ENGINEERING ECONOMICS

FINAL PERIOD (DEPRECIATION)

2. A consortium of international telecommunication
I. Sum of the Years-Digit (SYD) & Declining companies contracted for the purchase and
Balance Method (DBM) installation of a fiber optic cable linking two major
cities at a total cost of P960 million. If the able shall
be depreciated over a period of 15 years with salvage
QUIZ
value equal to 10% of the above contract price,
compute the book value at the end of 8 years using:
1. An industrial plant bought a generator set for (a) SYD
P90,000. Other expenses including installation (b) DBM
amounted P10,000. The generator set is to have a life Given:
of 17 years with a salvage value at the end of the life C o= 960M
of P5,000. Determine the depreciation charge during
the 13th year by: C L=96M (10% of C o ¿
      (a) sum-of-the-years digit method L= 15
(b) declining balance method n= 8
Given: C 8 (SYD )=?
C o= 90,000 + 10,000= 100,000 C 8 ( DBM)=?
C L=5,000 Solution:
L= 17 A.
n= 13 L
d 13 (SYD)=? ∑ years= 2 ( L+1)
d 13 (DBM )=? 15
Solution: ∑ years= 2 ( 1 5+1 )=120
A.
L 8
∑ years= 2 ( L+1) ∑ RD n= 2 ( 15+8 )=92
17
∑ years= 2 ( 17+1 )= 153 C 8=C o−D8

RD=L−n+1 C 8 (SYD )=C o−(C ¿ ¿ o−C L )(

∑ RD n )¿
RD=17−13+1=5 ∑ years
92
C 8 (SYD )=960 M −(960 M −96 M )( )
RD 120
d 13 ( SYD )=¿ -C L)( ¿
∑ years C 8 (SYD )=Php 297.6 million
5
d 13 ( SYD )=(100,000−5,000)( ) B.
153

B.
d 13 ( SYD )=Php 3,104.5752
k =1−
√
L CL
Co

k =1−
CL
Co √
L k =1−
√
1596 M
960 M
k =0.1 423041014
k =1−
√
5,000
17

100,000
k =0.1615661113
C 8 ( DBM ) =Co ( 1−k )n
C 8 ( DBM ) =960 M ( 1−0.1423041014 )8
n−1 C 8 ( DBM ) =Php 281,14 9,878.20
d 13 ( DBM )=C o ( 1−k ) (k )
13−1
d 13 ( DBM )=( 100,000 ) (1−0.1615661113 ) (0.1615661113)
d 13 ( DBM )=Php1,949.7376
ASSIGNMENT

1. An asset is purchased for P120,000. Its estimated life

is 10 years, after which it will be sold for P12,000.
 Find the total depreciation after 4 years using the
sum-of-the-years digit method.
Given: 3. A product has a current selling price of P325. If its
C o= 120,000 selling price is expected to decline at the rate of 10%
C L=12,000 per annum because of obsolescence, what will be the
total depreciation after 4 years?
L= 10 Given:
n= 4
C o= 325
D 4 =?
k= 10%
Solution: n= 4
L
∑ years= 2 ( L+1) D 4 =?
Solution:
10 D4 =C o [1−( 1−k )n ]
∑ years= 2 ( 10+1 )=55
D4 =325[ 1−( 1−0.10 )4 ]
4 D 4 =Php111.7675
∑ RD n= 2 ( 10+7 )=34
4. The first cost of equipment is P100,000 and estimated
to have a book value of P30,000 when retired at the
D 4 =∑ d n end of 10 years. Determine the book value after 8
Co −C L years using a constant percentage declining balance
D4 = ¿ method.
∑ years Given:
120,000−12,000 C o= 100,000
D4 = (34)
55 C L= 30,000
D4 =Php66,763.6364 L= 10
n= 8
2. A company purchased an asset for P15,000 and plans C 8=?
to keep it for 20 years. If the salvage value is P1,000
Solution:
at the end of the 20th year, determine the book value
at the end of 5th year. Use SYD method.
Given:
C o= 15,000
k =1−
√
L CL
Co

