 𝟖𝟔𝟗𝟔 − 𝟏𝟎. 𝟓𝟕𝟓𝟑 𝐱 − 𝟎. 𝟎𝟐
𝟎. 𝟎𝟏
𝟎. 𝟔𝟕𝟗𝟖 −𝟎. 𝟎𝟏
=
𝐓𝐫𝐲 𝐢 = 𝟐% 𝐨𝐫 𝟎. 𝟎𝟐 𝟎. 𝟐𝟗𝟒𝟑 𝐱 − 𝟎. 𝟎𝟐
−𝟏𝟐 𝟎. 𝟐𝟗𝟒𝟑
𝟏 − 𝟏 + 𝟎. 𝟎𝟐 𝐱 − 𝟎. 𝟎𝟐 = (−𝟎. 𝟎𝟏)
= 𝟏𝟎. 𝟓𝟕𝟓𝟑 𝟎. 𝟔𝟕𝟗𝟖 Effective rate = 1 + i m
−1
𝟎. 𝟎𝟐
𝟎. 𝟐𝟗𝟒𝟑
𝐱 = −𝟎. 𝟎𝟏 + 𝟎. 𝟎𝟐 Effective rate = 1 + 0.01567 12
−1
𝟎. 𝟔𝟕𝟗𝟖
𝐱 = 𝟎. 𝟎𝟏𝟓𝟔𝟕 𝐨𝐫 𝟏𝟓. 𝟔𝟕% Effective rate = 𝟎. 𝟐𝟎𝟓𝟏 𝐨𝐫 𝟐𝟎. 𝟓𝟏%
𝐢 = 𝟎. 𝟎𝟏𝟓𝟔𝟕 𝐨𝐫 𝟏𝟓. 𝟔𝟕%
Continuation:
First Offer “one year at 12.5% interest per annum (discounted)”

Effective Rate = 𝟏𝟒. 𝟐𝟖%

Second Offer “Another lender is charging 14%, with the principal and interest payable at the end of one year”

Effective Rate = 𝟏𝟒 % Best Offer!

Third Offer “A third financer is willing to lend him P50,000 payable in 12 equal monthly installments of P4,600”

Effective rate = 𝟎. 𝟐𝟎𝟑𝟔 𝐨𝐫 𝟐𝟎. 𝟑𝟔%

DEFERRED
ANNUITY
Deferred Annuity
In deferred annuity the first payment is deferred a certain number of compounding periods
after the first.

It is an annuity where payment is delayed or deferred for a certain period of time.

𝟏 − (1 + i)−𝐧
𝐏′ = 𝐀
𝐏’ 𝐢
𝐏

1 2 3 n-2 n-1 n

0 1 2 3 4 5 n-2 n-1 n

period of deferral

A A A A A A
𝐏 = 𝐏 ′ (𝟏 + 𝐢)−(𝐤−𝟏) Note:
Thus, For 𝐅 the
𝟏 − (1 + i)−𝐧 𝟏+𝐢 𝐧−𝟏 formula is the same
𝐏=𝐀 (𝟏 + 𝐢)−𝐤 𝐅=𝐀 since deferred does
𝐢 𝐢 not have effect on
the future amount
k – period of deferral
Example Problem:
Determine the present worth of a deferred annuity, consisting of 10 semi-annual payments, each P1000,
the first at the end of the third year. Money is worth 14% compounded semi-annually.

Solution: 𝐢 = 𝟎. 𝟎𝟕
𝐧 = 𝟏𝟎 (𝐬𝐞𝐦𝐢 − 𝐚𝐧𝐧𝐮𝐚𝐥 𝐩𝐚𝐲𝐦𝐞𝐧𝐭𝐬)
𝟏 − (1 + i)−𝐧
𝐏=𝐀 (𝟏 + 𝐢)−𝐤 𝐤=𝟓 𝐧 = 𝟏𝟎
𝐀 = 𝐏𝟏𝟎𝟎𝟎 𝐢 𝐀 = 𝟏𝟎𝟎𝟎
𝐫 = 𝟏𝟒%
𝟏 − (1 + 𝟎. 𝟎𝟕)−𝟏𝟎
Solve for 𝐢 : 𝐏 = 𝟏𝟎𝟎𝟎 (𝟏 + 𝟎. 𝟎𝟕)−𝟓
𝐫 𝟎. 𝟏𝟒 𝟎. 𝟎𝟕
𝐢= =
𝐦 𝟐
𝐏 = 𝐏𝟓, 𝟎𝟎𝟕. 𝟕𝟏𝟕
𝐢 = 𝟎. 𝟎𝟕
𝐏

