ENGINEERING MIDTERM

01/06
MANAGEMENT LECTURE / FIRST SEMESTER

ANNUITIES
DEFINITION
 a series of equal payments made at equal intervals of time

TYPES OF ANNUITIES
1. Ordinary Annuities
2. Deferred Annuities
3. Annuity Due
4. Perpetuity

ORDINARY ANNUITY

 is one where the equal payments are made at the end of each payment period
starting from the first period
a. PRESENT WORTH:
P= A ¿ ¿

b. FUTURE WORTH:
F= A ¿ ¿
EXAMPLE PROBLEMS
1. A man paid 10% down payment of Php 200,000.00 for a house and lot and agreed
to pay the 90% balance on a monthly installment for 60 months at an interest rate of
15% compounded monthly. Compute the amount of the monthly payment.
Given: P = 1,800,000
.15
i = 15% = = 0.0125
12
n = 60 months
A =?
Solution:
P= A ¿ ¿
1,800,000= A ¿ ¿
A=Php 42, 821.87
2. What is the present worth of a 3 years annuity paying Php 3,000.00 at the end of
each year, with an interest at 8% compounded annually?
Given: P =?

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i = 8%
n = 3 years
A =3,000
Solution:
P= A ¿ ¿
P=3,000 ¿ ¿
P=Php 7,731.29
3. A manufacturing firm wishes to give each 80 employees a holiday bonus. How
much is needed to invest monthly for a year at 12% nominal interest rate,
compounded monthly, so that each employee will receive a Php 2,000.00 bonus?
Given: F = 80(2,000) = 160,000
.12
i = 12% = = 0.01
12
n = 12
A =?
Solution:
F= A ¿ ¿
160,000= A ¿ ¿
A=Php12,615.81

4. What is the accumulated amount of the 5-year annuity paying Php 6,000.00 at the
end of each year, with interest at 15% compounded annually?
Given: F =?
i = 15%
n=5
A = 6,000
Solution:
F= A ¿ ¿
F=6,000 ¿ ¿
F=Php 40,454.29
5. Maintenance cost of an equipment is Php 20,000.00 for 2 years, Php 40,000.00 at
the end of 4 years and Php 80,000.00 at the end of 8 years. Compute for the semi-
annual amount that be set aside for this equipment. Money worth 10% compounded
annually.
Given: F1 = 20,000
F2 = 40,000
F3 = 80,000
i = 10%
n1 = 2

Ma. Elaine T. Francisco | 2

ENGINEERING MIDTERM
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MANAGEMENT LECTURE / FIRST SEMESTER

n2 = 4
n3 = 8
A =?
Solution:
F
P 1=
¿¿
20,000
P 1=
¿¿
P1=Php 16,528.92

F
P 2= F
¿¿ P 3=
40,000 ¿¿
P2= 20,000
¿¿ P 3=
P2=Php 27,320.54 ¿¿
P3=Php 37,320.59

P=P1 + P2 + P3
P=16,528.92+27,320.54+ 37,320.59
P=Php 81,170.05
¿
i
=0.0976
2
i=0.0488
P= A ¿ ¿
81,170.35=A ¿¿
P=Php 7,425.75

Ma. Elaine T. Francisco | 3

ENGINEERING MIDTERM
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MANAGEMENT LECTURE / FIRST SEMESTER

DEFERRED ANNUITY

 it is also ordinary annuity but the payment of the first amount is deferred a certain
number of periods after the first.

EXAMPLE PROBLEMS
1. A man loans Php 187,400.00 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 years. Find the annual payments.
Given: F = 187,400
i = 5%
n=8
A =?
Solution:
F=P ¿
F=187,400 ¿
F=Php 290,718.91
P= A ¿ ¿
290,718.91= A ¿ ¿
A=Php 44,980.56

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MANAGEMENT LECTURE / FIRST SEMESTER

2. A house and lot can be acquired a down payment of Php 500,000.00 and a yearly
payment of Php 100,000.00 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?
Given: P1 = 500,000
P2 =?
P3 =?
i = 14%
n2 = 10
n3 = 4
A = 100,000
Solution:
P 2= A ¿ ¿
P2=100,000 ¿ ¿
P2=Php 521,611.56

F
P 3=
¿¿
521,611.56
P 3=
¿¿
P3=Php 308,835.92

Cash price=P1 + P3
P=500,000+308,835.92
P=Php 808,835.92

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ENGINEERING MIDTERM
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MANAGEMENT LECTURE / FIRST SEMESTER

