Inflation Present Worth of Annuity

Inflation is the increase in the prices for goods and

[ ]
−n
1− (1+i )
services from one year to another, thus decreasing P= A
P i
the purchasing power of money.
n
FC=PC (1+f ) 0 1 2 3 4 5

FC – future cost of a commodity A A A A A

PC – present cost of a commodity
f – annual inflation rate Future Worth of Annuity
n – number of years

Sample Problems
F= A [
( 1+ i )n −1
i ] F
1. An economy is experiencing inflation at an 0 1 2 3 4 5
annual rate of 8%. If this continues, what will P1000
be worth two years from now, in terms of today’s
A A A A A
pesos? Ans. P857.34
Ordinary Annuity
2. A man invested P10000 at an interest rate of
10% compounded annually. What will be the final Present Worth of Annuity
amount of his investment, in terms of today’s
pesos, after five years, if inflation remains the same
at the rate of 8% per year? Ans. P10 960.86
P= A ( PA , i% , n)
“uniform series present worth factor”
Annuity Future Worth of Annuity

( FA ,i % , n)
Annuity is defined as a series of equal payments
occurring at equal interval of time. When an annuity F= A
has a fixed time span, it is known as annuity
certain. Annuities are established for the following “uniform series compound amount factor”
purposes:
Finding A when P is given:
1. As payment of a debt by a series of equal
payments at equal time intervals, also known as
amortization.
P= A
[ i
1− (1+i )−n ]
2. To accumulate a certain amount in the future by
depositing equal amounts at equal time intervals.
These amounts are called sinking fund.
A=P ( AP , i% , n)
“capital recovery factor”
3. As a substitute periodic payment for a future
lump sum payment. Future Worth of Annuity

Types of Annuity
A=F
[ i
( 1+ i )n −1 ]
Ordinary Annuity is one where the payments are
A=F ( FA ,i % , n)
made at the end of each period.
“sinking fund factor”
Annuity Due is one where the payments are made 2. What is the present worth of P500 deposited at
at the beginning of each period the end of every three months for 6 years if the
interest rate is 12% compounded semiannually.
Present Worth of Annuity Due
Ans. P8504

P= A+ A ( PA , i % , n−1) 3. A businessman needs P50,000 for his

operations. One financial institution is willing to lend
him the money for one year at 12.5% interest per
P annum (discounted). Another lender is charging
14% with the principal and interest payable at the
0 1 2 3 4 5 end of one year. A third financier is willing to lend
him P50,000 payable in 12 equal monthly
A A A A A installments of P4600. Which offer is best for him?
Ans. 14.29%, 14 %, 20.26%
Future Worth of Annuity
4. A mechanical engineer wishes to set up a
F= A ( FA ,i % , n+1)− A special fund making uniform semiannual end-of-
period deposits for 20 years. The fund is to provide
P100,000 at the end of each of the last five years of
F the 20-year period. If interest is 8% compounded
semiannually, what is the required semiannual
0 1 2 3 4 5 deposit to be made? Ans. P6193.39
5 .Using a compound interest of 8%, find the
A A A A A
equivalent uniform annual cost for a proposed
machine that has a first cost of P100,000, an
Deferred Annuity is one where the first payment is
estimated salvage value of P20,000 and an
made several periods after the beginning of the
estimated life of 8 years. Annual maintenance will
annuity.
amount to P2000 a year and periodic overhaul
costing P6000 each will occur at the end of the
second and fourth year. Ans. P19183
Present Worth of Deferred Annuity
6. Money borrowed today is to be paid in 6 equal

[ ]
−n
1− (1+i ) payments at the end of 6 quarters. If the interest is
P= A ( 1+i )−m 12% compounded quarterly, how much was initially
i
borrowed if quarterly payment is P2000. Ans. P10
834.38
Perpetuity when an annuity does not have a fixed 7. What is the accumulated amount of five-year
time span but continuous indefinitely. The sum of annuity paying P6000 at the end of each year, with
perpetuity is an infinite value. interest at 15% compounded annually? Ans. P40
454.29
8. A young engineer borrowed P10,000 at 12%
Present Worth Perpetuity
interest and paid P2000 per annum for the last 4

[ ]
A years. What does he pay at the end of the fifth year
P= in order to pay off his loan? Ans. P6917.72
i
9. If you obtain a loan of P 1,000,000 at the rate of
Sample Problems
12% compounded annually in order to build a
1. What are the present worth and accumulated house, how much must you pay monthly to
amount of a 10-year annuity paying P10,000 at the amortize the loan within a period of 10 years? Ans.
end of each year, with interest at 15% compounded P13994.17
annually. Ans. P50,188/P203,037
10. How much must you invest today in order to the 9th deposit is made. Cost of money is 14% Ans.
withdraw P2000 annually for 10 years if the interest P34675
rate is 9%. Ans. P12835.32

11. A man bought an equipment costing P60,000

17. A debt of P40,000 whose interest date is 15%
payable in 12 quarterly payments, each installment
compounded semiannually is to be discharged by a
payable at the beginning of each period. The rate of
series of 10 semiannual payments, the first
interest is 24% compounded quarterly. What is the
payment to be made 6 months after consummation
amount of each payment? Ans. P7371.91
of the loan. The first 6 payments will be P6000
12. A certain property is being sold and the owner each, while the remaining 4 payments will be equal
received two bids. The first bidder offered to pay and of such amount that the final payment will
P400,000 each year for 5 years, each payment is to liquidate the debt. What is the amount of the last 4
be made at the beginning of each year. The second payments? Ans. P5454
bidder offered to pay P240,000 first year, P360,000
18. A person buys a piece of lot for P100000 down
the second year and P540,000 for the next 3 years,
payment and 10 deferred semi-annual payments of
all payments made at the beginning of each year. If
P8000 each, starting three years from now. What is
money is worth 20% compounded annually, which
the present value of the investment if the rate of
bid should the owner of the property accept? Ans.
interest is 12% compounded semi-annually? Ans.
P1435480/P1487875
P143 999.078
13. A man bought a brand-new washing machine
19. What amount of money invested today at 15%
costing P12,000 paid in cash. However, she can
interest can provide the following scholarships:
purchase it on installment basis to be paid within 5
P30,000 at the end of each year for 6 years;
years. If money is worth 8% compounded annually,
P40,000 for the next 6 years and P50000
what is her yearly amortization if all payments are
thereafter? Ans. P241277
to be made at the beginning of each year? Ans.
P2400 20. Find the present value in pesos, of a perpetuity
of P15000 payable semi-annually if money is worth
14. Mr. Ayala borrows P100,000 at 10% effective
8% compounded quarterly. Ans. P371287.128
annual interest. He must pay back the loan over 30
years with uniform monthly payments due on the
first day each month. What does Mr. Ayala pay
each month? Ans. P839
15. On the day his grandson was born, a man
deposited to a trust company a sufficient amount of
money so that the boy could receive five annual
payments of P10,000 each for his college tuition
fees, starting with his 18th birthday. Interest at the
rate of 12% per annum was to be paid on all
amounts on deposit. There was also a provision
that the grandson could elect to withdraw no annual
payments and receive a single lump amount on his
25th birthday. The grandson chose this option. How
much did the boy receive as the single payment?
How much did the grandfather deposit? Ans.
P89250/P5250
16. If P10,000 us deposited each year for 9 years,
how much annuity can a person get annually from
the bank every year for 8 years starting 1 year after