0 1 2 3 4 5 6 7

1 2 3 4 5

P10k P10k P10k P10k P10k P10k P10k P10k P10k P10k

1 2 3 4 5 6 7 8 9 10
Example Problem:
A man loans P187,400 from a bank with an interest rate of 5% compounded annually. He gets to pay his
obligations by paying 8 equal annual payments, the first being due at the end of 10 years. Find the annual
payment?
Solution: 𝟏 − (1 + i)−𝐧
𝐏 = 𝐏𝟏𝟖𝟕, 𝟒𝟎𝟎
𝐏=𝐀 (𝟏 + 𝐢)−𝐤
𝐢
𝐀 =?
𝐫 = 𝟓% 𝟏 − (1 + 𝟎. 𝟎𝟓)−𝟖
𝐏𝟏𝟖𝟕, 𝟒𝟎𝟎 = 𝐀 (𝟏 + 𝟎. 𝟎𝟓)−𝟗
𝐧=𝟖 𝟎. 𝟎𝟓
Solve for 𝐢 :
𝐫 𝟎. 𝟎𝟓 𝐀 = 𝐏𝟒𝟒, 𝟗𝟖𝟎. 𝟓𝟓𝟕
𝐢= =
𝐦 𝟏
𝐏
𝐢 = 𝟎. 𝟎𝟓

0 1 2 3 . . . 9 10 11 12 13 14 15 16 17

A A A A A A A A

1 2 3 4 5 6 7 8
Example Problem:
On the day his grandson was born, a man deposited to a trust company a sufficient amount of money so
that the boy could 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 a provision that the grandson could elect to withdraw no annual payments and receive a single
lump amount on his 25th birthday. The grandson chose this option.
(a) How much did the boy receive as the single payment?
Thus,
(b) How much did the grandfather deposit?
𝟏+𝐢 𝐧−𝟏 𝟏+𝐢 𝐧−𝟏
Solution: (a) 𝐅 = 𝐅′(𝟏 + 𝒊)𝒏′ ; 𝐅′ = 𝐀 𝐅=𝐀 (𝟏 + 𝐢)𝐧′
𝐢 𝐢
𝐀 = 𝐏𝟏𝟎, 𝟎𝟎𝟎 𝟏 + 𝟎. 𝟏𝟐 𝟓 − 𝟏
𝐏 =? 𝐅 = 𝐏𝟏𝟎, 𝟎𝟎𝟎 (𝟏 + 𝟎. 𝟏𝟐)𝟑 = 𝐏𝟖𝟗, 𝟐𝟓𝟐. 𝟗𝟑𝟏
𝟎. 𝟏𝟐
𝐅 =?
𝐫 = 𝟏𝟐% 𝐏
𝐧=𝟓

Solve for 𝐢 :
𝐫 𝟎. 𝟏𝟐 . . .
𝐢= = 0 1 2 3 17 18 19 20 21 22 23 24 25
𝐦 𝟏

𝐢 = 𝟎. 𝟏𝟐
P10k P10k P10k P10k P10k

1 2 3 4 5

𝐅’ 𝐅
Continuation: 𝐢 = 𝟎. 𝟏𝟐
𝟏 − (1 + i)−𝐧
Solution: (b) 𝐏=𝐀 (𝟏 + 𝐢)−𝐤 𝐤 = 𝟏𝟕 𝐧=𝟓
𝐢 𝐀 = 𝟏𝟎, 𝟎𝟎𝟎
𝐀 = 𝐏𝟏𝟎, 𝟎𝟎𝟎
𝐏 =? 𝟏 − (1 + 𝟎. 𝟏𝟐)−𝟓
𝐅 =? 𝐏 = 𝐏𝟏𝟎, 𝟎𝟎𝟎 (𝟏 + 𝟎. 𝟏𝟐)−𝟏𝟕
𝟎. 𝟏𝟐
𝐫 = 𝟏𝟐%
𝐧=𝟓