C L=1,000
L= 20
n= 5
k =1−
√
10 30,000
100,000
=0.113432

n
C 5=? C 8=C o ( 1−k )
8
Solution: C 8=100,000 ( 1−0.113432 )
L D 4 =Php38,167.7372
∑ years= 2 ( L+1)
20
∑ years= 2 ( 20+1 )=210

5 II, Straight-Line Method (SLM) & Sinking Fund Method

∑ RD n= 2 (20+ 16 )=90 (SFM)

QUIZ
C 5=C o−D5
C 5=C o−∑ d n 1. A firm bought a piece of equipment, including its
C −C L installation and other expenses, amounts to 200,000.
C 5=C o− o ¿ This equipment was designed to have a life of 18
∑ years years and the expected book value after 12 years is
15,000−1,000 80,000. What is the book value of this equipment at
C 5=15,000− ( 90)
210 the end of its life?
C 5=Ph p 9,000.00 Given:
C o= 200,000
C L= ?
 L= 18 i= 6%
n= 12 d(SLM)=?
C 12=80,000 d(SFM)=?
Solution: Solution:
C 12=Co −D12 A.
C o−C L
C 12=Co −nd d ( SLM )=
C −C L L
C 12=Co −n( o ) d ( SLM )=
960 M −96 M
L 15
Co −C L
[C ¿ ¿ 12=C o−n( )] L ¿ d ( SLM )=Php 57.6 M
L
n(C ¿ ¿ o−C L )=L(C ¿ ¿ o−C 12)¿ ¿ B.
L(C ¿ ¿ o−C 12) i
C o−C L = ¿ d (SFM )=(C ¿ ¿ o−C L )( )¿
n ( 1+i )L −1
L(C ¿ ¿ o−C 12) 0.06
C o− =C L ¿ d ( SFM )=(960 M −96 M )( )
n ( 1+0.06 )15−1
18(200,000−80,000) d ( SFM )=Php 37,119,828.06
C L =200,000−
12
C L =Php20,000.00

2. A machine cost 7,000 last 8 years and has a salvage ASSIGNMENT

value at the end of life of 350. Determine the book
value at the end of 5 years using the sinking fund 1. An equipment costs P60,000 with installation fees of
method with 12% interest. P5,000. The useful life of the equipment is 8 years
Given: with a salvage value of P15,000. What is the book
C o= 7,000 value of the equipment after 5 years?
C L= 350 Given:
L= 8 C o= 60,000 + 5,000= 65,000
n= 5 C L= 15,000
i= 12% L= 8
C 5=? n= 5
Solution: C 5=?
C 5=C o−D5 Solution:
( 1+i )n−1 C o−C L
C 5=C o−( C ¿ ¿ o−C L )( )¿ d=
L
( 1+i ) −1 L
C 5=7,000−(7,000−350)¿ 65,000−15,000
d=
C 5=Php3565.2448 8
d=6,250
3. A consortium of international telecommunication
companies contracted for the purchase and C 5=C o−D5
installation of a fiber optic cable linking two major C 5=C o−nd
cities as a total cost of 960 million. If the cable shall C 5=65,000−5 (6,250)
be depreciated over a period of 15 years with salvage
value equal to 10% of the above contract price,
