TOPICS

01 Annuity 03 Sample Problems

Amortization
02
 Students will be able to illustrate the
different types of Annuity

I N G
A R N Students will be able to apply the
L E principles of Amortization.
D E D ES
E N O M
INT OUTC

Students will be able to solve complex

JULY word problems involving Annuity and
Amortization.
1
Annuity
 Annuity
➢An annuity is a series of equal payments occurring at equal
periods of time.
 Annuity
➢An annuity is a series of equal payments occurring at equal
periods of time.
 Annuity
1.Ordinary Annuity is one where the equal payments are made at
the end of each payment period starting from the first period.
2.Deferred Annuity is one where the payment of the first amount
is deferred a certain number of periods after the first.
3.Annuity Due is one where the payments are made at the start of
each period, beginning from the first period
4.Perpetuity is an annuity where the payment periods extend
forever or in which the periodic payments continue indefinitely.
 Ordinary Annuity

(1+𝑖)𝑛 −1
•𝑃= 𝐴
𝑖(1+𝑖)𝑛

𝑟 𝑚𝑛
(1+ ) −1
•𝑃=𝐴 𝑟
𝑚
𝑟 𝑚𝑛
𝑚
(1+ 𝑚
)
 Ordinary Annuity

1−(1+𝑖)−𝑛
•𝑃= 𝐴
𝑖
𝑟 −𝑚𝑛
1−(1+𝑚)
•𝑃=𝐴 𝑟
𝑚
• mn = # of payments
 Ordinary Annuity
(1+𝑖)𝑛 −1
• 𝑃= 𝐴
𝑖(1+𝑖)𝑛

• 𝐹 = 𝑃(1 + 𝑖)𝑛

1+𝑖 𝑛 −1 𝑛
• 𝐹 = (𝐴 )( 1+𝑖
𝑖 1+𝑖 𝑛

(1+𝑖)𝑛 −1
• 𝐹= 𝐴
𝑖
 Sample Problem # 1
• if an ordinary annuity pays $50,000 per year for five years and the interest rate is
7%, what would be the present value?
 Sample Problem # 2
• Auto loan requires payments of P3000 per month for 3 years at a nominal annual
rate of 9% compounded monthly. What is the present value of this loan?
 Sample Problem # 4
Jose wants to retire in twenty years and for this purpose he is depositing $200 at the
end of each month in a sinking fund that pays 7.2% compounded monthly. If he will be
doing this for twenty years, then how much money will be there for him when he
retires?
 Sample Problem # 6
What is the future worth of P500 deposited at the end of every three months for 6
years if the interest rate is 12% compounded monthly?
 Sample Problem # 7
Today, you invest P100,000 into a fund that pays 25% interest compounded annually.
Three years later, you borrow P50,000 from a bank at 20% annual interest and invest in
the fund. Two years later, you withdraw 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 5 withdrawals, you withdraw the balance in the
fund. How much was withdrawn?
 Deferred Annuity
• A deferred annuity is one where the first payment is made
several periods after the beginning of the annuity.
Deferred Annuity

(1+𝑖)𝑛 −1
• 𝑃2 = 𝐴
𝑖(1+𝑖)𝑛
• 𝑃2 = 𝐹2 = 𝑃(1 + 𝑖)𝑘
(1+𝑖)𝑛 −1
• 𝐴 = 𝑃(1 + 𝑖)𝑘
𝑖(1+𝑖)𝑛
(1+𝑖)𝑛 −1
• 𝑃= 𝐴 (1 + 𝑖)−𝑘
𝑖(1+𝑖)𝑛
𝑟
(1+𝑚)𝑚𝑛 −1 𝑟 −𝑚𝑘
• 𝑃=𝐴 𝑟 (1 + )
𝑖(1+ )𝑚𝑛 𝑚
𝑚
 Sample Problem # 9
A condominium unit can be bought at a down payment of P150,000 and a monthly
payment of P21,170 for 10 years starting at the end of the 5th year from the date of
purchase. If money is worth 4% compounded monthly, what is the cash price of the
condominium unit?
 Sample Problem # 10
Find the present value of a contract that requires yearly payments of P11832 for 20
years. Money is worth 3.37% for the first eight years and 8.02% for the last 12 years.
 Sample Problem # 11
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 one year after the 9th deposit is
made? The cost of money is 14%.
 Annuity Due
• An annuity due is one where the payments are made at the
beginning of each period.
 Annuity Due

(1+𝑖)−(𝑛−1) −1
•𝑃= 𝐴
𝑖(1+𝑖)−(𝑛−1)

𝑟 −𝑚𝑛+1
(1+ ) −1
•𝑃=𝐴 𝑟
𝑚
𝑟 −𝑚𝑛+1
(1+ )
𝑚 𝑚
 Sample Problem #1
A man bought equipment costing P60,000 payable in 12 quarterly payments, each
installment payable at the beginning of each period. The rate of interest is 32%
compounded quarterly. What is the amount of each payment?
 Sample Problem #2
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 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 the money is worth 20% compounded annually, which bid should the owner of the
property accept?
 Sample Problem #3
Mr. D deposits P100 at the beginning of each month that pays a 6% monthly interest at
the end of each year. How much money will he have at the end of 10 years?
 Perpetuity
• It is an annuity in which the payments continue indefinitely.
Perpetuity
 Sample Problem #1
What amount of money deposited 20 years ago at 4% interest would provide perpetual
payment of P2,000 per year if the annual payments will start a year after?
 Sample Problem #2
Find the present value of perpetuity of P15,000 payable semi-annually if money is
worth 8% compounded quarterly.
 Sample Problem #2
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?
 Capitalized Cost
• The capitalized cost 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
 • 𝐶𝐶 = 𝐹𝐶 + 𝑃𝑂𝑀 + 𝑅𝐶
• 𝑊ℎ𝑒𝑟𝑒: 𝐶𝐶 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝐶𝑜𝑠𝑡
• 𝐹𝐶 = 𝐹𝑖𝑟𝑠𝑡 𝐶𝑜𝑠𝑡
𝑃
• 𝑃𝑂𝑀 = 𝑃𝑒𝑟𝑝𝑒𝑡𝑢𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑛𝑑 𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝐶𝑜𝑠𝑡 =
𝑖
𝑃
• 𝑅𝐶 = 𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡 = 𝑤ℎ𝑒𝑟𝑒 𝑘 = # 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑒𝑣𝑒𝑟𝑦 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡
(1+𝑖)𝑘 −1
 Sample Problem
• Example: Determine the capitalized cost of a structure that
requires an initial investment of P1.5M and an annual
maintenance of P150,000. Interest is 15%
 Sample Problem
Calculate the capitalized cost of a project that has initial cost of
P300,000 and an additional investment cost of P1,000,000 at the
end of every 10 years, operating cost will be P100,000 at the end of
every year for the first four years and P160,000 thereafter. In
addition, there is maintenance expense of P300,000 every 13 years.
Assume interest rate of 15%
 2
Amortization
 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.
 Sample Problem
Find the monthly payment necessary to amortize the given loan. 225,000
at 3.25% for 30 years.
 Sample Problem
A debt of P10,000 with interest at the rate of 20% compounded semi-annually 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. Find the semi-annual payment and construct an amortization schedule.
 Sample Problem
A man pays his debt in the following manner: P1000 after 1 yr, P900 after 2 yrs., P800 after 3
years and so on up to 6th year. Find the accumulated amount of these payments at the rate of
10% compounded annually.