ANNUITY AND

AMORTIZATION
CHAPTER 2
ANNUITY

ANNUITY IS A SERIES OF EQUAL PAYMENTS

OCCURING AT EQUAL PERIOD OF TIME
F. APPLICATIONS OF ANNUITY
1. BOND VALUE
 PRESENT WORTH OR COST OF THE BOND OR THE AMOUNT
BEING PAID TO OWN A BOND.

I I I I I I

C
Formula:
1. Present Worth, P
−𝑛
1− 1+𝑖 −𝑛
𝑃=𝐼 +𝐶 1+𝑖
𝑖

2. Interest, I
𝐼 = 𝐹𝑟 , if I is not given
Where:
P, bond value
I, interest per period through the ownership of the bond
C, redemption cost, C = F if not given
i, rate of interest
F, face value or par value
r, bond rate of interest per period
Sample Problem 1

Midland oil has ₱50,000 par value bonds

outstanding at 8% interest. The bonds will
mature in 25 years. Compute the current
price of the bonds if the present yield to
maturity is 6%.
Sample Problem 1
 Midland oil has ₱50,000 par value bonds outstanding at 8% interest. The
bonds will mature in 25 years. Compute the current price of the bonds if the
present yield to maturity is 6%.
Solution:
1− 1+𝑖 −𝑛
𝑃=𝐼 +𝐶 1+𝑖 −𝑛
𝑖

where: I = Fr = (50,000) (0.06) = 3,000

C = F = 50,000
i = 8% = 0.08
n = 25 years

1 − 1 + 0.08 −25
then, 𝑃 = 3000 + 50000 1 + 0.08 −25
0.08
𝑷 = ₱𝟑𝟗, 𝟑𝟐𝟓. 𝟐𝟐
Sample Problem 2

The amount of the prospective investor

pay for a bond if he desires an 8% return
on his investment and the bond will return
P1,000 per year for 20 years and P20,000
after 20 years is _______.
Sample Problem 2
 The amount of the prospective investor pay for a bond if he desires an 8%
return on his investment and the bond will return ₱1,000 per year for 20 years
and ₱20,000 after 20 years is _______.
Solution:
1− 1+𝑖 −𝑛
−𝑛
𝑃=𝐼 +𝐶 1+𝑖
𝑖

where: I = 1,000
C = 20,000
i = 8% = 0.08
n = 20 years

1 − 1 + 0.08 −20
then, 𝑃 = 1000 + 20000 1 + 0.08 −20
0.08

𝑷 = ₱𝟏𝟒, 𝟏𝟎𝟗. 𝟏𝟏
F. APPLICATIONS OF ANNUITY
2. CAPITALIZED COST
 AMOUNT TO BE CONSIDERED AT PRESENT TO PURCHASE
A PROPERTY, EQUIPMENT OR BUSINESS AT CONTINUOUS
SERVICE.
Where:
FC, first cost
MC, maintenance cost
Formula:
CR, cost of repair
RC, renewal cost
𝑀𝐶 𝐶𝑅 𝑅𝐶 RC = FC – SV – CR, if not given
𝐶𝐶 = 𝐹𝐶 + + 𝑘
+
𝑖 1+𝑖 −1 1+𝑖 𝐿 −1 i, rate of interest
k, interval, repair of replacement
period
L, useful life
Sample Problem 1

What is the capitalized cost of the bridge

costing ₱4.5M and having 25 year life;
₱30,000 annual maintenance cost and
repairs at 5-year intervals of ₱200,000 if the
interest is 10%.
Sample Problem 1
 What is the capitalized cost of the bridge costing ₱4.5M and having 25 year
life; ₱30,000 annual maintenance cost and repairs at 5-year intervals of
₱200,000 if the interest is 10%.

