ENGINEERING ECONOMY

ANNUITY
ANNUITIES
An annuity consists of a series of equal payments made at equal
intervals of time. There are four types of annuity- ordinary annuity, deferred
annuity, annuity due and perpetuity.

1. ORDINARY ANNUITY
An ordinary annuity is the one where the equal payments are made at the
end of each payment period starting from the first period.

2. DEFERRED ANNUITY
Deferred annuity is also an ordinary annuity but the payment of the first
amount is deferred a certain number of periods after the first.

3. ANNUITY DUE
An annuity due is one where the payments are made at the start of each
period, beginning from the first period.

4. PERPETUITY
A type of annuity where the payment period extend forever or in which the
periodic payment continues indefinitely
FORMULAS
UNIFORM SERIES PRESENT WORTH FACTOR (P/A)
P = A (P/A, i%, n)
1  (1  i)  n 
P  A 
 i 
UNIFORM SERIES CAPITAL RECOVERY FACTOR (A/P)
A = P ( A/ P, i%, n)
 i 
A  P n 
1  (1  i ) 
UNIFORM SERIES COMPOUND AMOUNT FACTOR (F/A)
F = A ( F/ A, i%, n)

 (1  i) n  1
F  A 
 i 
UNIFORM SERIES SINKING FACTOR (P/A)

 
A = F (A/F, i%, n)
i
A  F 
 (1  i ) n
 1 
Examples:
1. A series of equal annual deposits of P50,000 extends over a
period of 10 years. What is the future worth of this annual
deposits at 9% per year compounded quarterly?

2. You are considering purchasing a piece of industrial

equipment that costs Php 1,500,000. You decide to make a
downpayment of Php 250,000 and to borrow the remainder
from a local bank of 11%, compounded monthly. The loan is
to be paid in 8 annual installments. What is the amount of
annual payments?

3. How much would you have to deposit for five consecutive

years starting one year from now if you want to be able to
withdraw P1,000,000 fifteen years from now? Assume the
interest rate to be 15% compounded semi-annually?
4. A man borrows P100,000, which agrees to repay in installments of
P15,000 at the end of each year. How long will it take to pay the
principal and interest at 8% compounded annually?

5. A grove of mango trees is expected to yield P10,000 a year for 20

years after the tree come into full bearing. Find the present value of
the entire expected yield at an interest rate of 7% per year
compounded monthly, assuming the first income of P10,000 to be
due at the end of 5 years?

6. Maintenance money for a new building has been sought, Mr.

Kendall would like to make a donation to cover all future expected
maintenance costs for the building. These maintenance costs are
expected to be P40,000 each year for the first 5 years, P50,000 each
year for year 6 through 10 and P60,000 each year for year 11
through 15. If money is placed in account that will pay 12% interest
compounded annually, how large should the gift be?
7. A farmer bought a tractor costing P550,000 payable 10 annual
payments, 10 each installments payable at the beginning of each
period. If the rate of interest is 12% compounded annually,
determine the amount of each installment.

8. A corporation sets aside P25000 at the beginning of each year to

create a fund in case of future expansion. If the fund earns 5%
compounded annually to how much does it amount at the end of
10th year?

9. A house and lot can be acquired by a down payment of P500,000 and

a yearly payment of P100,000 at the end of each year for a period of
10 years, starting at the end of 5 years from the date of purchase. If
money is worth 14% compounded annually, what is the cash price of
the property?
10. If a woman deposits P5,000 every 6 months for 7
years, how much will she have in her account after she
makes her last deposit if the interest rate is 12% per
year compounded quarterly?

11. A man paid 20% down payment of P400,000 for a

house and lot and agreed to pay the 80% balance on
monthly installment for 60 months at an interest rate
of 15% compounded bimonthly. Compute the amount
of the monthly payment
12. A loan association lends money at the rate of 15%
compounded monthly. A man borrows P125,000 payable in 16
semiannual installments. How much is each of the semiannual
payment with the first installment due at the end of two
years reckoned from the date of the loan?

13. Christine deposits P3,000 a month into an account paying

8% per year compounded quarterly. Fifteen months deposits
were made. Determine how much will be accumulated in the
account one year after the last deposit.
14. Calculate the equivalent lump sum receipt
now for the following cashflows: You invest
$4,000 today, another $400 one year from
now, and still another $1600 two years from
now. You then receive $2,000 each year for 10
years starting 4 years from now. The interest
rate is 8% per year.
15. What lump sum of money must be
deposited into a bank account at present time
so that $500 per month can be withdrawn for
five years, with the first withdrawal scheduled
for six years from today? The interest rate is
4% per quarter.
16. An individual is borrowing Php 150,000 at
10% interest compounded annually. The loan
is to be repaid in equal annual payments over
30 years. However, just after the eighth
payment is made, the lender allows the
borrower to triple the annual payment. The
borrower agrees to this increased payment. If
the lender is still charging 10% per year,
compounded annually, on the unpaid balance
of the loan, what is the balance still owed just
after the twelfth payment.
17. An individual makes six annual deposits of
$2,000 in a savings account that pays interest
at a rate of 4% compounded annually. Two
years after making the last deposit, the
interest rate changes to 7% compounded
annually. Twelve years after the last deposit,
the accumulated money is withdrawn from
the account. How much is withdrawn,
18. A woman arranges to repay $1,000 bank loan
in 10 equal payments at a 10% effective annual
interest rate. Immediately after her third
payment, she borrows another $500, also at
10% per year. When she borrows the $500, she
talks the banker into letting her repay the
remaining debt of the first loan and the entire
amount of the second loan in 12 equal annual
payments. The first of these payments would
be one year after she receives the $500.
Compute the amount of each of payments.