Engineering Economy: Annuity Due, Deferred Annuity and Perpetuity

ENGINEERING ECONOMY
ANNUITY DUE, DEFERRED ANNUITY AND PERPETUITY
LEARNING CONTENT
Annuity Due
- Is a type of annuity where the payments are made at the
beginning of each period starting from the first period.
From the diagram shown:
𝐴[(1+ⅈ )6 −1]
𝐹= ⅈ
𝐹 𝐴[(1+ⅈ )6 −1]
𝑃 = (1+ⅈ )5 = (1+ⅈ )5 ⅈ
From the previous example, the formula for P can be

generalized as:
𝐴[(1+ⅈ)𝑛 −1]
𝑃= (1+ⅈ )𝑛−1 ⅈ
Where n is the number of payments and (n-1) is the number

of periods from zero period up to the last payment.
Example:
1. At what interest rate payable quarterly will payments of

P500 at the beginning of each 3 months for 7 years discharge a
debt of P12500 due immediately?
Solution:
𝐴[(1+ⅈ)𝑛 −1]
𝑃= (1+ⅈ )𝑛−1 ⅈ
MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

1|PAGE
ⅈ 4(7)
500[(1+ ) −1]
4
12500=
ⅈ ((4)(7))−1 ⅈ
(1+4) ( 4)
ⅈ = 0.0344
ⅈ = 3.44%
2. An engineer is entitled to receive P25,000 at the

beginning of each year for 18 years. What is the present value of
this annuity at the time he is supposed to receive the first payment
if the rate of interest is 4% compounded annually.
Solution:
𝐴[(1+ⅈ)𝑛 −1]
𝑃= (1+ⅈ )𝑛−1 ⅈ
25000[(1+0.04)18 −1]
𝑃= (1+0.04)18−1 (0.04)
𝑷= 𝟑𝟐𝟗, 𝟏𝟒𝟐
Deferred Annuity
- In this type, the first payment is deferred a certain number of
periods after the first. Consider the cash flow diagram below.
For the cash flow diagram shown above, the following

calculations can be made for solving Present and Future worth.
So, solve for the future worth (𝐹)
𝐴[(1+ⅈ )4 −1]
𝐹=
ⅈ

2|PAGE
To solve for the present worth (𝑃)
𝐹 𝐴[(1+ⅈ)4 −1]
𝑃= ( )5
= (1+ⅈ )5 ⅈ
1+ⅈ
Example:
1. A house and lot can be acquired by a down payment of

500,000 and a yearly payment of 100,000 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?
Solution:
𝐴[(1+ⅈ )𝑛 −1]
𝑃1=
(1+ⅈ )𝑛 ⅈ
100,000[(1+0.14)10 −1]
𝑃1=
(1+0.14)10 (0.14)
𝑃1= 521,611.56
𝑃1
𝑃2 =
(1+ⅈ )𝑛
521,611.56
𝑃2 =
(1+0.14)4
𝑃2 = 308,835.90

3|PAGE
Cash price = 500,000 + 𝑃2
Cash price = 500,000 + 308,835.90
Cash price = 808,835.90
2. A man loans P187, 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.
Solution:
𝐴[(1+ⅈ )𝑛 −1]
𝑃1=
(1+ⅈ )𝑛 ⅈ
𝐴 [(1+0.05)8 −1]
𝑃1=
(1+0.05)8 (0.05)
𝑃1= 6.643𝐴
𝑃1= 𝑃2 (1 + ⅈ )𝑛
6.643𝐴= 187,400 (1 + 0.05)9
𝑨= 𝟒𝟒, 𝟗𝟖𝟐. 𝟎𝟒

4|PAGE
Perpetuity
- Is an annuity where the payment periods extend forever or the
periodic payments continue indefinitely.
- If the payment is made at the end of each period starting from
the firs period, the present worth of perpetuity is:
𝐴
𝑃=
ⅈ
Example:
1. If money is worth 8%, determine the present value of a

perpetuity of P1,000 payable annually, with the first payment due at the
end of 5 years.
Solution:
𝐴
𝑃′ =
ⅈ
1000
𝑃′ =
0.08
𝑃′ = 12,500
The present worth at of 𝑃′ is:
𝑃′
𝑃= (1+ⅈ )4
12500
𝑃= (1+0.08)4
𝑷 = 𝟗, 𝟏𝟖𝟕. 𝟖𝟕

