ENSC 023 - Engineering economy

Week 5
ANNUITY DUE
PERPETUITY

CAPITALIZED COST
 annuity DUE
the payments are made at the beginning of each period
ORDINARYANNUM: ANNUI DVE:
ORDINARYANNUIM

ze
pp pp
0
#I
1 2

181
db+ ddbA
3 4 5n-1 n P
x(!]
=

a
+

↓ A

P
A(,,!]
=

I
n+ periods
↑F en ↑F
-1]
A((
n 1

..
211 F
01 n
2 3 4 5n-1 R
-

#I
181 A
=
-

Aldddt
↓1,e
t
b

Annuity
PROBLEM 1
Find the difference between the sums of an annuity due and an ordinary annuity for
the following data: E FUTURE ORDINARYANNVIM:
Periodic Payment = P14,000
WORNA ↑ ? F =

Payment Interval = 3 months int

Term = 16 years ↓ ↓↓↓↓/ ↓ ↓

Interest Rate = 10% compounded quarterly

GIVEN:

A F14,000 ANNUIT
SOL'N?

DUE:
m 16yx
= x
4 64
=
F A =

(I1]
↑ F ?
=

m 4
int
F
14,000((*-1]
=
=

t 16=

yrs
↓t tft4dd
r 10%
=
comp. quarterly i 10 0.025
Fox 2,159,664.999
=

5
=
=

4
REG'D:FAD FOA FAD
F A
- 17
(* FOA 2,213,656.624
-

-
A =

2,159,664,999
((wtstt-17-14,000
-

F
=
14,000
Fap-Fox =
53,991,69
ANNUITY DUE
P 53,991.62
FA $2213656.624
=
PROBLEM 2
A farmer bought a tractor costing P25,000 payable in 10 semi-annual payments, each
installment payable at the beginning of each period. If the rate of interest is 26%
compounded semi-annually, determine the amount of each installment.
i 0.26
GIVEN: SOLN: 0.13

"Iin]+]
=

--

iii
F25,008 25,000 25,000 =

B
↑
=

=
n 10 0

r 26%
=

comp, semi-annually 25,000

m 2
= A

Hi]+
REQ'D'

A ?
=

P
x(!!)
=
a
+

A b4,077,20
=

(20,!.]
25,000 A =

A
+

ANNUITY DUE
p 4,077.20
PROBLEM 3
A certain manufacturing plant is being sold and was submitted for bidding. Two bids were
submitted by interested buyers. The first bid offered to pay P200,000 each year for 5 years, each
payment being made at the beginning of each year. The second bidder offered to pay P120,000 the
first year, P180,000 the second year, and P270,000 each year for the next 3 years, all payments
being made at the beginning of each year. If money is worth 12% compounded annually, which bid
should the owner of the plant accept? SOL".
GIVEN 9 REQ'D! BIDDER 2; IBDEK
B
T:

<

,1,]
B IDDER T:

Mr
p
x(, x

co
+
=

i
200,000
is-] 200,000
+
=

I I I 11 17
6/2345 P 807,459.87
=

P2>P..:P2
I
should
↓P, =
? ↓ P2 =
? BIDDER 2:
be chosen
-
P 120,000 180,000 (1+0.12)
= +

v 12:
=

comp, annually m1
=

+
(0,2,3)
270000 -
(10.12)
i
5
=

1
= 12%
= P 859, 727.18

ANNUITY DUE
P 807, 469.87
P2 859,727.18
=
SOLVE IT
TO
WIN IT
SOLVE IT TO WIN IT
A contractor bought a concrete mixer at Php 120,000 if paid in cash. The mixer may also be purchased by
installment to be paid within 5 years. If money is worth 8%, determine the amount of each annual payment if
all payments are made at the beginning of each year.
GNEN ↑ REQ'D: SOLN:

A(,,!]
⑳
OA p x
↑1201
=
+

O I
"
5

120,000
(wors]
I 17 x
=

+*

↓ ↓db ↓
A A A A

x(),
A

r=]+)
120,000 =

i =
8%

A P27,828.49
=

ANNUITY
 perpetuity P only

an annuity where the payments continue indefinitely

ORDINARYANNUM: PERPENIN

pp pp
0 4 5n-1 01
1 2 3 n
3 4 5n-1
I-
2
#I
181
db+ ddbA
i11, f
↓
db+ ddbA
↓ ↓A
P
A(,,!]
=

px =

(i I
- A
[ Fir into itage
- o

P A
=

I
PROBLEM 1
What present sum would be needed to provide for annual end of year payments of
P150,000 each forever at an interest of 8%?
10%y y p100
i 100
=
100
GIVEN REQ'D:
9 SOLN:
01234
· ↑
150k
pE
=

