Problems (Annuity)

Deferred Annuity

𝟏 − 𝟏 +𝒊 - 𝟏 +𝒊 𝒏 −
𝑷=𝑨 𝒏 (𝟏 + 𝒊)-𝒌 𝑭=𝑨 𝟏 𝒊 𝟏 +𝒊
𝒊 𝒌

Where: k = deferred period

n= number of annuities
 Problems (Annuity)
1. What lump sum of money must be deposited in a bank account at present time so that Php 500 per month can
be withdrawn for five years with the first withdrawal scheduled six years from today? Interest rate is 9%
compounded monthly. A=
500

0 1 2 3 4 5 6 1
0

i = 9% compounded
1− 1 -𝑛
+monthly
P
𝑃=𝐴 𝑖 (1 + 𝑖 ) - 𝑘
𝑖
-
1 − 1 + 0.0 5(12) 0.09
𝑃 = 500 91
0.0 (1 + ) -5 ( 1 2 ) 𝑷 = 𝑷𝟏𝟓, 𝟑𝟖𝟒. 𝟏𝟔
2 1
9 2
 Problems (Annuity)
2. A man invested Php 10,000 now for the college education of his three year old son. If the fund earns 14%
effective, how much will the so n get each year starting from 19th to 22nd birthday?
A=?

0 1 2 3 4 1 2 2 2
9 0 1 2
i = 14%
effective
-𝑛 P=P
1− 1+ 10,000
𝑃=𝐴 𝑖
𝑖 (1 + 𝑖)-𝑘
1 − 1 + 0.14 - 4
10,000 = (1 + 0.14) - 𝑨 = 𝑷𝟐𝟒, 𝟒𝟗𝟕. 𝟕𝟒
0.1 15
𝐴
4
 Problems (Annuity)
3. During the first ten years of the life of a certain machine, the following were spent for its maintenance:
During the first 5 years, Php 3,000 was spent each year; during the second five years, Php 5,000 each year
was spent. In addition Php 8,000 was spent for overhauling at the end of the fourth year and Php 10,000 also
for overhauling at end of the ninth year. If the money is worth 9% compounded annually, what was the
equivalent uniform annual cost for the ten-year period? A =?

0 1 2 3 4 9 1
0

P3,00
0
i = 9% compounded P5,00
annually 0
P8,000

P10,000
P=
 Problems (Annuity)
A=
?
1− 1+ -𝑛
𝑃=𝐴 𝑖 (1 + 𝑖 ) - 𝑘
𝑖
0 1 2 3 4 9 1
0 𝑃 = 𝐹(1 + 𝑖 ) - 𝑛
P3,00
0
i = 9% compounded P5,00
annually 0
P8,00
0
-5 P10,00 -5
0.09 0 - 0.09
P= 1− 1+ 1
0.09 0 ( 1 ) 1− 1+ 1
0.09
-
? 𝑃 = 3000 1 1+ + 5000 1 1+ 5(1)
0.09 1 0.09 1
1 1
- -
0.09 4(1) 0.09 9 ( 1 )
+ 8000 1 + + 10000 1 +
1 1

𝑷 = 𝑷𝟑𝟒, 𝟓𝟖𝟎. 𝟔𝟕
 Problems (Annuity)
A=
?
𝑷 = 𝑷𝟑𝟒, 𝟓𝟖𝟎. 𝟔𝟕

𝟏 − (𝟏 + 𝒊) - 𝒏
0 1 2 3 4 9 1 𝑷=𝑨
0 𝒊
P3,00
0
i = 9% compounded P5,00
annually 0
P8,000

P10,000
P= -
? 0.0
1− 1+ 10(1)
34,580.67 = 91
0.0
𝐴 9
𝑨 = 𝑷𝟓, 𝟑𝟖𝟖. 𝟑𝟔1
 Problems (Annuity)
Annuity Due

𝟏 − (𝟏 + 𝒊 ) - ( 𝒏 - 𝟏 ) 𝟏 +𝒊 𝒏+𝟏 −𝟏
𝑷 = 𝑨+𝑨 𝑭=𝑨 −𝑨
𝒊 𝒊
 Problems (Annuity)
1. A farmer bought a tractor costing Php 25,000 payable in ten semi-annually payments , each instalment
payable at the beginning of each period. If the rate of interest is 26% compounded semi-annually,
determine the amount of each instalment.
A=?

