ENGINEERING ECONOMY

ANNUITY – is a series of equal payments made at equal intervals of time. Financial activities like
installment payments, monthly rentals, life-insurance premium, monthly retirement benefits, are
familiar examples of annuity.
TYPES OF ANNUITIES:
In engineering economy, annuities are classified into four categories. These are (1) Ordinary
annuity, (2) Annuity due, (3) Deferred annuity, and (4) Perpetuity
SYMBOL AND THEIR MEANING:
P = Value or sum of money at present
F = Value or sum of money at some future time
A = A series of periodic, equal amounts of money
n = number of interest periods
i = interest rate per interest period
 ENGINEERING ECONOMY
Ordinary Annuity – One where equal payments are made at the end of each payment period
starting from the first period.
Beginning

End of Term 1 End of Term 2 End of Term 3

n-1 n

Finding P when A is given: 0 1 2 3

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

Where:
P= present worth P
A= periodic payment
n= period of time
i= rate of interest

[ ( 1 + ⅈ )𝑛 − 1
( 1+ ⅈ ) 𝑛 i ] The quantity in bracket is called the “uniform series present worth factor”
and is designated by the functional symbol P/A, i%, n, read as “P given A at
i percent in the interest periods”. Hence equation can be expressed as
P=A(P/A, i%, n)
 ENGINEERING ECONOMY
F
Finding F when A is given:
𝑨 [ ( 𝟏+𝒊 ) − 𝟏 ]
𝒏
n-1 n
𝑭=
𝒊 0 1 2 3

Where: A A A
A A
F= future worth
A= periodic payment
n= period of time
i= rate of interest

The quantity in bracket is called the “uniform series compound amount

[ ]
𝑛
( 1+ ⅈ) − 1 factor” and is designated by the functional symbol F/A, i%, n, read as “F
𝑖 given A at i percent in n interest periods”. Hence equation can be
expressed as : F=A(F/A, i%, n)
 ENGINEERING ECONOMY
Finding A when P is given:

𝐴= 𝑃
[ ⅈ
1 − ( 1+ ⅈ )−𝑛 ] The quantity in bracket is called the “capital recovery factor” and is
designated by the functional symbol A/P, i%, n, read as “A given P at i
percent in n interest periods”. Hence equation can be expressed as :
A=P(A/P, i%, n)

Finding A when F is given:

𝐴= 𝐹
[ ⅈ
( 1+ ⅈ )𝑛 − 1 ] The quantity in bracket is called the “sinking fund factor” and is designated
by the functional symbol A/F, i%, n, read as “A given F at i percent in n
interest periods”. Hence equation can be expressed as :
F=A(F/A, i%, n)
 ENGINEERING ECONOMY
Sample Problem 1 : A generator is purchased on the basis of guaranteed performance. After testing the
machine, it indicates that the operating cost will be P400 more per year than the manufacturer guaranteed.
If money is worth 8% per annum, compounded annually, how much should the buyer deduct from the
purchased price to compensate for the extra operating cost if the expected life of the generator to be 20 years?

𝑨 [ ( 𝟏+𝒊 ) 𝒏 − 𝟏 ]
𝑷= 0 2 18 20
( 𝟏+𝒊 ) 𝒏 𝒊 1 3 19

𝟒𝟎𝟎 [ ( 𝟏+𝟎 .𝟎𝟖 ) −𝟏 ] P

𝟐𝟎
400 400 400 400 400 400
𝑷=
( 𝟏+𝟎 . 𝟎𝟖 )𝟐𝟎 (𝟎 . 𝟎𝟖) Cash Flow-Diagram

3,927.26 php
 ENGINEERING ECONOMY
Sample Problem 2
A property may be bought at a cash price of P6 million. However a 10% down payment is
acceptable with the balance payable on monthly installments of P128,465.61 each for “x” years.
The rate of interest is 15% compounded monthly. What is the value of “x”?
Solution:
= = 0.0125 𝑨 [ ( 𝟏+𝒊 ) 𝒏 − 𝟏 ]
𝑷=
( 𝟏+𝒊 ) 𝒏 𝒊

Balance = 6,000,000 – 0.1(6,000,000) 𝟏𝟐𝟖 , 𝟒𝟔𝟓 . 𝟔𝟏 [ ( 𝟏+𝟎 .𝟎𝟏𝟐𝟓 )𝟏𝟐 𝒙 − 𝟏 ]

