CE 213 – ENGINEERING

ECONOMICS
 II. ANNUITIES

An annuity is a series of equal payments occurring at equal periods of

time.
TYPES OF ANNUITY:
1. Ordinary Annuity
2. Annuity Due
3. Deferred Annuity
4. Perpetuity
 ORDINARY ANNUITY

is one where the payments are made at the end of each period.
Present Worth

Future Worth
 SAMPLE PROBLEMS

1. A man paid a 10% down payment of P200,000 for a house and lot and agreed to
pay the 90% balance on monthly installments for 60 months at an interest rate of
15 % compounded monthly. Compute the amount of the monthly payment.
2. An instructor plans to retire in one year and wants an account that will pay him
P25,000.00 a year for the next 15 years. Assuming a 6% annual effective interest
rate, what is the amount he would need to deposit now? (the fund will be
depleted after 15 years).
3. How much money must you invest today in order to withdraw P2000 annually
for 10 years if the interest rate is 9%?
4. What is the accumulated amount of the five-year annuity paying P6000 at the end
of each year, with interest at 15% compounded annually?
5. The maintenance cost of equipment is P20,000 for 2 years, P40,000 at the end of
4 years, and P80,000 at the end of 8 years. Compute the semi-annual amount that
is set aside for this equipment. Money worth 10% compounded annually.
 ASSIGNMENT
1. A piece of machinery can be bought for P10,000.00 cash, or for P2,000.00 down and payments of
P750.00 per year for 15 years. What is the annual interest rate for the time payments?
2. A manufacturing firm wishes to give each 80 employees a holiday bonus. How much is needed to
invest monthly for a year at a 12% nominal interest rate, compounded monthly, so that each
employee will receive a P2,000.00 bonus?
3. Money borrowed today is to be paid in 6 equal payments at the end of 6 quarters. If the interest is
12% compounded quarterly, how much was initially borrowed if the quarterly payment is P2,000.00?
4. A debt of P10,000 with 10% interest compounded semi-annually is to be amortized by semi-annual
payments over the next 5 years. The first due is 6 months. Determine the semi-annual payments.
5. A man purchased on a monthly installment of P100,000 worth of land. The interest rate is 12%
nominal and payable in twenty years. What is the monthly amortization?
6. The maintenance cost of equipment is P23,000 for 2 years, P40,000 at the end of 4 years, and
P80,000 at the end of 8 years. Compute the semi-annual amount that is set aside for this equipment.
Money worth 10% compounded annually.
 ASSIGNMENT

7. An employee is about to receive the sum of P300.00 at the end of each year for 5 years. One year
prior to the receipt of the first sum, he decides to discount all 5 sums. If the interest rate is 6%, what
proceeds will he obtain?
8. The president of a growing engineering firm wishes to give each of 50 employees a holiday bonus.
How much is needed to invest monthly for a year at a 12% nominal interest rate compounded
monthly, so that each employee will receive a P1,000 bonus?
9. Mr. Ramirez borrowed P15,000 two years ago. The terms of the loan are 10% interest for 10 years
with uniform payments. He just made his second annual payment how much principal does he still
owe?
10. A machine is under construction for investment. The cost of the machine is P25,000.00. Each year it
operates, the machine will generate a savings of P15,000.00. Given an effective annual interest rate
of 18%, what is the discounted payback period, in years, on the investment in the machine.
 ANNUITY DUE

is one where the payments are made at the beginning of each period.
• Present Worth

• Future Worth
 SAMPLE PROBLEMS

1. Engr. Sison borrows P100,000.00 at 10% effective annual interest. He must pay back the loan over
30 years with uniform monthly payments due on the first day of each month. What does Engr.
Sison pays each month?
2. A man wishes to have P35,000 when he retires 15 years from now. If he can expect to receive 4%
annual interest, how much did he set aside in each of the 15 equal annual beginning-of-year
deposits?
3. A man owes P12,000 today and agrees to discharge the debt by equal payments at the beginning of
each 3 months for 8 years, where these payments include all interest at 8% payable quarterly. Find
the quarterly payment.
4. At what interest rate is payable quarterly will payments of P500 at the beginning of each 3 months
for 7 years discharge a debt of P12500 due immediately?
 ASSIGNMENT