5|PAGE
Activity Problem
Solve the following problem.
1. What is the present worth of a 3 year annuity paying ₱3,000 at the

end of each year with interest at 8% compounded annually?
2. A piece of machinery can be bought for ₱10,000 cash or for ₱2,000

down and payments of ₱750 per year for 15 years. What is the annual
interest rate for the time payments?
3. A parent on the day the child is born wishes to determine what lump
sum would have to be paid into an account annually in order to
withdraw ₱20,000 each on the child’s 18th, 19th, 20th and 21st birthdays.
4. A manufacturing firm wishes to give each 80 employees a holiday

bonus. How much is needed to invest monthly for a year at 12%
nominal interest rate compounded monthly so that each employee
will receive a ₱2,000 bonus?
5. A man borrowed ₱300,000 from a lending institution which will be

paid after 10 years at an interest rate of 12% compounded annually.
If money is worth 8% per annum, how much should he deposit to a
bank monthly in order to discharge his debt 10 years hence?
6. Money borrowed today is to be paid in 6 equal payments at the end

of 6 quarters. If the interest is 12% compounded quarterly, how much
was initially borrowed if a quarterly payment is ₱2,000?
7. A fund for replacement of machinery in a plant must contain ₱30,000

at the end of 9 years. If the fund is invested at 3.5% compounded
semi-annually, what equal deposits should be placed in the fund at
the end of each 6 months just for the first four years.
8. Mr. Ramirez borrowed ₱15,000 two years ago. The terms of the loan
are 10% interest for 10 years with uniform payments. He just made his
second annual payment. How much principal does he still owe?
9. Engr. Sison borrows ₱100,000 at 10% annual interest. He must pay

back the loan over 30 years with uniform monthly payments due on
the first day of each month. How much does Engr. Sison pay each
month?

6|PAGE
10. Mr. Robles plans a deposit of ₱500 at the end of each month for 10
years at 12% annual interest compounded monthly. What amount will
be available in two years?
11. A man wishes to have ₱35,000 when he retires 15 years from now. If
he can expect to receive 4% annual interest, how much must he set
aside in each of 15 equal annual beginning of year deposits?
12. A service car whose cash price was ₱540,000 was bought with a
down payment of ₱162,000 and monthly installments of ₱10,874.29
for 5 years. What was the rate of interest if compounded monthly?
13. A man owes ₱10,000 with interest at 6% payable semi-annually. What

equal payments at the beginning of each 6 months for 8 years will
discharge his debt?
14. A man paid a 10% down payment of ₱200,000 for a house and lot
and agreed to pay the balance on monthly installments for 5 years
at an interest rate of 15% compounded monthly. What was the
monthly installment?
15. A man will deposit ₱200 with a savings and loan association at the
beginning of each 3 months for 9 years. If the association pays interest
at the rate of 5.5% quarterly, find the sum to his credit just after the
last deposit.
16. If money is worth 8%, obtain the present value of a perpetuity of

₱1,000 payable annually when the first payment due at the end of 5
years?
17. A man inherited a regular endowment of ₱100,000 every end of 3

months for “x” years. However, he may choose to get a single lump
of ₱3,702,939.80 at the end of 4 years. If the rate of interest was 14%
compounded quarterly, what is the value of “x”?
18. ₱45,000 is deposited in a savings account that pays 5% interest

compounded semi-annually. Equal annual withdrawals are to be
made from the account, beginning one year from now and
continuing forever. Compute the maximum amount of the equal
annual withdrawal.

7|PAGE
19. At what interest rate payable quarterly will payments of ₱500 at the
beginning of each 3 months for 7 years discharge a debt of ₱12,500
due immediately?
20. An annual deposit ₱1,270 is placed on the fund at the end of each
year for 6 years. If the fund invested has a rate of interest of 5%
compounded annually, how much is the worth of this fund at the end
of 9 years?

8|PAGE

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ENGINEERING ECONOMY

ANNUITY DUE, DEFERRED ANNUITY AND PERPETUITY

From the diagram shown:

From the previous example, the formula for P can be

Where n is the number of payments and (n-1) is the number

1. At what interest rate payable quarterly will payments of

MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

2. An engineer is entitled to receive P25,000 at the

For the cash flow diagram shown above, the following

So, solve for the future worth (𝐹)

MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

1. A house and lot can be acquired by a down payment of

MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

2. A man loans P187, 400 from a bank with interest at 5%

MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

1. If money is worth 8%, determine the present value of a

The present worth at of 𝑃′ is:

MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

Solve the following problem.

1. What is the present worth of a 3 year annuity paying ₱3,000 at the

2. A piece of machinery can be bought for ₱10,000 cash or for ₱2,000

4. A manufacturing firm wishes to give each 80 employees a holiday

5. A man borrowed ₱300,000 from a lending institution which will be

6. Money borrowed today is to be paid in 6 equal payments at the end

7. A fund for replacement of machinery in a plant must contain ₱30,000

9. Engr. Sison borrows ₱100,000 at 10% annual interest. He must pay

MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

13. A man owes ₱10,000 with interest at 6% payable semi-annually. What

16. If money is worth 8%, obtain the present value of a perpetuity of

17. A man inherited a regular endowment of ₱100,000 every end of 3

18. ₱45,000 is deposited in a savings account that pays 5% interest

MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

MODULE 3: ANNUITY DUE, DEFFERED ANNUITY AND PERPETUITY

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