𝟓 , 𝟒𝟎𝟎 , 𝟎𝟎𝟎=
Balance = 5,400,000 ( 𝟏+𝟎 . 𝟎𝟏𝟐𝟓 )𝟏𝟐 𝒙 (𝟎 . 𝟎𝟏𝟐𝟓)
Use Shift-Solve in your calculator to get x

5 years
 ENGINEERING ECONOMY
Sample Problem 3
A promissory note has an outstanding payments of P650 at the end of each year for the next
five years. What market price would be paid for this note by an investor who requires a 12%
yield on his investments, compounded quarterly.
Solution: Recall : ER =
P
𝐸 𝑅 𝐴=𝐸 𝑅 𝑄

( )
4
0 1 2 3 4 5 0.12 1
1+ − 1=( 1+𝑖 ) − 1
4
A A A A A
(annually)
𝐴 [ ( 1+𝑖 )𝑛 − 1 ] 𝑷=𝑷 𝟐,𝟑𝟏𝟏.𝟓𝟑
𝑃=
( 1+𝑖 )𝑛 𝑖
650 [ ( 1+ 0.1255 ) −1 ]
5

𝑃=
( 1+0.1255 )5 ( 0.1255)
 ENGINEERING ECONOMY
Sample Problem 4 : 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?

𝑨 [ ( 𝟏+𝒊 ) 𝒏 − 𝟏 ]
𝑷=
( 𝟏+𝒊 ) 𝒏 𝒊

𝟏𝟎 ,𝟎𝟎𝟎 [ ( 𝟏+𝟎 .𝟏𝟓 ) −𝟏 ]

𝟏𝟎
0 1 2 3 8 9 10
𝑷=
(𝟏+𝟎 . 𝟏𝟓 )𝟏 𝟎 (𝟎 .𝟏𝟓)
10K
P 10K 10K 10K 10K 10K
P50,187.69 Cash Flow-Diagram
 ENGINEERING ECONOMY
Sample Problem 5 : A chemical engineer wishes to set up a special fund by making uniform semi-annual 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 the
20-year period. If interest is 8% compounded semi-annually, what is the required semi-annual deposit to be
made?

Solution 1: 100k 100k 100k 100k 100k

( 1+ ⅈ )𝑛 −1
F= A
ⅈ 0 1 2 3 12 13 14 15 16 17 18 19 20

𝐹 𝐴=𝐹 100 𝐾
A A A A A A A A A A A A

( ) ( )
2 1
0.08 𝑟
1+ −1= 1+ −1
2 1 Solution 2:
𝑟 =0.0816 𝑨 [ ( 𝟏+𝒊 )𝒏 −𝟏 ] A(19.79277388)
𝑷= 𝒏
A ( 𝟏+𝒊 ) 𝒊
=
𝑃 𝐴 =𝑃 100 𝐾 ( 1+ ⅈ ) − 15

95.0255157) = 588,534.66 = P6,193.44

= =

P6,193.44
 ENGINEERING ECONOMY
Sample Problem 6 : A man purchased a house for P425,000. In the first month that he owned the house, he
spent P75,000 on repairs and remodeling. Immediately after the house was remodeled, he was offered
P545,000 to sell the house. After some consideration, he decided to keep the house and have it rented for
P4,500 per month starting two months after the purchase. He collected rent for 15 months and then sold the
house for P600,000. If the interest rate was 1.5% per month, how much extra money did he make or lose by
not selling the house immediately after it was remodeled? 545K 600,000K
4.5K 4.5K 4.5K 4.5K 4.5K
1
Profit @ Offer 1=545 𝐾 −75 𝐾 −425 K (1+ 0.015 )
1 = P 38,625.00 0 1 2 3 14 15 16

425K 75K

+]

Profit @ Offer 2=P  33,580.45

Loss by not selling immediately by (P38,625 – P33,580.45 = P5,105.00)

 ENGINEERING ECONOMY

DEFERRED ANNUITY
 ENGINEERING ECONOMY
Deferred Annuity – one where the first payment is made several periods after the beginning of
the annuity.

