ESECON230 | MIDTERM

ANNUITY ORDINARY ANNUITY

- is a series of equal payments made at equal intervals - is a series of uniform cash flows where the first
of time. Financial activities like installment payments, amount of the series occurs at the end of the first period
monthly rentals, life-insurance premium, monthly and every succeeding cash flow occurs at the end of
retirement benefits, are familiar examples of annuity. each period.
- is one where the payments are made at the end of
1. ANNUITY CERTAIN - the specific amount of
each period.
payments are set to begin and end at a specific
CHARACTERISTICS OF ORDINARY ANNUITY:
length of time. A good example of annuity certain is
1. P (present equivalent value)
the monthly payments of a car loan where the
-Occurs one interest period before the first A (uniform
amount and number of payments are known.
amount)
TWO CLASSIFICATIONS OF ANNUITY CERTAIN 2. F (future equivalent value)
a) SIMPLE ANNUITY - the payment period is -Occurs at the same time as the last A and n intervals
the same as the interest period, which after P
means that if the payment is made monthly 3. A (annual equivalent vale)
the conversion of money also occurs -Occurs at the end of each period
monthly.
b) GENERAL ANNUITY - the payment period
is not the same as the interest period.
2. ANNUITY UNCERTAIN - the annuitant may be
paid according to certain event. Example of annuity
uncertain is life and accident insurance. In this
example, the start of payment is not known and the
amount of payment is dependent to which event.

In engineering economy, annuities are classified into

four categories
TYPES OF ANNUITIES

1. ORDINARY ANNUITY
2. ANNUITY DUE
3. DEFERRED ANNUITY
4. PERPETUITY

ANNUITY is a series of equal payments occurring at

equal periods of time.
SYMBOL AND THEIR MEANING
The quantity in brackets is called the “uniform series
P = Value or sum of money at present
present worth factor” and is designated by the
F = Value or sum of money at some future time
functional symbol (P/A, i%, n), read as “P given A at I
A = A series I periodic, equal amounts of money
percent in the interest periods. “Hence Equation can be
n = Number of interest periods
expressed as P = A (P/A, i%, n)
i = Interest rate per interest period
 EXAMPLE ON ORDINARY ANNUITY

1. What are the present worth and the accumulated

amount of a 10-year annuity paying P10,000 at the
end of each year, with interest at 15% compounded
annually?

The quantity in brackets is called “Uniform series
compound amount factor” and is designated by the
functional symbol (F/A, i%, n), read as “F given at I
percent in n interest period. “ Equation can now be
written as F = A (F/A, i%, n )
2. What is the present worth of P500 deposited at the
end of every three months for 6years if the interest
rate is 12% compounded semiannually?

The quantity in brackets is called the “capital recovery

factor.” It will be denoted by the functional symbol
(A/P, i%, n) which is read as “ A given at I percent in an
interest periods.” Hence A = P (A/P, i%, n)

The quantity in brackets is called the “sinking fund

factor”. It will be denoted by the functional symbol (A/F,
i%, n) which is read as “ A given F at I per n interest
periods.” Hence A = F (A/F, i%, n)
 DEFERRED ANNUITY SOLUTION FOR (A)

- is one where the first payment is made several periods

after the beginning of the annuity.
- where the first cash flow of the series is not at the end
of the lot period or it is deferred for some time

SOLUTION FOR (B)

EXAMPLE ON DEFERRED ANNUITY

1. 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 P80,000
each for his college tuition fees, starting with his 18th
birthday. Interest at the rate 12% per annum was to be
ANNUITY DUE
paid on all amounts on deposit. There was also a
provision that the grandson could select to withdraw no - is one where the payments are made at the beginning

annual payments and received a single lump amount on of each period.

his 25th birthday. The grandson chose this option. - is series of uniform cash flows that occur at the

(a)How much did the boy received as the single beginning of each period.

payments?
(b)How much did the grandfather deposit?
 EXAMPLE ON PERPETUITY
1. What amount of money invested today at 15%
interest can provide the following scholarship: P30,000
at the end of each year for 6 years; P40,000 for the next
years and P50,000 thereafter?

EXAMPLE ON ANNUITY DUE

1. A man bought an equipment costing P60, 000
payable in 12 quarterly payments, each installment
payable at the beginning of each period. The rate of
interest is 24% compounded quarterly. What is the
amount of each payment?

PERPETUITY

- is an annuity in which the payments continue

indefinitely.
- is a series of uniform cash flows where they extend for
a long time or forever.
 CAPITALIZED COST

One of the most important applications of perpetuity is

in 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.

CAPITALIZED COST is an application for perpetuity. It

is one method used in comparing alternatives. It is
defined as the sum of the first cost (FC) and the present
worth of all perpetual maintenance and replacement
cost.
 AMORTIZATION

- is any method of repaying a debt, the principal and

interest included, usually by a series of equal payments
at equal interval of time.

GEOMETRIC GRADIENT