PROBLEM SOLVING

1. Mr. A signs a note promising to pay Mr. B P30,000.00 in 6 years with interest at 5% compounded
quarterly. Four years later Mr. B sells the note to Mr. C. How much did Mr. C pay if money is
then worth 4% compounded semi-annually?
2. A debt of P25,000.00 overdue for 2 years and another of P75,000.00 due in 3 years are to be
discharged today by a single payment. Find the payment if money is worth 5% compounded
semi-annually.
3. A lot is sold for P50,000.00 cash and P25,000.00 a year for the next 4 years. If money is worth
6% effective, find he cash value of the lot.
4. A manufacturing firm is contemplating retiring an existing machine at the end of 1982. The new
machine cost of P100,000.00. This expense will be partially defrayed by sale of the old machine
as scrap for P7,500.00. To accumulate the balance of the required capital, the firm will deposit
the following sums in an account earning interest at 5% compounded quarterly:
P15,000.00 at the end of 1979
P15,000.00 at the end of 1980
P20,000.00 at the end of 1981
What cash disbursement will be necessary at the end of 1982 to purchase the new machine?

5. A firm borrows P6,000.00 for 6 years at 8%. At the end of 6 years, it renews the loan for the
amount due plus P2,000.00 more for 2 years at 8%. What is the lump sum due?
a.) P6,135.00 b.) P5,280.00 c.) P5,254.00 d.) 6,035.00

6. American Express Corp. charges 1 ½% interest per month, compounded continuously on the
unpaid balance purchases made on this credit card. Compute the effect rate interest
a.) 19.72% b.) 20.25% c.) 21.20% d.) 19.90%

7. P200,000 was deposited for a period of 4 years and 6 months and bears on interest of
P85,649.25. What is the rate of interest if it is compounded quarterly?
a.) 8% b.) 6% c.) 7% d.) 5%

8. A man wishes his son to receive P200,000.00 ten years from now. What amount should he
invest now if it will earn interest of 10% compounded annually during the first 5 years and 12%
compounded quarterly during the next 5 years? Ans: P68,758.67