P
n-1 n
0 1 2 3

A A A

[ ]
−𝒏
𝟏 − ( 𝟏+ ⅈ )
𝑷=𝑨 ( 𝟏+ ⅈ )−𝒎
ⅈ
 ENGINEERING ECONOMY
Sample Problem No. 1
A man loans P200,000 from a bank with interest at 5% compounded annually. He agrees to
pay his obligations by paying 8 equal payments , the first being due at the end of 10 years .
Find the annual payments. Using Deferred Annuity Formula:
Cash Flow Diagram:
[ ]
−𝒏
𝟏 − ( 𝟏+ ⅈ ) −𝒎
m period n period
𝑷 = 𝑨 ( 𝟏+ ⅈ )
200,000 ⅈ

[ ]
−𝟖
𝟏 − ( 𝟏+𝟎 . 𝟎𝟓 )
𝟐𝟎𝟎 , 𝟎𝟎𝟎= 𝑨 (𝟏+𝟎 . 𝟎𝟓 )− 𝟗
0 1 2 3 9 10 11 12 13 14 15 16 17 𝟎 .𝟎𝟓

A A A A A A A A A=
𝐴 [ ( 1+0.05 ) −8
− 1]
Solution :
(1+ 0.05 )−8 ( 0.05)
𝐴 [ ( 1+𝑖 ) − 1: P] is the present worth of annuity the period
𝑛
𝑨=𝑷 𝟒𝟖 ,𝟎𝟎𝟒 .𝟖𝟔
𝑃=
( 1+𝑖 )𝑛 𝑖 before the first period
P9 = -9

0 = -9 𝑨=𝑷 𝟒𝟖 ,𝟎𝟎𝟒 .𝟖𝟔

= -9
 ENGINEERING ECONOMY
Sample Problem No. 2
Determine the present worth of a deferred annuity consisting of 10 semi-annual payments,
each P1,000, the first at the end of the third year. Money is worth 14% compounded semi-
annually. 𝐴 [ ( 1+𝑖 )𝑛 − 1 ] Using Deferred Annuity Formula:
𝑃 =

[ ]
Cash Flow Diagram: 𝑛 −𝒏
P ( 1+𝑖 ) 𝑖 𝟏 − ( 𝟏+ ⅈ ) −𝒎
𝑷=𝑨 ( 𝟏+ ⅈ )
ⅈ
0 1 2 3 4 5 6 7 8
m=5 n = 10

= 7% = 0.07

P2.5 =
1,000 1,000 1,000 1,000 1,000
1,000 1,000 1,000 1,000 1,000
𝑃=1,000 [
1 − ( 1+0.07 )−10
0.07
( 1+0.07 )−5 ]
P = P5,007.72
Solution :
P2.5 =

P2.5 = P7,023.58
P0 = 7,023.58 (1+0.07)-5
P0 = P5,007.72
 ENGINEERING ECONOMY
Sample Problem No. 3
Find the value after 20 years in pesos of an annuity of P20,000 payable annually for 8 years with
the first payment at the end of 2 years if money is worth 5%.
𝑨 [ ( 𝟏+𝒊 ) − 𝟏 ]
𝒏

Cash Flow Diagram: 𝑭=

𝒊
F9 F

0 1 2 3 4 5 6 7 8 9 10 17 18 19 20

20,000 20,000 20,000 20,00020,000 20,000 20,000 20,000

Solution: 𝐹 9= 𝑃 190,982.18
20000 [ ( 1+0.05 )8 −1 ]
𝐹 9= F11
0.05
F P326,644.33
𝐹 9= 𝑃 190,982.18
 ENGINEERING ECONOMY
Sample Problem No. 4
If P10, 000 is deposited each years for 9 years, how much annuity can a person get annually from
the bank every year for 8 years starting 1 year after the 9th deposit is made. Cost of money is
14%.

Cash Flow Diagram: A A A A A A A A

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

10,000 10,000 10,000 10,000 10,00010,000 10,000 10,000 10,000

Solution:

[ ] [ ] 𝟏𝟎 , 𝟎𝟎𝟎 [ ( 𝟏+𝟎 .𝟏𝟒 ) − 𝟏 ]