/
#
How thor I have
↓
X

#111-
o
p =

1100
↓ P ?
=

i 8%
=

1000
low 1108

P F1,875,000
=

(1+0,08) =
1,075,000 2,025,000
-

150,000
perpetuity 75,000 p 1,875,000
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? SOLN;

GNEN G REQ'D: iox * =

(!]
↑
Pp = 30,000
(18- I
0.15 (170,/5)

↑ PBA Pox F
b I =

113,534.4808

e
↑POA ↑

⑧
58/

1x 40,000
it]1+0.15-3
/
=

↓ PDA Y65,445,45219
=

P OA 15% DA

200(1+0.15)
=
? i =

P Pp =
-
12
462,302.3834
↓
=

P POA
=
+ PDA Pp
+

perpetuity P P 241,282.31
=
P 241,282.31
PROBLEM 3
To maintain a bridge, Php 5,000 will be required at the end of 3 years and annually
thereafter. If money is worth 8%, determine the present value of all future
maintenance.
SOL'N!
GIVEN
Y REP'D:

5(1+
p
↑ P =
? =

0.08)-2

it
O

ies P =
$53,583.68

5K 5K512512512

i 8%
=

perpetuity
P 53, 583.68
SOLVE IT
TO
WIN IT
SOLVE IT TO WIN IT
How much money must you deposit today to an account earning 12% so that you can withdraw Php 30,000
yearly indefinitely starting at the end of the 8th year?
GNEN
4 REQ'D:

re
30K 3012 30K
SOL'N!
7
Pp(1+i)
-

P =

01 2 3 4
5

i
20(1+0.12)
-7
p =

↓P =
? i 12%
=

P =
↑113,087,30

ANNUITY
 CAPITALIZED COST

Capitalized Cost = First Cost + Present Worth of Perpetual

Operation, Maintenance, and Replacement Cost

Components of Capitalized Cost (CC)

First Cost (FC)
Operation and Maintenance Cost (OM)
Replacement Cost (RC)
Salvage Value (SV)
 common types of capitalized cost

CASE 1: No replacement, only maintenance and/or operation every period

ex.
dams, bridges
CASE 2: Replacement only, no maintenance and/or operation
ex. curtains in office

CASE 3: Replacement, maintenance and/or operation every period

ex.
equipments, machineries

Capitalized cost
 common CASES of capitalized cost
CASE 1: No replacement, only maintenance and/or operation every period
01 2
in
4 56
CC = First Cost + Present Worth of Perpetual OM Costs 3

111 7
#

↑x
0 I 23
ANNUAL UNIFORM PAYMENT

.
& n = interval of
Om

Vae Payments

P P(H.r5)/PC1+0.0572
FL UNIFURG PAYMENT
BUT NOW-YEARLY 0,23456
P A 1 I 11 I 13
1
=
=

T n 2
↓ ↓ ↓
=

C =
FC OM
+

Om
Om Om
T ~

Capitalized cost
D+ in
"yearly) =(+in)'
(1+iyearly"
=

1
 common CASES of capitalized cost
RC-su
CASE 2: Replacement only, no maintenance and/or operation

O iten
is
CC = First Cost + Present Worth of Perpetual RC
0

(i+i)" -

6 k useful
=

(1 ti) -
life

Capitalized cost
 common CASES of capitalized cost
CASE 3: Replacement, maintenance and/or operation every period

CC = First Cost + Present Worth of Perpetual OM Costs + Present Worth of Perpetual RC

↑sr ④s
0123456789102
#
,
114

↓tot ane
↓

Capitalized cost
PROBLEM 1
At 6%, find the capitalized cost of a bridge whose cost is P250 M and life is 20 years, if
the bridge must be partially rebuilt at a cost of P100 M at the end of each 20 years.
GIVEN 1 REND: SOLN:

=?
y CASETi

O C2 Fc m
⑲k
+
=

&

4+i)" -

↓ iom tm itm om 100m

↓ =250M -
+

(1+0.06720-1
250M
4
i 6%= F2 250M
=
c =
295,307,595
n 20
=

OM=100M

Capitalized cost