PROBLEM SOLVING FOR EXAM

1. A student plans to deposit P1,500.00 in the bank now and another P3,000.00 for the next 2
years. If he plans to withdraw P5,000.00 three years after his last deposit for the purpose of
buying shoes, what will be the amount of money left in the bank after one year of his
withdrawal? Effective interest rate is 10%?
2. A firm borrows for 6 years at 8%. At the end of 6 years, it renews the loan for the amount due
plus P2,000.00 more for 2 years at 8%. What is the lump sum due?
3. You need P4,000.00 per year for four years to go to college. Your father invested P5,000.00 in
7% account for your education when you were born. If you withdraw P4,000.00 at the end of
 your 17th, 18th, 19th, and 20th birthday. How much money will be left in the account at the end of
the 21st year?
4. Mr. W borrowed P2,000.00 from Mr. Y on June 1, 1927 and P500.00 on June 1, 1930, agreeing
that money is worth 5% compounded annually. Mr. W paid P500.00 on June 1, 1931, P400.00 on
June 1, 1932 and P700.00 on June 1, 1933. What additional sum should Mr. W pay on June 1,
1936 to discharge all remaining liability?
5. A debtor owes P20,000.00 due in 1 year with interest at 6%. He agrees to pay P5,000.00 at the
end of 6 months. If money is worth 6%, what payment made at the end of 1 year will retire the
rest of the debt?
6. What is the present value of a note for P12,000.00 with interest at 5% compounded semi-
annually for 10 years if money is currently worth 4 1/2% effective?
7. Mr. A sign a note promising to pay Mr. B P30,000.00 in 6 years with interest at 5% compounded
quarterly. Four years later Mr. B sells the note to Mr. C. How much did Mr. C pay if money is
then worth 4% compounded semi-annually?
8. A lot is sold for P50,000.00 cash and P25,000.00 a year for the next 4 years. If money is worth
6% effective, find the cash value of the lot.
9. P200,000.00 was deposited for a period of 4 years and 6 months and bears on interest of
P85,649.25. what is the rate of interest if it is compounded quarterly?
10. A debt of P5000 due 2 years from today and another of P7500 due 6 years from today are to be
discharged by a single payment 4 years from today. Find the payment if money is worth 4%
compounded quarterly.
11. A debt of P25,000 overdue for 2 years and another of P75,000 due in 3 years are to be
discharged today by a single payment. Find the payment if money is worth 5% compounded
semi-annually.
12. If money is worth 4% compounded quarterly, what 4 equal yearly payments will discharge an
obligation of P20,000 due today when (A) the first payment is made today, (B) the first payment
is made 1 year from today.
13. A father wishes to have P50,000 available at his son’s eighteen birthday what sum should he set
aside at the son’s fifth birthday if it will earn interest at the rate of 3% compounded semi-
annually?
14. Alexander owes P25,000 due in one year and P75,000 due in 4 years. He agrees to pay P50,000
today and the balance in 2 years. How much must he pay at the end of 2 years if money is worth
5% compounded semi-annually?
15. On his 6th birthday a boy is left an inheritance. The inheritance will be paid in a lump sum of
P10,000 on his 21st birthday. What is the present value of the inheritance as of the boy’s switch
birthday, if the interest is compounded annually?
16. A man deposit P2,000 in the bank today at the rate of 4% per annum. After 2 years he deposits
another P4,000 in five years he will withdraw P6,000. How much money does he have on the 6 th
year?
17. If P1,000 becomes P1,126.49 after 4 years when invested at a certain nominal rate of interest
compounded semi-annually, determine the nominal rate and the corresponding effective rate.
18. Find the present value of installment payments of P1,000.00 now, P2,000.00 in year 1,
P3,000.00 in year 2, P4,000.00 in year 3 and P4,000.00 in year 4 if money is worth 10%
compounded annually.
 19. If money is worth 5% compounded quarterly, find the equated time for paying a loan
P150,000.00 due in year 1 and P280,000.00 due in year 2.
20. If money is worth 6% simple interest, find the value (a) today, (b) 3 months from today, (c) 7
months from today, (d) 1 year from today of a debt of P25,000.00 due 9 months from today.
21. A debtor owes P20,000.00 due in 1 ear with interest at 6%. He agrees to pay P5,000.00 at the
end of 6 months. If money is worth 6%, what payment made at the end of 1 year will retire the
rest of the debt?
22. On July 1, 1982, a bank account had a balance of P80,000.00. A deposit of P10,000.00 was made
on Jan. 1, 1983, and a deposit of P2,500.00 on Jan. 1, 1984. On April 1, 1985, the sum of
P12,000.00 was withdrawn. What was the balance in the account on Jan 1, 1988, if interest is
earned at the rate of 4% compounded quarterly.
23. A fund was established in 1985, whose history is recorded below:
Deposit of P10,000.00 on Jan. 1, 1985
Deposit of P20,000.00 on Jan. 1, 1987
Withdrawal of P3,000.00 on July 1, 1987
Deposit of P16,000.00 on July 1, 1988
Withdrawal of P12,000.00 on Jan. 1, 1989
The fund earned interest at the rate of 3 ½% compounded semi-annually until 1988. At that
date, the interest rate was augmented to 4% compounded semi-annually. What was the
principal in the fund in 1992?

ANNUITY
ORDINARY ANNUITY
1. Ria rose borrowed P50,000.00 from SSS in the form of calamity loan, w/ interest at 8%
compounded quarterly payable in equal quarterly installments for 10 years. Find the
quarterly payments. Answers: 1,827.78739
2. A man paid a 10% down payment of P200,000.00 for a house & lot & agreed to pay the
balance on monthly installments for 5 yrs. At a rate of 15% compounded monthly. What was
the monthly interest in pesos? Answer: 42,821.87416

DEFERRED ANNUITY

1. A new generator has just been installed. It is expected that there will be no maintenance
chargers until the 6th year, when P300 will be spent at the end of each successive year until the
generator is scrapped on its fourteenth year of service. What sum of money set aside at the
time of installation of the generator at 6% will take care all maintenance expenses for the
generator? P1,524.78042
2. A parent wishes to develop a fund for a new born child’s college education. The fund is to pay
P50,000.00 on the 18th, 19th, 20th & 21st birthdays of the child. The fund will be built up by the
deposit of fixed sum on the child’s first to seventeenth birthdays. Find the fixed sum if money is
worth 4% per annum. Answer: 93,174.55467