3. A father wishes to provide Php 4,000.00 for his son on his 21 st birthday. How much
should he deposit every 6 months in a savings bank which pays 3% converted semi-
annually, if the first deposit is made when the son is 3 ½ year old?
Given: F = 4,000
i = 3%
n = 36
A =?
Solution:
F= A ¿ ¿
4,000= A ¿ ¿
F=Php 63.22

4. 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 Php 20,000.00 each
on the child’s 18th, 19th, 20th, and 21st birthdays. Money is worth 5% per annum.
Given: P =?
i = 5%
n=4
A = 20,000
Solution:
P 1= A ¿ ¿
P1=20,000 ¿ ¿
P1=Php 70,919.01

F
P 2=
¿¿
70,919.01
P 2=
¿¿
P2=Php 30,941.73

Ma. Elaine T. Francisco | 6

ENGINEERING MIDTERM
01/06
MANAGEMENT LECTURE / FIRST SEMESTER

ANNUITY DUE

 is one where payments are made at the start of each period, beginning from the first
period.
a. PRESENT WORTH:
P= A ¿ ¿
b. FUTURE WORTH:
F= A ¿ ¿
EXAMPLE PROBLEM
1. A man wishes to have Php 35,000.00 when he retires 15 years from now. If he can
expect to receive 4% annual interest, how much he set aside in each of 15 each
annual beginning of year deposits?
Given: F = 35,000
i = 4%
n = 15
A =?
Solution:
F= A ¿ ¿
35,000= A ¿¿
A=Php1,680.71
2. On retirement, a workman finds that his company pension calls for payment of Php
300.00 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.
Given: P =?
.05
i = 5% = = 0.00417
12
n = 20 = 20 x 12 = 240
A = 300
Solution:
P= A ¿ ¿
P=300 ¿ ¿
P=Php 45,631.87

3. Under a factory savings plan, a workman deposits Php 25.00 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?
Given: F =?

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MANAGEMENT LECTURE / FIRST SEMESTER

.06
i = 6% = = 0.005
12
n = 4 = 4(12) = 48
A =25
Solution:
F= A ¿ ¿
F=25 ¿ ¿
F=Php1 , 359.21
4. A man owes Php 12,000.00 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.
Given: P = 12,000
.0 8
i = 8% = = 0.02
4
n = 8 = 8(4) = 32
A =?
Solution:
P= A ¿ ¿
12 , 000= A ¿ ¿
A=Php501.30

Ma. Elaine T. Francisco | 8

ENGINEERING MIDTERM
01/06
MANAGEMENT LECTURE / FIRST SEMESTER

PERPETUITY

 is one where the payment periods extend forever or in which the periodic payments
continue indefinitely
A
P=
i
 perpetuity payable annually beginning of each year
A
P= A+
i
 perpetuity payable annually with the first payment due at the end of “nth” year
A
P= −A¿¿
i
EXAMPLE PROBLEMS
1. What present sum would be needed for annual end of year payments of Php
15,000.00 each, forever, if money is worth 8%?
Given: A = 15,000
i = 8%
P =?
Solution:
A 15,000
P= = =Php187 ,500.00
i 0.08
2. Php 45,000.00 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.
Given: P = 45,000
i = 8%
A =?
Solution:
A
P=
i
A
45,000=
0.0506
A=Php2,277.00

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ENGINEERING MIDTERM
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MANAGEMENT LECTURE / FIRST SEMESTER

3. If money is worth 4%, find the present value of a perpetuity of Php 100.00 payable
at the beginning of each year.
Given: P =?
i = 4%
A = 100
Solution:
A
P= A+
i
100
P=100+
0.04
P=Php 2,600.00

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ENGINEERING MIDTERM
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MANAGEMENT LECTURE / FIRST SEMESTER

PRESENT WORTH FACTOR

 (P/A, i, n) – present value of uniform series of equal investments

P=
[ ( 1+i )n−1 ]
( 1+i )n i
CAPITAL RECOVERY FACTOR
 (A/P, i, n) – uniform series of equal investments

( 1+i )n−1
A= n
( 1+i ) −1
FUTURE WORTH FACTOR
 (F/A, i, n) – future value of uniform series of equal investments

A [ ( 1+i ) ¿¿ n−1]
F= ¿
i
SINKING FUND FACTOR
 (A/F, i, n) – uniform series of equal end-of-period payments

i
A=
( 1+i )n−1

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