𝟏 − (𝟏 + 𝒊 ) - ( 𝒏 - 𝟏 )
𝑷 = 𝑨+𝑨
𝒊
0 1 2 3 4 9 1
0
-(10-
i = 26% compounded semi- 0.2
annually 1− 1+ 1)(2)
25,000 = 𝐴 + 𝐴 62
0.2
P= 6
25,000
𝑨 = 𝑷𝟑, 𝟏𝟖𝟖. 𝟖𝟏 2
 Problems (Annuity)
2. A certain manufacturing plant is being sold and was submitted for bidding. Two bids were submitted by
interested buyers. The first bid offered to pay Php 200,000 each year for five years, each payment being
made at the beginning of each year. The second bidder offeref to pay Php 120,00 for the first year, Php
180,000 for the second year and Php 270,000 each year for the next 3 years, all payments being made at
the beginning of each year. If the money is 12% compounded annually, which bid should the owner
consider?
A= 𝟏 − (𝟏 + 𝒊 ) -(𝒏-𝟏)
For the First Bidder: 𝑷 = 𝑨+𝑨
200,000 𝒊
-(5-
1− 1 + 0.1 1)
𝑃 = 200,000 + 200,000 21
0.1
2
0 1 2 3 4 1
𝑷 = 𝑷𝟖𝟎𝟕, 𝟒𝟔𝟗. 𝟖𝟕
i = 12% compounded
annually
 Problems (Annuity)

For the Second Bidder: 𝟏 − 𝟏 +𝒊 -𝒏

𝑷=𝑨 (𝟏 + 𝒊) - 𝒌
𝒊
A=
270,000
180,00 𝑷 = 𝑭(𝟏 + 𝒊) - 𝒏
120,00 0 -0 -1
0 0.1 0.1
𝑃 = 120,000 1 + 2 + 180,000 1 + 2
1 1
-3
1−
1 + 0.1 -1

0 1 2 3 4 + 270,000 2 1 + 0.1
0.1 2
i = 12% compounded 2
annually
𝑷 = 𝑷𝟖𝟓𝟗, 𝟕𝟐𝟕. 𝟏𝟖
Second bidder must be considered by the owner
P=
?
 Problems (Annuity)
3. As rental for building, the owner received two offers:
a. Php 50,000 a year for eight years, the rental for each year being paid at the start of each year.
b. Php 30,000 the first year, Php 40,000 the second year. Php 50,000 the third year and Php 60,000
for the next five years with rentals paid at the beginning of each year.
If money is worth 12% effective, which is better offer?
For the First Offer:
A=
50,000 𝟏 − (𝟏 + 𝒊 ) - ( 𝒏 - 𝟏 )
𝑷 = 𝑨+𝑨
𝒊

0 1 2 3 4 6 7

i = 12%
1 − 1 + 0.12 -(8-1)
𝑃 = 50,000 +
effective 0.1
50,000
2
P= 𝑷 = 𝑷𝟐𝟕𝟖, 𝟏𝟖𝟕. 𝟖𝟑
?
 Problems (Annuity)
For the Second Offer:
A=