C 5=Php33,750.0000
compute the annual depreciation charge using:
A. Straight-line method 2. A machine costs P8,000 and an estimated life of 10
B. Sinking fund method with 6% interest years. If its book value at the end of 8 years is
Given: P2,000, determine its salvage value using straight-
line method.
C o= 960M Given:
C L= 96M (10% of C o) C o= 8,000
L= 15 C L= ?
 L= 10 ( 1+i )5−1
n= 8 C 5=C o−( C ¿ ¿ o−C L )( L
)¿
C 8=2,000 ( 1+i ) −1
Solution: ( 1+i )5−1
(C ¿ ¿ o−C L )( L
)=C o−C 5 ¿
C 8=C o−D8 ( 1+i ) −1
C 8=C o−nd ( 1+i )5−1 C o−C 5
( )=
( 1+ i ) −1 C o−C L
L
C −C L
C 8=C o−n ( o )
L (C ¿ ¿ o−C L )[ (1+i )5−1]=(C ¿ ¿ o−C 5)[ ( 1+i )L −1]¿ ¿
C o−C L
[C ¿ ¿ 8=C o−n( )] L¿ (C ¿ ¿ o−C L )[ ( 1+i )5 −1]
L L
( 1+i ) −1= ¿
n(C ¿ ¿ o−C L )=L(C ¿ ¿ o−C 8) ¿ ¿ (C ¿ ¿ o−C 5) ¿
L(C ¿ ¿ o−C 8) 5
C o−C L = ¿ L (C ¿ ¿ o−C L )[ (1+i ) −1]
n ( 1+i ) = ¿
(C ¿ ¿ o−C 5)+1 ¿
L(C ¿ ¿ o−C 8 )
C o− =C L ¿
n Lln(1+i)=ln ⁡¿
10( 8,000−2,000)
C L =8,000− L=ln ⁡¿ ¿
8
C L =Php500.0000 (25,000−5,000)[ ( 1+0.04 ) −1]
5
ln ⁡( +1)
(25,000−15,977.3876)
3. A certain office equipment has a first cost of P20,000 L=
and has a salvage value of P1,000 at the end of 10 ln(1+ 0.04)
years. Determine the total depreciation at the end of
the 6th year using sinking fund method at 3% L=10 years
interest.
Given:
C o= 20,000 Midterm Exam
C L= 1,000
L= 10 1. A graduating high school student decides to take a
n= 6 year off and work to save money for college. The
i= 3% student plans to invest all money earned in a savings
D 6=? account earning 6% interest compounded quarterly.
Solution: The student hopes to have 10,000 by the time school
starts in 12 months. How much money will the
( 1+ i )n−1 student have to save each month?
D 6=(C ¿ ¿ o−C L )( L
)¿
( 1+i ) −1 Given:
D 6=(20,000−1,000)¿ F= 10,000
D 6=Php 10,720.6108 ¿q = 6%
4. A device was purchased that amounts to P25,000 n= 12 months
including tax and other fees. The book value of this m= 12 (monthly)
device in the 5th year and at the end of its useful life ¿m = ?
is P15,977.3876 and P5,000, respectively. Determine A= ?
the number of useful life of the device if interest is at Solution:
4%. m m
Given:
C o= 25,000 ( ) ( )
1+
¿q
m
−1= 1+
¿m
m
−1
12