Solution:
𝑀𝐶 𝐶𝑅 𝑅𝐶
𝐶𝐶 = 𝐹𝐶 + + +
𝑖 1+𝑖 𝑘−1 1+𝑖 𝐿−1

where: FC = 4.5 M
MC = 30,000
CR = 200,000
RC = 4.5 M – 200000 = 4.3 M
i = 10%
k = 5 years
L = 25 years
30000 200000 4.3𝑀
then, 𝐶𝐶 = 4.5𝑀 + + +
0.10 1 + 0.10 5 − 1 1 + 0.10 25 − 1
𝑪𝑪 = ₱𝟓, 𝟓𝟔𝟒, 𝟖𝟐𝟐. 𝟎𝟕
Sample Problem 2

A building cost ₱10M and the salvage

value is ₱150,000 after 25 years. The
annual maintenance cost is ₱60,000, cost
of repair is ₱200,000 every 5 years. Find
the capitalized cost if money is worth 15%
per annum.
Sample Problem 2
 A building cost ₱10M and the salvage value is ₱150,000 after 25 years. The
annual maintenance cost is ₱60,000, cost of repair is ₱200,000 every 5 years.
Find the capitalized cost if money is worth 15% per annum.

Solution:
𝑀𝐶 𝐶𝑅 𝑅𝐶
𝐶𝐶 = 𝐹𝐶 + + +
𝑖 1+𝑖 𝑘−1 1+𝑖 𝐿−1

where: FC = 10 M
SV = 150,000
MC = 60,000
CR = 200,000
RC = 10 M – 150000 - 200000 = 9.65 M
i = 15%
k = 5 years
L = 25 years
then,
60000 200000 9.65𝑀
𝐶𝐶 = 10𝑀 + + +
0.15 1 + 0.15 5 − 1 1 + 0.15 25 − 1

𝑪𝑪 = ₱𝟏𝟎, 𝟗𝟎𝟎, 𝟎𝟖𝟐. 𝟐𝟗

F. APPLICATIONS OF ANNUITY
3. ARITHMENT GRADIENT
 SERIES OF PAYMENT WITH COMMON DIFFERENCE
OCCURING AT EQUAL PERIOD.

Courtesy of SlidePlayer
Formula:
1. Present Worth, P

𝑃 = 𝑃𝐴 + 𝑃𝐺

where:

1− 1+𝑖 −𝑛
𝑃𝐴 = 𝐴
𝑖

𝐺 1− 1+𝑖 −𝑛
−𝑛
𝑃𝐺 = −𝑛 1+𝑖
𝑖 𝑖
Formula:
2. Future Worth, F
𝐹 = 𝐹𝐴 + 𝐹𝐺
where:
1+𝑖 𝑛−1
𝐹𝐴 = 𝐴
𝑖
𝐺 1+𝑖 𝑛−1
𝐹𝐺 = −𝑛
𝑖 𝑖
also,
𝐺 = 𝐴2 − 𝐴1 = 𝐴3 − 𝐴2
Sample Problem 1

Maintenance cost for a new equipment is

expected to be P25,000 for the first year
and increases ₱1,250 per year for every
year thereafter. If the cost of funds is 10%,
what is the present worth of maintenance
for the next 5 years?
Sample Problem 1
Maintenance cost for a new equipment is expected to be P25,000 for the first year and increases
P1,250 per year for every year thereafter. If the cost of funds is 10%, what is the present worth of
maintenance for the next 5 years?

Solution:
𝑃 = 𝑃𝐴 + 𝑃𝐺

where:
1− 1+𝑖 −𝑛 −5
1 − 1 + 0.10
𝑃𝐴 = 𝐴 = 25000 = 94,769.67
𝑖 0.10

−𝑛
𝐺 1− 1+𝑖 −𝑛 1250 1 − 1 + 0.10 −5
𝑃𝐺 = −𝑛 1+𝑖 = − 5 1 + 0.10 −5
𝑖 𝑖 0.10 0.10

= 8,577.25
then,
𝑃 = 94,769.67 + 8,577.25
𝑷 = ₱𝟏𝟎𝟑, 𝟑𝟒𝟔. 𝟗𝟐
Sample Problem 2

A salesman earns ₱1,000 on the 1st month,

₱1,500 on the 2nd month, ₱2,000 on the 3rd
month and so on. Find the accumulated
amount of his income at the 10th month if
money is worth 12% compounded
monthly.
Sample Problem 2
 A salesman earns P1,000 on the 1st month, P1,500 on the 2nd month, P2,000 on the 3rd month and so on. Find the
accumulated amount of his income at the 10th month if money is worth 12% compounded monthly.

