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ANNUITIES and
CAPITALIZED COST

Annuities

Series of equal payments accruing at

equal periods of time.

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Ordinary Annuity

Ordinary Annuity

 One where payments are made

each period.

To find F, given A:
1+𝑖 𝑛 −1
𝐹=𝐴
𝑖
To find A, given F:
𝑖
A= F [ ]
(1+𝑖)𝑛 −1

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Ordinary Annuity

To find P, given A
1−(1+𝑖)−𝑛
𝑃 = 𝐴[ ]
𝑖

To find A, given P
𝑖
𝐴 = 𝑃[ ]
1−(1+𝑖)−𝑛

Example

What are the present worth and the

accumulated amount of a 10 years
annuity paying P2,000 at the end of
each year with interest at 10%
compounded annually?

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12/52

13/52

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14/52

Deferred Annuity

 Deferred annuity is one where the

first payment is made several periods
after the beginning of the annuity.

m periods

10

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Deferred Annuity

1−(1+𝑖)−𝑛
𝑃 = 𝐴[ ](1 + 𝑖)−𝑚
𝑖

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Example 1

A lathe for a machine shop costs

P60,000 if paid in cash. On the
installment plan, a purchaser should
pay a P20,000 down payment and 10
quarterly installments. The first is due
at the end of the first year after
purchase. If money is worth 15%
compounded quarterly. Determine the
quarterly installment.

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Example 2

A man invests P10,000 now for the

college education of his 2-year-old
son. If the fund earns 14% effective,
how much will the son get each year
starting from his 18th to his 22nd
birthday?

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Example 4

19/54

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Annuity Due

Equal payments are made at the beginning

of each compounding period starting from
the first period

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Annuity Due

1−𝑛
𝑖+ 1− 1+𝑖
𝑃=𝐴
𝑖

𝑃𝑖
𝐴=
𝑖 + (1 − (1 + 𝑖)1−𝑛 )

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Example 1

21/54

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Example 2
A farmer brought 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.

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Example 3
As a rental for a building, the owner
received two offers;
a) P50,000 a year for 8 years, the rental
for each year being paid at the start of
each year.
b) P30,000 the first year, P40,000 the
second year, P50,000 the third year and
P60,000 for the next five years with all
rentals being paid at the beginning of
each period. If money is worth 12%,
which is the better offer?
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Perpetuity

Perpetuity is an annuity where the payment

period extends forever, which means that the
periodic payments continue indefinitely.

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Perpetuity
1−(1+𝑖)−𝑛
 𝑃 = 𝐴[ ]
𝑖
1−(1+𝑖)−𝑖𝑛𝑓𝑖𝑛𝑖𝑡𝑦
 𝑃 = 𝐴[ ]
𝑖

𝑨
 𝑷=
𝒊

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Capitalized Cost

The capitalized cost of any property is

the sum of the first cost and the
present worth of all costs of
replacement, operation, and
maintenance for a long time or
forever.

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Capitalized Cost

Case 1: No replacement, only

maintenance and or operation every
period.

CC= First cost + Present worth of

perpetual operation and or
maintenance
𝑨
CC= FC +
𝒊

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Example
Determine the CC of a building that
requires an initial investment of
P20,000,000 and annual maintenance
of P300,000. The interest rate is 7%.

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Capitalized Cost
Case II: Replacement only, no
maintenance and or operation
Let S= amount needed to replace a
property every k periods
x= amount of principal invested
at i% interest rate

𝑺
𝒙=
(𝟏 + 𝒊)𝒌 −𝟏
𝑪𝑪 = 𝑭𝑪 + 𝒙

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Example
A new engine was installed by a plant at a cost of
P500,000 and is projected to have a useful life of
25 years. It is estimated to have a salvage value
of P50,000. Determine the capitalized cost if
i=7%.

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Capitalized Cost

Case III: Replacement, maintenance

and or Operations every period

𝑨
CC= FC + +𝒙
𝒊

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Example

Determine the capitalized cost of a

research laboratory which requires
P5,000,000 for original construction;
P100,000 at the end of every year for
the first 6 years and then P120,000
each year thereafter for operating
expenses, and P500,000 every 5
years for replacement of equipment
with interest at 12% per annum?

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Amortization

Amortization is any method of

repaying a debt, the principal and
interest included, usually by a series
of equal payments at equal intervals
of time.

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Example

A debt of P5,000 with interest at 6%

payable quarterly will be discharged,
interest included by equal payments at
the end of each 3 months for two
years. Construct an amortization table.

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Period Outstanding Interest Due Payment Principal

Principal at the at the end of Repaid at
beg. Of the period at the end of
period 6% per the period
quarter

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Example
A debt of P100,000 is to be discharged by 10 semi-annual
payments. The debt will be discharged by the first five equal
payments each of P10,000 and by 5 other equal payments of
such amount that the final payment will liquidate the debt. If
interest is 12% compounded semi-annually, what is the amount
of the last 5 payments? Construct an amortization table.

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Period Outstanding Interest Due Payment Principal

Principal at the at the end Repaid at
beg. Of the of period at the end of
period 0.06 per the period
period

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