( ) ( )
C L= 5,000 0.06
4
¿m
1+ = 1+
C 5= 15,977.3876 4 12
n= 5 ¿
i= 4%
L=?
Solution:
¿m =12[ 1+( 0.06 13
4 )
−1]
C 5=C o−D5 ¿m =5.9702 %
 Pi
n A1=
( 1+i ) −1 1− (1+i )
−n 1

F= A( )
i 5,000( 0.07)
Fi A 1= −21
A= n
1− (1+0.07 )
(1+i) −1 A1=461.4450083
0.059702
10,000 ( )
12 ( 1+ i )n −1
A=
1

F= A1 ( )
( )
12
0.059702 i
1+ −1
12 ( 1+0.07 )21−1
A=Php810.7757 F=461.4450083( )
0.07
F=20,702.8119
2. A lathe for a machine shop costs 60,000 if paid in
cash. On the installment plan, a purchaser should pay
20,000 down payment and 10 quarterly installments, ( 1+ i )n −1 2

F 1=A ( )
the first due at the end of the first year after purchase. i
If money is worth 15% compounded quarterly,
( 1+0.07 )4−1
determine the quarterly installment. F 1=4,000( )
Given: 0.07
P= 60,000-20,000= 40,000 F 1=17,759.772
n= 10
M= 3 (4-1)[1 year=4 quarters] F 2=F1 (1+i)
i= 15%
F 2=17,759.772(1.07)
m= 4
Solution: F 2=19,002.9560
−n
−M1−( 1+ i )
P= A ( 1+i ) ( ) Left at the end of 21st year:
i
¿ F−F2
Pi
A= ¿ 20,702.8119−19,002.9560
( 1+i )− M ¿ ¿ ¿ Php1699.8559
0.15
40,000( )
4 4. A woman wishes to have a lump sum of 500,000 at
A=
( )
0.15 −3 the end of 3 years. If the money is invested at an
1+ ¿¿ interest rate of 10% compounded semi-annually, how
4
much must she deposit at the beginning of each
quarter?
A=Php5,439.1838 Given:
F= 500,000
3. You need 4000 per year for four years to go to ¿ s= 10%
college. Your father invested 5000 in a 7% account
¿q =?
for your education when you were born. If you
withdraw the 4000 at the end of your 17th, 18th, 19th, m= 4
and 20th year, how much money will be left in the n= 12(4x3)
account at the end of your 21st year? A=?
Given: Solution:
¿s m ¿q m
P= 5,000
A= 4,000 ( ) ( )
1+
m
−1= 1+
m
−1
n1 =21
¿q 4
n2 =4 [17th,18th,19th,20th]
i= 7%
( ) ( )
1+
0.10 2
2
= 1+
4
A1=? ¿
Solution:
1−( 1+i )−n 1
(
¿q =4 [ 1+
0.10 12
2
−1])
P= A 1 ( ) ¿m =9.8780 %
i
 ASSIGNMENT
n
( 1+i ) −1
F= A(1+i)( ) 1. Determine the capitalized cost of a small public
i market if the structure has a first cost of P20M, a life
Fi of 20 years and a salvage value of P750,000. The
A= annual operating cost is P150,000. Taxes to be paid is
(1+i)[(1+i)¿¿ n−1]¿ P70,000 annually. Use an interest rate of 7.5%.
0.098780 Given:
500,000( )
4 FC= 20M
A= L= 20 years
(1+
0.098780
4
)[ 1+(0.098780
4 )
¿ ¿ 12−1]¿ SV= 750,000
OM= 150,000
A=Php35,431.1206 Taxes= 70,000
i= 7.5%
5. Two contractors submitted the following cost FC=RC
Solution:
estimate for a proposed bridge:
OM RC −SV tax
Bridge A Bridge B CC =FC + + + ( perpetuity)
FC 20M 27M i ( 1+i )L −1 i
Life 20 years 30 years 150,000 20 M −750,000 70,000
SV 500,000 750,000 CC =20 M + + +
0.075 ( 1+ 0.075 )20−1 0.075
Annual 160,000 50,000
Upkeep CC =Php28,860,329.19
Repairs 1.5M every 4 1M every 6
years years 2. The maintenance cost of equipment is P15,000 per
If interest is 7.5% compounded annually, which year and its capitalized cost at 6% interest is P1.8M.
bridge is cheaper in terms of its capitalized cost? And IF the equipment has a salvage value of P30,000 and
has to be renewed at cost after 10 years, find its
by how much?
original cost.
Solution: Given:
Bridge A OM= 15,000
OM RC−SV Repair CC= 1.8M
CC =FC + + +
i (1+i) −1 (1+ i)n−1
L i= 6%
SV= 30,000
OM FC−SV Repair L=10 years
CC =FC + + +
i (1+i) −1 (1+ i)n−1
L
FC=RC
160,000 20 M −500,000 1.5 M Solution:
CC =20 M + + + OM RC−SV
0.075 (1+ 0.075) −1 (1+0.075)4−1
20
FC =CC−[ + ]
i (1+i ) L−1
CC =Php32,608,653.33
OM FC−SV
FC =CC−[ + ]
Bridge B i (1+i ) L−1
OM RC−SV Repair FC −SV OM
CC =FC + + + FC + =CC−[ ]
i L n
(1+i) −1 (1+ i) −1
L
( 1+i ) −1 i
CC =FC +
OM FC−SV
+ +
Repair ¿)[ ( 1+i ) L −1]
i (1+i) −1 (1+ i)n−1
L
OM L
FC [ ( 1+i ) ¿¿ L−1]+ FC−SV =[CC− ][ ( 1+i ) −1]¿
50,000 27 M −750,000 1M i
CC =27 M + + + OM
0.075 (1+0.075) −1 (1+0.075)6−1
30
FC [ ( 1+i ) ¿¿ L−1]+ FC=[CC−
L
][ ( 1+i ) −1]+ SV ¿
CC =Php32,892,197.73 i