1. A man owes P10,000.00 with interest at 6% payable semi-annually. What equal payments at the beginning of
each 6 months for 8 years will discharge his debt?
2. On retirement, a workman finds that his company pension calls for payment of P300 to him or to his estate if
he dies at the beginning of each month for 20 years. Find the present value of this pension at 5% compounded
monthly.
3. Under a factory saving plan, a workman deposits P25 at the beginning of each month for 4 years, and the
management guarantees accumulation at 6% compounded monthly. How much stands to the work man’s
credit at the end of 4 years.
4. A man will deposit P200 with a savings and loan association at the beginning of each 3 months for 9 years. If
the association pays interest at the rate of 5.5% quarterly, find the sum to his credit just after the last deposit
5. Engr. Aventajado loan an amount of P100,000 at a local commercial bank at 10% compounded annually. How
much is his monthly payment if he is required to pay at the beginning of the first day of the month for a period
of 30 years?
 DEFERRED ANNUITY

is also an ordinary annuity but the payment of the first amount is deferred for a certain number of
periods after the first.
Present Worth

Future Worth
 SAMPLE PROBLEMS

1. A man loans P187,400 from a bank with interest at 5% compounded annually. He agrees to pay his
obligations by paying 8 equal annual payments the first being due at the end of 10 yrs. Find the annual
payments.
2. A father wishes to provide P4,000 for his son on his deposit 21 st birthday. How much should he deposit
every 6 months in a saving bank which pays 3% converted semi-annually, if the first deposit is made when
the son is 3 ½ year old?
3. XYZ Inc. plans to construct and additional building at the end of 10 years for an estimated cost of
P5,000,000.00. To accumulate this amount it will have equal year end deposits in a fund earning 13%.
However, at the end of the 5th year, it was decided to have a larger building that originally intended to an
estimated cost of P8,000,000.00 what should be the annual deposit for the last 5 years?
4. Two years ago the rental for the use of equipment and facilities as paid 5 years in advance, with option to
renew the rent for another years by payment P15,000 annually at the start of each year for the renewal
period. Now, the lessor asks the lessee if it could be possible to prepay the rental that will be paid annually
in the renewed 5 years period. If the lessee will consider the request, what would the fair prepayment to be
made to the lessor if the interest is now figured at 8%?
 ASSIGNMENT
1. A house and lot can be acquired with a down payment of P500,000.00 and a yearly payment of
P100,000.00 at the end of each year for a period of 10 years, starting at the end of 5 years from the date
of purchase. If money is worth 14% compounded annually, what is the cash price of the property?
2. A parent on the day the child is born wishes to determine what lump sum would have to be paid into an
account annually, in order to withdraw P20,000.00 each on the child’s 18th, 19th, 20th, and 21st birthdays
3. In five years, P18,000 will be needed to pay for a building renovation. In order to generate this sum, a
sinking fund consisting of three annual payments is established now. For tax purposes, no further
payments will be made after three years. What payments are necessary if money is worth 15% per
annum?
4. Annual maintenance costs for a rotary kiln are P2,000.00. The placement of a new refractory would
reduce the annual maintenance cost to P500 a year for the first 5 years and to P1000.00 a year for the
next 5 years. The annual maintenance cost after 10 years would again be P2,000.00 if the maintenance
cost is the only savings, what maximum investment can be justified for new refractory? Assume
interest at 4%
 ASSIGNMENT

5. The old boiler costs P2,400 a year to maintain. What expenditures for a new boiler are justified if no
maintenance will be required for the first 3 years, P600 per year for the next 7 years, and P2,400 a
year thereafter? Assume money to cost 4% compounded annually and no other cost to be considered.
6. A shirt factory has just installed a boiler. It is expected that there will be no maintenance expenses
until the end of the 11th year when P400 will be spent at the end of each successive year until the
boiler is scrapped at the age of 35 years. What sum of money was set aside at his time at 6% interest
will take care of all maintenance expenses for the boiler?
7. A new generator has just been installed. It is expected that there will be no maintenance charges until
the end of the 6th year when P300 will be spent at the end of each successive year until the generator
is scrapped at the end of the fourteenth year of service. What sum of money set aside at the time of
installation of the generator at 6% will take care of all maintenance expenses for the generator?
 ASSIGNMENT