𝟏 − 𝟏 +𝒊
60,00 -
50,00
𝑷=𝑨 𝒏 (𝟏 + 𝒊) - 𝒌
40,00
0
𝒊
30,00 0
0

𝑷 = 𝑭(𝟏 + 𝒊) - 𝒏
0 1 2 3 4 5 6 7

i = 12%
effective
𝑃 = 30,000 1 + 0.12 -0 + 40,000 1 + 0.12
-1
P=
? 1 − 1 + 0.12 -5
+ 50000(1 + 0.12) -2 1 + 0.12 -
0.1 2
+60,000
2
𝑷 = 𝑷𝟐𝟕𝟕, 𝟗𝟗𝟔. 𝟑𝟏
First offer is much better than the second offer.
 Problems (Annuity)
Perpetuity 𝑨
𝑷=
𝒊
Annuity with Continuous
Compounding
Finding P and F given A:
𝟏 − 𝒆 -𝒓𝒏
𝑷=𝑨
𝒆𝒓 − 𝟏
𝒆 𝒓𝒏 − 𝟏
𝑭=𝑨
Capitalized Cost (Cc) 𝒆𝒓 − 𝟏
Case 1: No replacement, only maintenance and/or operation every period
𝑨
𝑪𝒄 = 𝑪𝑭 +
𝒊
 Problems (Annuity)
Capitalized Cost (Cc)
Case 2: Replacement only, no maintenance and/or operation
𝑪𝒄 = 𝑪𝑭 + 𝑿
𝑆
𝑋=
(1 + 𝑖) 𝑘 −1
Where: S = amount needed to replace a property every k period
(𝐒 = 𝑪𝑭 − 𝑺𝑽)
X = amount of principal invested at a rate i% of the interest on which
will amount to S every k period
Xi = interest on X every period, the periodic deposit towards the
accumulation of S
Case 3: Replacement, maintenance and/or operation every period
𝑨
𝑪𝒄 = 𝑪𝑭 + + 𝑿
𝒊
 Problems (Annuity)
1. A present loan of P12,000 is to repaid by equal payments semi-annually over the next 8 years. If the
interest rate is 7% compounded continuously, what is the amount of each payment?
Given: P = Php 12,000 1 − 𝑒-𝑟𝑛
n=8 𝑃=𝐴
I = 7% 𝑒𝑟 − 1

- 8
1 − 𝑒 0.072 (2)
12,000 = 0.0
𝐴 𝑒 7 −1
2

𝑨 = 𝑷 𝟗𝟗𝟔. 𝟖𝟒
 Problems (Annuity)
2. What is the future worth of an equal-payment series of $5,000 per year for five years if the interest rate is
8% compounded continuously?
Given: A = $5,000 𝑒 𝑟𝑛 − 1
n=5 𝐹=𝐴
I = 8% 𝑒𝑟 − 1
0.0
5
𝑒 81
(1)
−1
𝐹= 0.0
5,000 𝑒 8 −1
1

𝑭 = $ 𝟐𝟗, 𝟓𝟐𝟓. 𝟖𝟕
 Problems (Annuity)
3. Determine the capitalized cost of a structure that requires an initial investment of Php 1,500,000 and an
annual maintenance of Php 150,000. Interest is 15%.
Given: 𝑪𝑭 = Php 1,500,000
A = Php 150,000
I = 15%
𝐴
𝐶𝑐 = 𝐶𝐹 +
𝑖
150,00
𝐶𝑐 = 1,500,000 + 0
0.1
𝑪𝒄 = 𝑷 𝟐, 𝟓𝟎𝟎, 𝟎𝟎𝟎5
 Problems (Annuity)
4. To maintain a bridge, Php 5,000 will be required at the end of 3rd year and annually thereafter. If money
is worth 8%, determine the capitalized cost of all future maintenance.
Given: A = Php 5,000 𝐴
I = 8% 𝐶𝑐 = 𝐶𝐹 +
𝑖
5,000
𝐶𝑐 = 0 + (1 + 0.08) - 2
0.0
8 𝟓𝟖𝟑. 𝟔𝟖
𝑪𝒄 = 𝑷 𝟓𝟑,
 Problems (Annuity)
5. A manufacturing plant installed a new boiler at a total cost of Php 150,00 and is estimated to have a useful
life of 10 years. It is estimated to have a scrap value at the end of the useful life Php 5,000. If the interest is
12% compounded annually, determine its capitalized cost.