OM L
Bridge A is cheaper by Php 283,544.40 FC [ ( 1+i ) ¿¿ L]=[CC − ][ ( 1+i ) −1]+ SV ¿
i
MIDTERM PERIOD (CAPITALIZED COST & OM L
[CC − ][ (1+i ) −1]+ SV
ANNUITIES) i
FC =
[ ( 1+i ) ¿¿ L]¿
I. CAPITALIZED COST

QUIZ
 15,000 4. Determine the capitalized cost of a research
[1.8 M − ][ ( 1+ 0.06 )10−1]+30,000 laboratory that requires P5M for original
0.06
FC = construction; P100,000 at the end of every year for
[ ( 1+0.06 )¿¿ 10]¿ the first 6 years and then P120,000 each year
FC =Php 701,239.9391 thereafter for operating expenses, and P500,000
every 5 years for replacement of equipment with
3. A company uses a type of truck that costs P2M, with interest at 12% per annum?
a life of three years and a final salvage value of Given:
P320,000. How much could the company afford to FC=5M
pay for another type of truck for the same purpose, A1=100,000
whose life is four years with a final salvage value of A2=120,000
P400,000, if money is worth 4%?
Given: n1 =6
FC 1=2M n1 =6 to inf
FC 2=??? i= 12%
L1=3 RC= 500,000
SV= no value
L2=4
L=5 years
SV 1=320,000 Solution:
SV 2=400,000 RC
i= 4% CC =FC +Q+
FC=RC
(1+i ) L−1
CC 1=CC 2 Where Q= sum of ordinary payment ( A1 & A2)
Solution:
RC 1−SV 1
CC 1=FC 1+ 1−( 1+i )
−n1
( 1+i )L −1 1
P1= A1 ( )
20 M −320,000 i
CC 1=2 M + 1−( 1+0.12 )−6
( 1+0.04 )3−1 P1=100,000( )
CC 1=15,454,638.65 0.12

P1=411,140.7324
CC 1=CC 2=15,454,638.65 A2 1− (1+i )−n 1

P 2= − A 2( )
i i
RC 2−SV 2
CC 2=FC 2+
( 1+i )L −1 2
120,000 1−( 1+0.12 ) −6
P2= −120,000( )
0.12 0.12
FC 2−SV 2
FC 2=CC 2−
( 1+i ) L −12
P2=506,631.1212

FC 2−SV 2 L2 Q=P1 + P2
(FC ¿ ¿ 2=CC 2− L2
)[ ( 1+i ) −1]¿
( 1+ i) −1 Q=¿ 411,140.7324 +506,631.1212
Q=917,771.8536
FC 2 [ ( 1+ i )L −1 ]=CC 2 [ ( 1+i )L −1 ]−FC 2 + SV 2
2 2

FC 2 [ ( 1+ i )L −1 ]+ FC 2=CC 2 [ ( 1+i )L −1 ] +SV 2 RC

CC =FC +Q+
2 2

FC 2 [ ( 1+ i )L ] =CC 2 [ (1+i ) L −1 ]+ SV 2
2 2 (1+i ) L−1
500,000
CC 2 [ ( 1+i )L −1 ] +SV 2
2
CC =5 M +917,771.8536+
FC 2= ( 1+0.12 )5−1
[ ( 1+i ) L ]
2

15,454,638.65 [ ( 1+ 0.04 ) −1 ] + 400,000

4
CC =Php6,573,645.7370
FC 2=
[ ( 1+0.04 )4 ]
FC 2=Php 2,585,870.4370
 II. ANNUITIES 3. A man plans to invest a certain amount of money
today in an account that pays 10% compounded
QUIZ annually. He planned to invest this money so that he
1. Determine the present worth and the accumulated can withdraw 10,000 every month starting at the end
amount of an annuity consisting of 6 payments of of the first month of the 21st year. How much must he
120,000 each, the payment is made at the beginning invest today?
of each year. Money is worth 15% compounded Given:
annually. ¿ a= 10%
Given: ¿m =?
A= 120,000
m= 12
n= 6
n= 21
i= 15%
P=?
P=?
Solution:
F=?
Solution: m m

( ) ¿a
( )
¿m
−n
1−( 1+i ) 1+ −1= 1+ −1
P= A (1+i)( ) m m
i
12

( ) ( )
1
1− (1+ 0.15 )−6 0.10 ¿m
P=120,000 (1+ 0.15)( ) 1+ −1= 1+ −1
0.15 1 12

((1+ 0.101 ) =( 1+ 12¿ ) )