Solve for 𝐢 :
𝐏 = 𝐏𝟓, 𝟐𝟓𝟎. 𝟏𝟓𝟐
𝐫 𝟎. 𝟏𝟐
𝐢= =
𝐦 𝟏

𝐢 = 𝟎. 𝟏𝟐
𝐏

0 1 2 3 . . . 17 18 19 20 21 22 23 24 25

P10k P10k P10k P10k P10k

1 2 3 4 5

𝐅’ 𝐅
ANNUITY
DUE
Annuity Due
An annuity due is one where the payments are made at the beginning of each period.

Finding 𝐏 when 𝐀 is given Finding 𝐅 when 𝐀 is given

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

𝐏 𝐅

0 1 2 3 n-1 n 0 1 2 3 n-1 n

A A A A A A A A A A
Finding 𝐏 when 𝐀 is given

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

0 1 2 3 n-1 n −(𝐧−𝟏)
𝟏− 𝟏+𝐢
𝐏=𝐀 +𝐀
𝐢

A A A A A 𝐅𝐚𝐜𝐭𝐨𝐫 𝐨𝐮𝐭 𝐀

𝟏− 𝟏+𝐢 −(𝐧−𝟏)
A A A A A 𝐏=𝐀 +𝟏
𝐢
Finding 𝑭 when 𝐀 is given
𝟏+𝐢 𝐧−𝟏
𝐅=𝐀 (𝟏 + 𝐢)
𝐢
𝐅

𝟏+𝐢 𝐧−𝟏
𝐅′ = 𝐀
𝐢
0 1 2 3 n-1 +1 n
𝐅 = 𝐅′(𝟏 + 𝐢)

Thus,
A A A A A

𝐅′ 𝟏+𝐢 𝐧−𝟏
𝐅=𝐀 (𝟏 + 𝐢)
𝐢
Example Problem:
A man bought an equipment costing P60,000 payable quarterly for 3 years, each installment payable at
the beginning of each period. The rate of interest is 24% compounded quarterly, what is the amount of
each payment
𝟏 − 𝟏 + 𝐢 −(𝐧−𝟏)
Solution: 𝐏=𝐀 +𝟏
𝐢
𝐏 = 𝐏𝟔𝟎, 𝟎𝟎𝟎
𝟏 − 𝟏 + 𝟎. 𝟎𝟔 −(𝟏𝟐−𝟏)
𝐀 =? 𝐏𝟔𝟎, 𝟎𝟎𝟎 = 𝐀 +𝟏
𝐫 = 𝟐𝟒% 𝟎. 𝟎𝟔
𝐦=𝟒
𝐭=𝟑 𝑨 = 𝑷𝟔, 𝟕𝟓𝟏. 𝟓𝟑𝟎
Solve for 𝐢 : 𝐏𝟔𝟎, 𝟎𝟎𝟎
𝐫 𝟎. 𝟐𝟒
𝐢= =
𝐦 𝟒

𝐢 = 𝟎. 𝟎𝟔 0 1 2 3

Solve for 𝐧 :
𝐧 = 𝐦𝐭 A A A A A A A A A A A A

= (𝟒)(𝟑)
𝐧 = 𝟏𝟐
Example Problem:
What is the future worth of P1,000 yearly deposited at 2% annual interest for 10 years if the payments are
made at the beginning of each year.
Solution:
𝐅 =? 𝟏+𝐢 𝐧−𝟏
𝐀 = 𝐏𝟏, 𝟎𝟎𝟎 𝐅=𝐀 (𝟏 + 𝐢)
𝐢
𝐫 = 𝟐%
𝐦=𝟏 𝟏 + 𝟎. 𝟎𝟐 𝟏𝟎 − 𝟏
𝐭 = 𝟏𝟎 𝐅 = 𝑷𝟏, 𝟎𝟎𝟎 (𝟏 + 𝟎. 𝟎𝟐)
𝟎. 𝟎𝟐

