ANNUITY​ 3.

What is the present worth of Php 500 deposited at

- series of uniform payments made at equal intervals of time the end of every three months for 6 years if the
interest rate is 12% compounded Semiannually?

Annuities are established for the following purposes:

1. As payment of debt by series of equal payments at equal
time intervals, also known as amortization.
2. To accumulate a certain amount in future by depositing
equal amounts at equal time intervals. These amounts are
called sinking fund.
3. As a substitute periodic payment for a future lump sum
payment.

TYPES OF ANNUITY 4. An employee is earning Php18,000 a month and he

1. Ordinary Annuity - payment is made at END OF EACH can only afford to purchase a car, which will require a
PERIOD starting from the first period. downpayment of Php85,000 and a monthly
2. Annuity Due - payment is made at BEGINNING OF EACH amortization of 30% of his monthly salary. What
PERIOD starting from the first period. would be the maximum cash value of a car he can
3. Deferred Annuity – the first payment is made several purchase if the seller will agree to a down payment of
periods after the beginning of annuity. Php85,000 and the balance payable in 4 years at a
nominal rate of 18% payable on a monthly basis? The
4. Perpetuity – annuity where payment periods extend forever
first payment will be due at the end of the first month.
or periodic payments continue indefinitely.

ORDINARY ANNUITY
- the equal payments are made at the end of each compounding
period starting from the first compounding period.
Finding future worth/equivalent given uniform equal
payments

5. A fund is to provide an annual scholarship of 4000

Php for the first 5 years; 6000 for the next 5 years and
9000 Php thereafter. The fund will be established 1
Finding present equivalent given uniform equal year before the first scholarship is awarded. If the
payments fund earns 12 % interest, what sum must be
deposited?

SAMPLE PROBLEMS
1. If 500 pesos is invested at the end of each year for 4 years at
an annual interest rate of 10%, what is the total peso amount
after 4 years?

DEFERRED ANNUITY
- is like a regular annuity, except the first payment is
delayed by a certain number of compounding periods.

2. What is the present worth and the accumulated amount of a

10-year annuity paying Php10,000 at the end of each year, with Finding future worth/equivalent given uniform
interest at 15% compounded annually? equal payments

Finding present equivalent given uniform equal

Payments
SAMPLE PROBLEMS ASSIGNMENT
6. A house and lot can be acquired with a downpayment of
Php500,000.00 and a yearly payment of Php100,000.00 at the 1. Colet deposits Php6,000.00 every month for her
end of each year for a period of 10 years, starting at the end of business. If the interest rate is 10% compounded
5 years from the date of purchase. If money is worth 14% quarterly, what lump sum value can she expect after
compounded annually, what is the cash price of the property?
20 years?

7. A man loans Php187,400 from a bank with interest at 5%

compounded annually. He agrees to pay his obligations by
paying 8 equal annual payments, the first being due at the end
of 10 years. Find the annual payments. 2. A debt of Php40,000, whose interest rate is 15%
Compounded semi-annually, is to be discharged by a
series of 10 semi-annual payments, the first payment
to be made is 6 months after consummation of the
loan. The first 6 payments will be Php6,000 each,
while the remaining 4 payments will be equal and of
Such amount that the final payment will liquidate the
debt. What is the payment of the last 4 payments?

8. The purchase of equipment of Php 100000 has been made

available through a loan which earns 12% per annum. It has
been agreed that the load be payable in 10 equal payments.
How much is the yearly due?

3. A parent on the day the child is born wishes to

determine what lump sum would have to be paid into
an account, in order to withdraw Php 20,000.00 each
of the child’s 18th, 19th, 20th and 21st birthdays.
9. What is the future worth of Php 600 deposited at the end of Given money is worth 5% compounded annually.
every month for 4 years if the interest rate is 12% compounded
quarterly?
ANNUITY DUE 3. Hanni deposits $1000 per year for 10 years.
-the equal payments are made at the beginning of ​ Assume she begins making deposits today, and each
each compounding period starting from the first deposit occurs at the beginning of each year. How
Period. much money will she have right after the final deposit
Finding future worth/equivalent given uniform has earned one full year of interest if i(1) = 10%?
equal payments

Finding present equivalent given uniform equal

Payments

4. Gabriela borrows Php100,000.00 at 10% effective

annual interest. She must pay back the loan for over
5 years with uniform monthly payments due on the
first day of each month. What does she pay each
month?