P=Php 522,258.6118 1
m
12 1
12

( 1+i )n−1
¿ =12[( 1+
1 )
F= A(1+i)( ) 0.10 1
i m
12
−1]
( 1+ 0.15 )6−1
F=120,000(1+0.15)( ) ¿m =9.5690 %
0.15
F=Php1,208,015.9040

2. A commercial building can be acquired at a down ASSIGNMENT

payment of 500,000 and a yearly payment of 100,000
at the end of each year for a period of 10 years, 1. Determine present worth and the accumulated
starting at the end of 5 years from the date of amount of an annuity consisting of 6 payments of
purchase. If money is worth 12% compounded P120,000 each, the payment is made at the end of
yearly, what is the cash price of the commercial each year. Money is worth 15% compounded
building? annually.
Given: Given:
DP= 500,000 A= 120,000
i= 15%
A=100,000
n= 6
n= 10 Solution:
M= (5-1)=4
i= 12%
CP=?
1−( 1+ i )−n
P= A ( )
Solution: i
−M1−( 1+ i )
−n
1−( 1+ 0.15 )−6
P= A ( 1+i ) ( ) P=120,000 ( )
i 0.15
−4 1− ( 1+0.12 )
−10 P=Php 454,137.9233
P=100,000 ( 1+0.12 ) ( )
0.12
P=359,081.8882 ( 1+i )n−1
F= A( )
i
CP=DP + P ( 1+ 0.15 )6−1
CP=500,000+359,081.8882 F=120,000( )
0.15
CP=Php 859,081.8882 F=Php1,050,448.6130
 ( )
2. What are the present worth and the accumulated 0.12 12
amount of a 10-year annuity paying P10,000 at the ¿q =4 [ 1+ −1]
2
end of each year, with interest at 15% compounded
monthly? ¿q =11.8252 %
Given:
−n
A= 10,000 1−( 1+ i )
n= 10 P= A ( )
i
¿m =15%
( )
−mn
¿ a=? i
1− 1+
P=? m
P= A ( )
F=? i
Solution: m
¿m m ¿a m
( 1+
m )
( ) −1= 1+
m
−1
P=500 (
1− 1+ (
0.118252 −4 (6)
4
)
)
1

( ) ( )
1+
0.15 12
12
= 1+
¿a
1
0.118252
4
P=Php 8,507.7711
( )
12
0.15
¿ a=[ 1+ −1]
12 4. You make monthly deposits of P100 into an annuity
¿ a=16.0755 % and after 30 years wish to accumulate a sum of
P160,000. What annual rate compounded monthly
−n will be required to do this? 
1−( 1+ i )
P= A ( )
i 5. Suppose you would like to have P25,000 saved 6
−10 years from now to pay towards your down payment
1−( 1+ 0.160755 ) on a new house. If you are going to make equal
P=10,000 ( )
0.160755 annual end-of-year payments to an investment
P=Php 48,196.7296 account that pays 7 percent, how big do these annual
payments need to be?
Given:
( 1+i )n−1 F= 25,000
F= A( )
i i= 7%
n= 6
( 1+ 0.160755 )10−1
F=10,000( ) A=?
0.160755 Solution:
P=Php 214,004.6454 ( 1+i )n−1
F= A( )
i
3. What is the present worth of P500 deposited at the
Fi
end of three months for 6 years interest rate is 12% A=
compounded semi-annually? ( 1+i )n−1
Given: 25,000(0.07)
A= 500 A=
n=6 ( 1+0.07 )6 −1
m= 4 A=Php3,494.8950
¿ s= 12%
¿q =? 6. Determine the present worth of deferred annuity
P=? consisting of 10 semi-annual payments each P1,000,
Solution: the first at the end of the third year.  Money is worth
m m 14% compounded semi-annually.
( ) ( )¿
m
¿
1+ s −1= 1+ q −1
m
Given:
A= 1,000
4 ¿ s= 14%
( ) ( ) ¿
2
0.12
1+ = 1+ q n= 10
2 4 m= 2