𝟗
𝑨 [ ( 𝟏+ 𝒊 ) − 𝟏 ]
−𝟖
𝟏 − (𝟏+ ⅈ )
−𝒏 𝒏
𝟏− ( 𝟏+𝟎 .𝟏𝟒 ) −𝟗
𝑃𝐴 =𝑨 ( 𝟏+ ⅈ𝑃) −𝒎
𝟏𝟎 , 𝟎𝟎𝟎 = 𝑨 ( 𝟏+𝟎 . 𝟏𝟒 ) =
𝑜
ⅈ
0
( 𝟏+𝒊 ) 𝒏 𝒊 𝟎 . 𝟏𝟒 ( 𝟏+𝟎 . 𝟏𝟒 )𝟗 (𝟎 .𝟏𝟒 )
𝟏𝟎 , 𝟎𝟎𝟎 [ ( 𝟏+𝟎 . 𝟏𝟒 ) −𝟏 ]
[ ]
𝟗
−𝟖
𝟏 − (𝟏+𝟎 . 𝟏𝟒 ) 𝑃 𝟏𝟎,. 𝟎𝟎𝟎
𝑃𝐴 =𝑨 ( 𝟏+𝟎 𝟏𝟒=
0 )−𝟗 (𝟏+𝟎 . 𝟏𝟒 )𝟗(𝟎 . 𝟏𝟒) A P34,675.19
𝑜
𝟎 .𝟏𝟒
𝑃 𝐴𝑜 = 𝑃 𝟏𝟎 , 𝟎𝟎𝟎 0
 ENGINEERING ECONOMY

ANNUITY DUE
 ENGINEERING ECONOMY
Annuity Due– one where the first payment are made at the beginning of each period.

P
n-1 n
0 1 2 3

A A A A A

+A

F-A
 ENGINEERING ECONOMY
Sample Problem No. 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?
60,000
Cash Flow Diagram: +A
60,000
= 6%
0 1 2 3 4 5 6 7 8 9 10 11 12

0 1 2 3 4 5 6 7 8 9 10 11 12
A A A A A A A A A A A A
A A A A A A 60,000
A A A A A A
Consider as Ordinary Annuity
Solution:
0 1 2 3 4 5 6 7 8 9 10 11 12
P
A A A A A A A A A A A A
6+A +A

A = P6,751.53
F-A
 ENGINEERING ECONOMY
Sample Problem No. 2
Ben Abellana deposits P750 in a savings account in the Bank of Asia at the beginning of each
year, starting now, for the next 10 years. If the bank pays 7% per year, compounded
annually. How much money will Mr. Abellana have accumulated by the end of the 10 th year?
Cash Flow Diagram:
F Solution :
F-A F
0 1 2 3 4 5 6 7 8 9 10

F - 750
750 750 750 750 750 750 750 750 750 750
 ENGINEERING ECONOMY
Sample Problem No. 3
A certain property is being sold and the owner received two bids. The first bidder offered to pay P400,000 each year for 5
years, each payment is to be made at the beginning of each year starting now. The second bidder offered to pay P240,000
first year, P360,000 the second year and P540,000 each year for the next years, all payments will be made at the beginning
of each year starting now. If money is worth 20% compounded annually, which did should the owner of the property
accept?
First Bid: Second Bid:

0 1 2 3 4 5 0 1 2 3 4 5

400K 400K 400K 400K 400K 240K 360K 540K 540K 540K

+𝑨 𝑃 =2 40 K +360 K ( 1+0.2 )
−1
+540 𝑘
[
( 1+0.2 )3 − 1
3
( 1+0.2 ) ( 0.2 ) ]
( 1+0.2 ) −1

𝑷 =𝑷 𝟏, 𝟒𝟖𝟕, 𝟗𝟏𝟔. 𝟔𝟕
+𝟒𝟎𝟎 ,𝟎𝟎𝟎
𝑷=𝑷 𝟏,𝟒𝟑𝟓,𝟒𝟗𝟑 .𝟖𝟑

The owner of the property should accept the second bid.

 ENGINEERING ECONOMY

PERPETUITY
 ENGINEERING ECONOMY
Perpetuity– is an annuity in which the payments continue indefinitely.

𝐴 A – equal series of payment

𝑃= i – nominal rate of interest
ⅈ
P – perpetuity/present cost
Sample Problem:
Determine the amount of money required to generate an infinite number of annual payments of
P6,000 each if the interest is 10% per year, compounded continuously.
Solution:
i = er -1 𝐴
𝑃=
i = e0.1 -1 ⅈ
i = 0.10517 6,000
𝑃=
0.10517
𝑃=P 57,050.48