Perpetuity Annuity
 1.1. A wealthy man donated a certain amount of money in a bank at a rate of 12% compounded
annually to be able to pay the following scholarship awards; P4,000 per year for the first 5
yrs.; P6000 per year for the next 5 years and P 9,000 per year on the years thereafter. Find
the amount of money deposited by the man. Answer: P 50,839.78301
1.2 P45,000.00 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. Answer: 2,278.125

Annuity Due

1. A man bought a car costing P 450,000 payable in 5 years at a rate of 24% compounded semi-
annually in installment basis. If each semi-annual payment is payable at the beginning of each
period, determine the amount of each payment? Answer: P71,109.70881

Other Sample of Annuity

1. What is the future worth of P600 deposited at the end of every month for 4 years if the interest
rate is 12% compounded quarterly? Answer: P 36,641.32204
2. A young woman 22 years old, has just graduated from college. She accepts a good job and
desires to establish her own retirement fund. At the end each year there after she plans to
deposit P2,000 in a fund of 15% annual interest. How old will she be when the fund has an
accumulated value of P 1,000,000? Answer: 53 years old
3. Mr. Reyes borrows P600,000 at 12% compounded annually, agreeing to repay the loan in 15
equal annual payments. How much of the original principal is still unpaid after he has made the
8th payment? Answer: P402.042.0502
4. M purchased a small lot in a subdivision, paying P200,000 down and promising to pay P15,000
every 3 months for the next 10 years. The seller figured interest at 12% compounded quarterly.
(a) What was the cash price of the lot?
(b) If M missed the first 12 payments, what must he pay at the time the 13 th is due to bring
himself up to date?
(c) After making 8 payments, M wished to discharge his remaining indebtedness by a single
payment at the time when the 9th regular payment was due, what must he pay in addition to
the regular payment the due?
(d) If M missed the first 10 payments, what must he pay when the 11 th payment is due to
discharge his entire indebtedness?
Answers: (a) P546,721.5796 (b) P234,266.8567 (c) P300,006.4274 (d) P479,943.7542
5. A man approaches the ABC Loan Agency for P100,000 to be paid in 24 monthly installments. The
agency advertises an interest rate of 1.5% per month. They proceed to calculate the amount of
his monthly payment in the following manner.
Amount requested P100,000 Interest: (P101,500)(24)(0.0015) = P36,540
Credit Investigation 500 Total Owed: P101,500 + P36,540 = P 138,040
Credit Risk Insurance 1,000
Total P 101,500
 Payment = P138,040 = P5,751.67
24
What is the effective rate of interest of the loan? Answer 38.83%

6. A man wishes to provide a fund for his retirement such that from his 60 th to 70th birthdays he will
be able to withdraw equal sums of P18,000 for his yearly expenses. He invests equal amount for
his 41st to 594th birthdays in a fund earning 10% compounded annually. How much should each
of these amounts be? Answer P2,285

Annuity Problems

11-30. How much money must you invest today in order to withdraw P 1,000.00 per year for 10 years
if interest rate is 12%?

11-31. A machine is under consideration for investment. The cost of the machine is P25,000.00. Each
year it operates, the machine will generate a savings of P 15,000.00. Given an effective annual interest
of 18%, What is the discounted payback period, in years, on the investment in the machine? 2.155

11-33. Consider a project which involves the investment of P100,000.00 now and P100,000.00 at the
end of one year. Revenues of P150,000.00 will be generated at the end of year 1 and 2. What is the net
present value of this project if the effective annual interest rate is 10%?

11-34. An investment of X pesos is made at the end of each year for three years, at an interest rate of
9% per year compounded annually. What will be the value of the investment upon the deposit of the
third payment? Answer: 3.278x

11-35. If P500 is invested at the end of each year for years. At an effective annual interest rate of 7%.
What is the total amount available upon the deposit of the 6th payment?

11-37. if money is worth 10% yearly, compounded quarterly, what monthly savings is required in order
to have P 200,000.00 at the end of 10 years?