8. A fund for the replacement of machinery in a plant must contain P30,000 at the end of 9 years. If the
fund is invested at 3.5% compounded semi-annually, what equal deposits should be placed in the
fund at the end of each 6 months just for the first four years?
9. A house costs P400,000 cash. A purchaser will pay P90,000 cash, P60,000 at the end of 2 years, and
a sequence of 6 equal annual payments starting with one at the end of 4 years, to discharge all his
liability as to the principal and interest at 7% compounded annually. Find the annual payments which
must be made for 6 years.
10. A businessman borrowed P300,000 and agrees to discharge his obligation by paying a series of equal
payments of P57,434.78 the first being due at the end of 5 ½ years. Find the rate of interest he is
paying if it is compounded semi-annually.
 PERPETUITY

is an annuity whose payments continue forever

Formulas:
•
Perpetuity payable annually beginning of each year

Perpetuity payable annually with the first payment due at the end of “nth” year

Where: P = Present value of perpetuity

A = annuity or amount of perpetuity
i = rate of interest
 SAMPLE PROBLEM

1. What present sum would be needed for annual end of year payments of P15,000 each, forever if
money is worth 8%.
2. What amount of money deposited 20 years ago at 4% interest would provide a perpetual payment
of P2,000 per year?
3. Find the present value of a perpetuity of P100 payable semi-annually if money is worth 4%
compounded quarterly.
4. If money is worth 8%, obtain the present value of a perpetuity of P1000 payable annually when
the first payment is due at the end of 5 years.
 ASSIGNMENT

1. P45,000 is deposited in a savings account that pays 5% interest compounded semi-annually. Equal
annual withdrawals are to be made from the account, beginning one year from now and continuing
forever. Compute the maximum amount of the equal annual withdrawal.
2. If money is worth 4% find the present value of a perpetuity of P100 payable at the beginning of
each year.
3. Find the present value, in pesos, of the perpetuity of P15000 payable semi-annually if money is
worth 8% compounded quarterly.
4. What is the present value in pesos of the perpetuity of P16000 payable every end of 3 months if
money is worth 10%, compounded monthly?
5. Find the present value of a perpetuity of P18000 payable at the end if every 6 months if money is
worth 10% compounded quarterly.
 CAPITALIZED COST

• One of the most important applications of perpetuity.

• is defined as the sum of money such that the annual interest on it at the rate “i
” % is equal to the annual investment cost of the asset.
• the present worth of cost associated with an asset for an infinite period of time
• From the annual cost equipment (amortization method)
• Annual Cost =
Dividing the equation by i:
• Capitalized cost =
From the annual cost equation (Capital recovery method)
 CAPITALIZED COST

• Annual cost =
Dividing the equation by i:
• Capitalized cost =
Capitalized cost for perpetual life:
• Capitalized cost =
Annual cost for perpetual life
• Annual cost =
• Annual Investment Cost

• Capitalized Cost
 SAMPLE PROBLEMS

1. At 6%, find the capitalized cost of a bridge whose cost is P250M and life is 20 years if the bridge
must be partially rebuilt at a cost of P100M at the end of each 20 years.
2. A new boiler was installed by a textile plant at a total cost of P300,000 and is projected to have a
useful life, it is estimated to have a salvage value of P30,000. Determine its capitalized cost if
interest is 18%compounded annually.
3. A machine costs P150,000 and will have a scrap value of P10,000 when retired at the end of 15
years. If money is worth 4% find the annual investment and the capitalized cost of the machine.
4. If a machine costs P3,000 with life of 15 years and a final salvage value of P500, compute the
capitalized cost if money is worth 5%
 ASSIGNMENT

1. A suspension bridge was constructed for P24M. The annual maintenance cost is P500,000. if the rate
of interest is 6%. Compute the capitalized cost of the bridge including maintenance.
2. A concrete pavement on a street would cost P10000 and would last for 5 years with negligible repairs.
At the end of each 5 years. P1000 would be spent again to lay a new surface. Find the capitalized cost
of the pavement at 5%.
3. Find the capitalized cost of an asset whose cost is P100,000, salvage value is P10000, and life is 15
years at 5%.
4. A bridge that was constructed at a cost of P75,000 is expected to last 30 years, at the end of which time
its renewal cost will be P40,000. Annual repairs and maintenance are P3000. What is the capitalized
cost of the bridge at an interest of 6%?
5. An item is purchased for P100,000. The annual cost is P18,000. using an interest rate of 8%, what is
the capitalized cost of perpetual service?