SAMPLE PROBLEMS
1. An engineer bought an equipment costing
Php80,000 payable quarterly for 3 years, each
installment payable at the beginning of
each period. The rate of interest is 24% compounded
quarterly, what is the amount of each payment?

CAPITALIZED COST
- An application of perpetuity.
- The capitalized cost of a project, structure or
machine is the sum of the first cost (FC), and the
present worth of all future payments and
replacements which is assumed to continue for
a long time or forever.

2. What amount will Mr. Krabs need in his Retirement

ANNUAL COST
Plan on the day he retires if he wants to receive
The annual cost is the uniform yearly equivalent of all
$3,500 at the beginning of every month for 24 year
project costs (such as initial investment, operating,
and the plan earns 6% compounded monthly? and maintenance expenses) spread evenly over the
project’s useful life, considering the time value of
money.
SAMPLE PROBLEMS 2. At 6%, find the capitalized cost of a bridge whose
5. Compute the capitalized cost of a new car worth P800,000 if cost is P250M and life is 20 years, if the bridge must
it is estimated that it requires P20,000 per year to maintain and be partially rebuilt at a cost of P100M at the end of
must be replaced at the same amount with a salvage value of each 20 years.
P300,000 after 5 years if the interest rate is 12% per annum.

6. A contractor can buy dump trucks for P800,000 each or rent 3. Find the capitalized cost of a machine that costs
them for P1200 per day. The truck has a salvage value of Php 300,000, annual costs of Php 35,000, and
P100,000 at the end of its useful life of 5 years. The annual cost periodic costs every 5 years of Php 75,000. Use an
of maintenance is P20,000. Using the annual cost method and interest rate of 12%
14% interest rate, determine the number of days per year that
the truck must be used to warrant its purchase.​
​
​

UNIFORM (ARITHMETIC) GRADIENT

In some cases, revenues or costs change by a
constant amount each period. This pattern forms an
arithmetic sequence of cash flows and can be
SEATWORK represented using a uniform gradient model.
1. A new broiler was installed by a textile plant at a total cost of
P300,000 and projected to have a useful life of 15 years. At the Finding P when given G
end of its useful life, it is estimated to have a salvage value of
P30,000. Determine its capitalized cost if interest is 18%
compounded annually

Finding A when given G

Finding F when given G

SAMPLE PROBLEMS 3. Consider the following cash flows:
1. A certain EOY cash flows are expected to be $1,000 for the
second year, $2,000 for the third year, and $3,000 for the fourth End of Year Cash Flows (Php)
year and that, if interest is 15% per year, it is desired to find
(a) present equivalent value at the beginning of the ​ 1 8,000
First year,
2 7,000
(b) uniform annual equivalent value at the end of each of the
3 6,000
four years.
4 5,000

Calculate their present equivalent at i= 15% per year,

​
using gradient conversion factors.

4. A certain machine purchased today shall be paid in

3 annual unequal payments with no down payment. If
2. Consider the following cash flows: the company agrees that the first payment is
End of Year Cash Flows (Php) P120,000 at the end of the first year and you have to
increase that payment by P30,000 per year for the
1 5,000 next remaining years until the end of the 3rd year,
2 6,000 How much is the present worth of the machine if the
company charges 12% annual interest?
3 7,000
4 8,000

Calculate their present equivalent at i= 15% per year, using

gradient conversion factors.

​
GEOMETRIC GRADIENT
A fixed amount of a commodity that inflates in price at a 6. Suppose that the geometric gradient in the
constant rate each year is a typical situation that can be previous problem begins with $1,000 at EOY one and
modeled with a geometric sequence of cash flows. The decreases by 20% per year after the first year.
resultant EOY cash-flow pattern is referred to as a geometric Determine P, A, and F under this condition.
gradient series.

i≠g

i=g

SAMPLE PROBLEMS
5. Consider the following EOY geometric sequence of cash
flows and determine the P, A, and F equivalent values. The rate
of increase is 20% per year after the first year, and the interest
rate is 25% per year.

​ 7. The annual maintenance costs for a machine are

P1,500 this year and estimated to increase 10% each
year every year. What is the present worth of the
maintenance costs for 4 years. i = 8%