11-38. how much money must you deposit today to an account earning 12% so that you can withdraw
P25,000.00 yearly indefinitely starting at the end of the 10 th year? 75,127

11-39. In five years, P 18,000.00 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 payment is necessary if money is worth 15% per
annum?

11-41. Mr. Jones borrowed P 150,000.00 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? Thanks for posting your question! Your Unique submission ID is CH-109461 We will get back to
you with the answers shortly.

11-42. Given that the discount rate is 15%. What is the equivalent Year 0 P100,000.00
uniform annual cash flow of the following stream of cash flows?
Year 1 P200,000.00

Year 2 P 50,000.00

Year 3 P 75,000.00
158,124.60

11-43. Mr. Bean borrowed P 100,000.00 at 10% effective annual rate. He must pay back the loan over
30 years with uniform monthly payments due on the first day of each month. What does he pay each
month?

11-44. An employee obtained a loan of P 10,000.00 at the rate of 6% compounded annually in order to
repair a house. How much must he pay monthly to amortize a loan within a period of ten years?
569.8416

11-45. what is the accumulated value of a payment of P12,500.00 at the end of each year for 9 years
with interest at 5% compounded annually?

11-46. what is the accumulated value of a payment of P 6,000.00 every six months for 16 years with
interest at 7% compounded semi-annually? 515435.58

11-47. A mining property is offered for sale for P 5.7 M on the basis of estimated production, an annual
return of P 800,000.00 is foreseen for a period of 10 years, the property will be worthless. What annual
rate of return is in prospect?

11-48. if a down payment of P 600,000.00 is made on a house and P 80,000.00 a year for the next 12
years is required. What was the price of the house if money is worth 6% compounded annually?

11-49. what annuity over a 10-year period at 8% interest is equivalent to a present worth of
P100,000.00?

11-50. deposits of P 1,500.00 each were made in a sinking fund at the end of each year. If the fund
earned interest at the rate of 6% per annum compounded quarterly, what was the principal in the fund
immediately after the seventh deposit was made? 10,984.491287

11-52. A service car whose cash price was P 540,000.00 was brought with a down payment of P
162,000.00 and monthly of P 10,874.29 for 5 years. What was the rate of interest if compounded
monthly?

11-53. The present value of an annuity of R pesos payable annually for 8 years, with the first payment
at the end of 10 years is P 187,481.25. Find the value of R if money is worth 5%.

11-54. How much money must you invest today in order to withdraw P 2,000.00 annually for 10 years if
the interest rate is 9%? 12,835.3154

11-55. Money sorrowed 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 quarterly payment is P
2,000.00?

11-56. A car was bought on installment basis with a monthly installment of P 10,000.00 for 60 months. If
interest is 12% compounded annually calculate the cash price of the car. 83240.49285

11-57. A steel mill estimates that one of its furnaces will require maintenance of P 20,000.00 at the
end of 2 years, P 40,000.00 at the end of 4 years and P 80,000.00 at the end of 8 years. What uniform
semi-annual amounts could it set aside over the next eight years at the end of each period to meet
these requirements of maintenance cost. If all funds would earn interest at the rate of 6%
compounded semi-annually?

11-59 How much be deposited at 6% each year beginning January 1, in order to accumulate P 5,000.00
on the date of the last deposit, January 1, year 6?

11-60. A piece of machinery can be bought for P 10,000.00 cash, of for P 2,000.00 down and payments
of P 750.00 per year for 15 years. What is the annual interest rate for the time payments?

11-61. An instructor plans to retire in exactly one year and want an account that will pay him P
25,000,000 a year for the next 15 years. Assuming 6% annual effective interest rate, what is the
amount he would need to deposit now? (the fund will be depleted after 15 years)

11-62. A man invested P 1,000.00 per month on a bank that offers 6% interest, How much can he get
after 5 years? 4212.6786 or 5637.09296

11-65. a debt of “x” pesos, with interest rate of 7% compounded annually will be retired at the end of 10
years through the accumulation of deposit in the sinking fund invested at 6% compounded semi-
annually. The deposit in the sinking fund every end of six months is P 21,962.68. what is the value of
“x”? ordinary annuity

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