Solve for 𝐢 : 𝐅 = 𝐏𝟏𝟏, 𝟏𝟔𝟖. 𝟕𝟏𝟓

𝐫 𝟎. 𝟎𝟐
𝐢= =
𝐦 𝟏
𝐅
𝐢 = 𝟎. 𝟎𝟐

Solve for 𝐧 :
0 1 2 3 9 10
𝐧 = 𝐦𝐭
= (𝟏)(𝟏𝟎)
𝐧 = 𝟏𝟎
A A A A A
PERPETUITY
Perpetuity
A perpetuity is an annuity similar to an ordinary annuity except that the payments continue
infinitely.
𝐏

Don’t Forget that!

0 1 2 3 n → ∞ 𝐫
𝐢=
𝐦
A A A
0
𝟏− 𝟏+𝐢 −𝐧
𝟏 − 𝟏 + 𝐢 −∞ 𝟏−𝟎
𝐏=𝐀 =𝐀 =𝐀
𝐢 𝐢 𝐢

𝐀 For Perpetuity Future Worth Value ( 𝐅 ) is

𝐏= 𝐅= cannot be determined since you are dealing
𝐢 with infinite annuities.
Example Problem:
Find the present value in pesos, of a perpetuity of P15,000 payable semi-annually, if the money is worth
8% compounded quarterly.
Solution:
𝐏 =?
Thus,
𝐀 = 𝐏𝟏𝟓, 𝟎𝟎𝟎
𝐫 = 𝟖% 𝐟𝐨𝐫 𝐦 = 𝟒 𝐫 = 𝟎. 𝟎𝟖𝟎𝟖 𝐨𝐫 𝟖. 𝟎𝟖%
𝐫 =? 𝐟𝐨𝐫 𝐦 = 𝟐
𝐀 𝐀 𝐏𝟏𝟓, 𝟎𝟎𝟎
Solve for interest rate of 𝐏= = 𝐫 = = 𝐏𝟑𝟕𝟏, 𝟐𝟖𝟕. 𝟏𝟐𝟗
semi-annually : 𝐢 𝟎. 𝟎𝟖𝟎𝟖
Use the formula for effective rate of
𝐦 𝟐
interest:
𝐫 𝐦
𝐢𝐞𝐟𝐟 = 𝟏+ −𝟏
𝐦
Equate 8% compounded quarterly
and r% semi-annually

𝟒 𝟐
𝟎. 𝟎𝟖 𝒓
𝟏+ −𝟏= 𝟏+ −𝟏
𝟒 𝟐
Example Problem:
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:
𝐏

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 ... ∞

P30k P30k P30k P30k P30k P30k P40k P40k P40k P40k P40k P40k P50k P50k P50k P50k P50k P50k P50k P50k P50k

−𝐧
𝟏− 𝟏+𝐢 𝟏 − 𝟏 + 𝐢 −𝐧 𝑨
𝐏= 𝐀 + 𝐀 𝟏+𝐢 −𝐤 + 𝟏 + 𝐢 −𝐤
𝐢 𝐢 𝐢
𝟏 − 𝟏 + 𝟎. 𝟏𝟓 −𝟔 𝟏 − 𝟏 + 𝟎. 𝟏𝟓 −𝟔 𝑷𝟓𝟎, 𝟎𝟎𝟎 −𝟏𝟐
𝐏 = 𝐏𝟑𝟎, 𝟎𝟎𝟎 + 𝐏𝟒𝟎, 𝟎𝟎𝟎 𝟏 + 𝟎. 𝟏𝟓 −𝟔 + 𝟏 + 𝟎. 𝟏𝟓
𝟎. 𝟏𝟓 𝟎. 𝟏𝟓 𝟎. 𝟏𝟓

𝐏 = 𝐏𝟐𝟒𝟏, 𝟐𝟖𝟐. 𝟑𝟏𝟔