UNIVERSITY OF THE CORDILLERAS COLLEGE OF ENGINEERING AND ARCHITECTURE

EngEcon- Engineering Economics

MODULE 2: Money-Time Relationships and
Equivalence

UNIT 4 – Annuity

Prepared by:
Engr. Melkisidick L. Angloan
Engr. Reymore A. Insas
 Annuity
- Series of equal payments occurring at equal periods of time.

A.) ORDINARY ANNUITY – payments are made at the end of each period.
B B B B B
@= + + +−−− + + Eq.(1)
(1 + 7)F (1 + 7)G (1 + 7)H 1 + 7 DIF (1 + 7)D
P “ multiply both sides of equation by (1 + 7) ”
B B B B
@ + @7 = B + + +−−− + + Eq.(2)
(1 + 7)F (1 + 7)G 1 + 7 DIG (1 + 7)DIF

0 1 2 3 ............. n-1
4 n
*Eq.(2) – Eq.(1) where:
P = present worth
A A A A A A 1+7 D−1 A = equal payment
@=B
7 1+7 D 7 = interest rate
8= # of interest period

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* from

1+, -−1 Eq.(1)

'=)
, 1+, -
/
/ =' 1+, -
→ '= -
Eq.(2)
1+,

* substitute Eq.(2) in Eq.(1)

/ 1+, -−1
-
=) where:
1+, , 1+, -
F = future worth
1+, -−1 A = equal payment
/=)
, , = interest rate
>= # of interest period

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 EXAMPLE 1:
1. What are the present worth and the accumulated amount of a 10-year annuity paying
Php 10,000 at the end of each year, with interest at 15% compounded annually?
/0123:
4 = 10,000 : =?
6 = 10 * =? *
7 = 15% P
?@ABC0@3:
1+7 =−1
:=4
7 1+7 =
1 + 0.15 EF − 1
: = 1000
0.15 1 + 0.15 EF 0 1 2 3 4 ............. 9 10
G = GHI JK, LMN. OP

1+7 =−1

Ph
Ph

Ph
Ph

Ph
Ph
*=4

p1
p1

p1
p1

p1
p1
7

0,
0,

0,
0,

0,
0,

00
00

00
00

00
00

0
0

0
0

0
0
1 + 0.15 EF − 1
* = 10000
0.15
Q = GHI RKS, KSN. LM 4
 EXAMPLE 2:
A civil engineer wishes to set up a special fund by making uniform semi-annual end-of-period deposits
for 20 years. The fund s to provide Php 100,000 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?
Given: /0 = Php 100,000
7 = 20
70 = 5
[Link] ]
9 = 8% →=>?? = (1 + E )E −1 = 0.0816 = 8.16%
m = 2
A = ? /0 /0 /0 /0 /0
Solution: “using after 20 years from today as focal date”

* Withdrawal:
(^_B.BD^`)a b^
]0 = 100000 [Link]^`
=Php 588,534.66
0 1 2 15 16 17 18 19 20

* Deposit: ]0 =] .............
[Link]
(^_ h )h(hf) b ^
588534.66 = A [Link]
h / / / / / / / / / / / / / / /
A = Php 6,193.44
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 B.) DEFERRED ANNUITY – the payments are made at the end of each period
but the first payment is made periods after the beginning.
Let: d = # of years of delay
FG = present worth computed at the beginning of the series
X
OPM
FG (1 + L) −1 FG
F= = N
(1 + L)M L(1 + L)OPM (1 + L)M
P
(1 + L)OPM −1
F=N d n-d
L(1 + L)O

S
*from F =
(TUV)W 0 .............
1 d d+1 d+2 ............. n

(1 + L)OPM −1
X=N
L A A A

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 EXAMPLE:
A civil engineer wishes to set up a special fund by making uniform semi-annual end-of-period deposits
for 20 years. The fund s to provide Php 100,000 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?
Given: -. = Php 100,000
6 = 20
6. = 5
V Vg
9 = 8% →=>?? = 8.16%
m = 2
A = ?
Solution: “considering the beginning as focal date” -. -. -. -. -.

* Withdrawal:
(XYZ.Z[X\)^ _X
V. = 100000 Z.Z[X\(XYZ.Z[X\)`a
=Php 122,585.32
0 1 2 15 16 17 18 19 20
* Deposit: V. =V .............
[Link] `(`a)
(XY ) _X
`
122585.32 = A [Link] [Link] `(`a)
( )(XY )
` `
- - - - - - - - - - - - - - -
A = Php 6,193.44
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C.) ANNUITY DUE – payments are made at the beginning of each period.

1 + D EFG − 1 F
?=A +A P
D 1 + D EFG

1 + D EFG − 1
?=A +1
D 1 + D EFG

1+D E−1 0 1 2 3 4 n-1 n

?=A (1 + D) .............
D 1+D E
J
* from ? = A A A A A A
(GKL)M

1+D E−1
N=A (1 + D)
D

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 EXAMPLE:
A man bought an equipment costing Php 60,000 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?

Given: P = Php 60,000 Php 60,000

4 = 24%
m = 4
n = 3
A = ?

Solution: 0 1 2 3

0.24 DE
1+ 4 −1 0.24
60000 = @ 1+ A A A A A A A A A A A A
0.24 0.24 DE 4
4 1 + 4

A = Php 6,751.53

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 D.) PERPETUITY– annuity in which payments continue indefinitely.
P

1+D E−1
?=A
D 1+D E
but: n = ∞ .............
0 1 2 3 4 5 ∞
1+D ∞−1 A 1+D ∞ 1 A
?=A = − = (1 − 0)
D 1+D ∞ D 1+D ∞ 1+D ∞ D
A A A A A
A
?=
D

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 EXAMPLE:
What amount of money invested today at 15% interest can provide the following
scholarships: Php 30,000 at the end of each year for 6 years; Php 40,000 for the next 6
years and Php 50,000 thereafter? P
Given: P = ? N5 N; N=
0 = 15%
45 = Php 30,000
4; = Php 40,000
0 6 12 ............. ∞
4= = Php 50,000
>5 = >; = 6
>= = ∞ 45 45 45 45 45 45
4; 4; 4; 4; 4; 4;
4= 4= 4=
Solution:

1 + 0.15 H − 1 1 + 0.15 H − 1 50000

P = 30000 + 40000 + = Php 241,282.32
0.15 1 + 0.15 H 0.15 1 + 0.15 5; 0.15(1 + 0.15)5;

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 P

G4 GA GD
……….…..Continuation……………

0 6 12 ............. ∞
* Other Solution:

E4 E4 E4 E4 E4 E4
1 + 0.15 ; − 1 EA EA EA EA EA EA
P4 = 30000 = Php 113,534.48 ED ED ED
0.15 1 + 0.15 ;

1 + 0.15 ; − 1
PA = 40000 = Php 151,379.31
0.15 1 + 0.15 ;
PA PD
50000 P = P4 + ;
+ 4A
1+H 1+H
PD = = Php 333,333.33
0.15
151379.31 333333.33
P = 113534.48 + +
1 + 0.15 ; 1 + 0.15 4A
P = Php 241,282.32

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 thanks!
Any questions?
rainsas@[Link]

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Reference Book: Engineering Economy (3rd Ed.)
by: Hipolito B. Sta. Maria

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