Solution:
𝐹 = 𝐹𝐴 + 𝐹𝐺
where:
1+𝑖 𝑛−1 1 + 0.01 10 − 1
𝐹𝐴 = 𝐴 = 1000 = 10,462.21
𝑖 0.01

𝐺 1+𝑖 𝑛−1 500 1 + 0.01 10 − 1 = 23,110.63

𝐹𝐺 = − 𝑛 = 0.01 0.01
− 10
𝑖 𝑖

then,
𝐹 = 10,462.21 + 23,110.63

𝑭 = ₱𝟑𝟑, 𝟓𝟕𝟐. 𝟖𝟒
F. APPLICATIONS OF ANNUITY
4. GEOMETRIC GRADIENT
 SERIES OF PAYMENT WITH COMMON RATIO.

Courtesy of SlideShare
Formula:
𝐴 1 − 𝑤𝑛
1. 𝑃 =
1+𝑖 1−𝑤

𝐴𝑛
2. 𝑃 = ; if i = r
1+𝑟

where:
1+𝑟
𝑤=
1+𝑖
Sample Problem 1

Airplane ticket price will increase 10% in

each of the next 4 years. The cost at the
end of the 1st year will be ₱9,000. How
much should be put away now to cover a
student travel home at the end of each
year for the next 4 years. Assume 5%
interest rate.
Sample Problem 1
 Airplane ticket price will increase 10% in each of the next 4 years. The cost at the end of the 1st year will be
P9,000. How much should be put away now to cover a student travel home at the end of each year for the next
4 years. Assume 5% interest rate.

Solution:
𝐴 1 − 𝑤𝑛
𝑃=
1+𝑖 1−𝑤

where: A = 9,000
i = 5% = 0.05
n = 4 years
1 + 0.10
𝑤= = 1.0476
1 + 0.05

then, 9000 1 − 1.04764

𝑃=
1 + 0.05 1 − 1.0476

𝑷 = ₱𝟑𝟔, 𝟖𝟏𝟐. 𝟑𝟐
 END OF CHAPTER 2!

PREPARE YOURSELVES TO QUIZ NO. 2!

Assignment no. 3
1. A man wishes to accumulate a total of ₱500,000 at the age of 30. On his 20th birthday,
he deposited a certain amount of money at a rate of 12% per annum. If he increases his
deposit by 10% each year until the 30th birthday, how much should his initial deposit be?
2. If ₱2000 is deposited in a savings account at the beginning of each of 15 years and the
account draws interest at 7% per year, compounded annually. Find the value of the
account at the end of 15 years.
3. A man deposits ₱1000 every year for 10 years in a bank. He has made no deposit during
the subsequent 5 years. If the bank pays 8% interest, find the amount of the account at the
end of 15 years.
4. Twenty-five thousand pesos is deposited in a savings account that pays 5% interest,
compounded semi-annually. Equal annual withdrawals are t o be m ade fro m the account,
beginning one year from now and continuing forever. Find the maximum amount of the
equal annual withdrawal.
5. A man buys a motorcycle. There will be no maintenance cost in the first year as the
motorc y c l e is sold with one year free maintenance. The 2nd year the maintenance
is estimated at ₱2000. In subsequent years the maintenance cost will increase by ₱2000
per year. How much would need to be set aside now at 5% interest to pay the
maintenance costs of the motorcycle for the first 6 years of ownership?