CHPATER II

ORDINARY ANNUITY EXAMPLES

Example
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?
Solution
A = P10,000 n = 10 i = 15%
P F

P = A(P/A, i%, n) = P10,000 (P/A, 15%,

10)
−10
1−( 1.15 )
= P10,000 [ ] = P50,188
.15
F = A(F/A, i%, n) = P10,000 (F/P, 15%, 10)
10
(1.15) −1
= P10,000 [ ] = P203,037
.15

Example
What is the present worth of P500 deposited at the end of every three months for 6years if the interest rate is 12%
compounded semiannually?
Solution
Solving for the interest rate per quarter,

(1+i) 4 – 1 = 1+ ( 2 )
0.12 2
–1

1 + i = (1.06) .5
i = 0.0296 or 2.96% per quarter

P = A (P/A, 2.96%, 24)

1−(1+ 0.0296)−24
= P500
0.0296
= P500 (17.0087)
= P 8,504
Example
A businessman need P50,000 for his operation. One financial institution is willing to lend him the money for one
year at 12.5% interest per annum (discounted). Another lender is charging 14% with the principal and interest payable at
the end of one year. A third financier is willing to lend him P50,000 payable in 12 equal monthly installments of P4,600.
Which offer best for him?

Solution
Compare the effective rate each offer and select the one with the lowest effective rate.
First offer:
Rate of discount, d = 12.5%
d 0.125
Rate of interest, i= = = 14.29% per year
1−d 1−0.125
Effective rate = 14.29%
Another solution
Amount received = P50,000 (0.875) = P43,750

P43,750

0 1

P50,000
P 50,000−P 43,750
Rate of interest = = 14.29% per year
P 43,750
Effective rate = 14.29%

Second Offer:
P50,000

P50,000(1.14)
Effective Rate = 14%
Third Offer:
P50,000

0 1 2 11 12

P4,600P4,600P4,600P4,600

P/A, i%, 12 = P = P 50,000

A P 4,600

1−( 1+i )−12

=10.6896
i
Try i = 1%,
 −12
1−( 1+0.01 )
= 11.2551
0.01
Try i = 2%

1−( 1+0.02 )−12

= 10.5753
0.02

i = 1% + 0.57% = 1.57% per month

Effective rate = (1+0.0157)12 – 1 = 20.26%
The second is the best offer.

Example
A chemical engineer wishes to set up a special fund by making uniform semiannual 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 semiannually, what is the required semiannual deposit to be made?
Solution
P100,000(F/A,8.16%,5)
8
For the deposits, i = = 4%
2
For the withdrawals, i = (1+0.04) 2 = 0.0816 or 8.16%
Using 20 years from today as the focal date, the equation of value is
A (F/A, 4%, 40) = P100,000 (F/A, 8.16%, 5)

[ ] [ ]
40 5
(1+.04) −1 (1+.0816) −1
A = P100,000
.04 .0816
A (95.0255) = P100,000 (5.8853)
A = P6,193.39
Example
Using a compound interest of 8%, find the equivalent uniform annual cost for a proposed machine that has a first
cost of P100,000 an estimated salvage value of P20,000 an estimated economic life of 8 years. Annual maintenance will
amount to P2,000 a year and periodic overhaul costing P6,000 each will occur at the end of the second and fourth year.

Solution
Let A = the equivalent uniform annual cost
Using today as the focal date the equation of value is
A (P/A, 8%, 8) = P100,000 + P2,000 (P/A, 8%, 8) + P6,000 (P/F, 8%, 2) + P6,000 (P/F, 8%, 4) – P20,000 (P/F, 8%, 8)
A (5.7466) = P100,000 + P2,000 (5.7466) + P6,000 (0.8573) + P6,000 (0.7350) – P20,000 (0.5403)
A = P19,183

Example
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?

The only focal date that can be used is one month after purchase.
Profit if the house was sold immediately after remodeling
(1 month after purchase) = P545,000 – P75,000 – P425,000 (F/P, 1.5%, 1) = P38,625
 Profit if the house was sold later (16 months after purchase)

= P600,000 (P/F, 1.5%, 15) + P4,500 (P/A, 1.5%, 15) – P75,000 –

P425,000 (F/P, 1.5%,1)
= P600,000 (0.7999) + P4,500 (13.3432) – P75,000 – P425,000 (1.015)
= P33,610
Loss by not selling immediately after remodeling = P38,625 – P33,610 = P5,105

Another solution:
Loss by not selling immediately after remodeling
= P545,000 – P4,500 (P/A, 1.5%, 15) – P600,000 (P/F, 1.5%, 15)
= P545,000 – P4,500 (13.3432) – P600,000 (0.7999)
= P5,105
Example:
Determine the present equivalent value of P5,000 paid every 3 months for period of seven years and the rate of
interest is 12% compounded quarterly.

Required: The present value, P

Solution: P = A1 - (1+i)-n
i
= P5, 000 1 – 1 + 0.03-28
0.03
= P93, 820.54
Example
Today, you invest P100,000 into a fund that pays 25% interest compounded annually. Three years later, you
borrow P50,000 from a bank at 20% annual interest and invest in the fund. Two years later, you withdraw enough money
from the fund to repay the bank loan and all interest due on it. Three years from this withdrawal you start taking P20,000
per year out of the fund. How much was withdrawn?

Let Q = the amount withdrawn after 12 years

Using 12 years from today as the focal date, the equation of value is

Q + P20,000 (F/A, 25%, 5) + P50,000 (1.20)2(F/P, 25%, 7) =

P100,000 (F/P, 25%, 12) + P50,000 (F/P, 25%, 9)
Q + P20,000¿ + P50,000 (1.20)2 (1.25)7 =
P100,000 (1.25)12 + P50,000 (1.25)9
Q + P20,000 (8.2070) + P50,000 (1.20)2(4.7684) =
P100,000(14.5519)+P50,000 (7.4506)
Q = P1,320,255