Given: 𝐶𝐹 = 𝑃 150,000 S = 𝐶𝐹 − 𝑆𝑉 𝐶𝑐 = 𝐶𝐹 + 𝑋
SV = P 5,000 𝑆
i = 12% S = 150,000 − 𝐶𝑐 = 𝐶𝐹 +
(1 + 𝑖) 𝑘 −1
𝑺5,000
= 𝑷 𝟏𝟒𝟓, 𝟎𝟎𝟎 145,000
𝐶𝑐 = 𝐶𝐹 + 𝑋
𝐶𝑐 = 150,000 +
(1 + 0.12) 10 −1
𝑆
𝑋= 𝑪𝒄 = 𝑷 𝟐𝟏𝟖, 𝟖𝟓𝟓. 𝟖𝟕
(1 + 𝑖) 𝑘 −1
 Problems (Annuity)
6. A new engine was installed by a textile plant at a cost of Php 300,000 and projected to have a useful life
of 15 years. At the end of its useful life, it is estimated to have a salvage value of Php 30,000. Determine its
capitalized cost if interest rate is 18% compounded annually.

Given: 𝐶𝐹 = 𝑃 300,000 S = 𝐶𝐹 − 𝑆𝑉 𝐶𝑐 = 𝐶𝐹 + 𝑋
SV = P 30,000 𝑆
i = 18%
S = 300,000 − 𝐶𝑐 = 𝐶𝐹 +
(1 + 𝑖) 𝑘 −1
30,000
𝑺 = 𝑷 𝟐𝟕𝟎, 𝟎𝟎𝟎
𝐶𝑐 = 𝐶𝐹 + 𝑋 270,000
𝐶𝑐 = 300,000 +
(1 + 0.18) 15 −1
𝑆
𝑋=
(1 + 𝑖) 𝑘 −1 𝑪𝒄 = 𝑷 𝟑𝟐𝟒, 𝟔𝟎𝟒.
𝟏𝟕
 Problems (Annuity)
7. Determine the capitalized cost of a research laboratory which requires Php 5,000,000 for original
construction, Php 100,000 at the end of every year for the first 6 years and then Php 120,000 each year
thereafter for operating expenses and Php 500,000 every 5 years replacement of equipment with interest at
12% per annum?
A 𝑆
Given: 𝐶𝐹 = 𝑃 5,000,000 P 𝐶𝑐 = 𝐶𝐹 + + 𝑋 𝑋=
𝐴6 = P 100,000
𝑖 (1 + 𝑖) 𝑘 −1
A = P 120,000
S = P 500,000
i = 12%
i = 12%
annually

0 1 2 3 4 5 𝒏 ∞
6

A=
100,000
A=
120,000
 Problems (Annuity)
P
𝟏 − (𝟏 + 𝒊) - 𝒏 𝑨
𝑷=𝑨 𝑷=
𝒊 𝒊
i = 12%
annually

0 1 2 3 4 5 𝒏 ∞
6

A=
100,000
A=
1 − (1 + 0.12) - 120,00 120,000
𝑃= 6 +0 (1 + 0.12) -
0.1 0.1 6
100,000
2 2
𝑷 = 𝑷 𝟗𝟏𝟕, 𝟕𝟕𝟏. 𝟖𝟓𝟑𝟓
 Problems (Annuity)

A 𝑆
𝐶𝑐 = 𝐶𝐹 + + 𝑋 𝑋= (1 + 𝑖) 𝑘 −1
𝑖

500,000
𝐶𝑐 = 5,000,000 + 917,771.8535 +
(1 +
0.12) 5 −1

𝑪𝒄 = 𝑷 𝟔, 𝟓𝟕𝟑, 𝟔𝟒𝟓. 𝟕𝟒