(( 1+ 0.12 4 )
4 1 M= 5(6 semi-annual -1)
) =( 1+ )
¿
2
q 4
P=?
2 Solution:
 (( ))
−n 12 1
1−( 1+ i )
P= A ( 1+i ) ( −M
i
) 1+
0.10 1
1 ) ( ¿
= 1+ m
12
12

( )
−n
i
( )
1
1− 1+ 0.10 12
¿m =12[ 1+ −1]
P= A 1+ ( )
i −M
m
(
i
m
) 1
¿m =9.5690 %
m
1− 1+ (
0.14 −10
) P= A (1+i)(
1−( 1+i )−n
)
P=1,000 1+ (
0.14 −5
2
( ) 0.14
2
)
A=
Pi
i

2 −n
(1+i)(1− (1+i ) )
P=Php 5,007.7166
Pi
7. A man loans P187,000 from a bank with interest at m
A=
( )
−mn
5% compounded annually. He agrees to pay his i i
obligations by paying 6 equal annual payments, the (1+ )(1− 1+ )
m m
first being due at the end of 10 years. Find the annual
payments.
Given: 0.09569
(100,000)( )
P= 187,000 12
i= 5% A=
( )
−12(30)
0.09569 0.09569
n= 6 (1+ )(1− 1+ )
M= 9(10-1) 12 12
A=? A=Php839.1989
Solution:
−n
1−( 1+ i ) 9. A certain property is being sold and the owner
P= A ( 1+i )− M ( ) receives two bids. The first bidder offered to pay
i P400,000 each year for 5 years, each payment is to be
Pi made at the beginning of each year. The second
A=
( 1+i ) (1−( 1+i )−n )
−M bidder offer to pay P240,000 first year, P360,000 the
second year, and P540,000 each year for the next 3
Pi
A= years, all payments will be made at the beginning of
( 1+i ) (1−( 1+i )−n )
−M
each year. If money is worth 20% compounded
187,000(0.05) annually, which bid should the owner of the property
A= accept?
( 1+0.05 )−9 (1−( 1+0.05 )−6) Given:
A=Php57,154.4476 Bidder/Option 1:
A= 400,000
i= 20%
8. Mr. Lopez borrows P100,000 at 10% effective annual
n= 5
interest. He must pay back the loan over 30 years
Bidder/Option 2:
with uniform monthly payments due on the first day
of each month. What does Mr. Lopez pay each A1= 240,000
month? A2=360,000
Given: A3 =540,000
P= 100,000
¿ a= 10% n1 = 1st year
¿m =? n2 = 2nd year
n= 30 n3 = 3rd to 4th year
m= 12 i= 20%
A=? Solution:
Solution: Bidder/Option 1:
( 1+i )n−1
m m F= A(1+i)( )
( ) ( )
1+
¿a
m
¿
−1= 1+ m −1
m
i
( 1+0.20 )5 −1
F=400,000 (1+ 0.20)( )
¿ m 12
( ) ( )
1
0.10 0.20
1+ = 1+
1 12 F=Php3,571,968.0000
 ( ) ( )
−n2 −n1
1− ( 1+i ) 1−( 1+i )
Bidder/Option 2: P 2= A 2 − A2
i i
( 1+i )n −1 1

( ) ( )
F 1=A 1 (1+i)( ) 1−( 1+ 0.08 )−10 1−( 1+0.08 )−5
i P2=8,000 −8,000
( 1+ 0.20 )1−1 0.08 0.08
F 1=240,000(1+0.20)( ) P2=21,738.9709
0.20
F 1=288,000
A3 1−( 1+i )−n 2

P 3= ( Perpetuity )− A3 ( )

( ) ( )
n
( 1+i ) −1 2 n
( 1+ i ) −1 1 i i
F 2=A 2 (1+i ) − A 2 ( 1+i ) 10,000 1−( 1+0.08 )
−10
i i P3= −10,000( )
0.08 0.08
( ) ( )
2 1
(1+ 0.20 ) −1 ( 1+0.20 ) −1
F 2=360,000 (1+ 0.20 ) −360,000 ( 1+0.20 ) P3=57,899.1860
0.20 0.20
F 2=518,400 P=P + P + P 1 2 3
P=19,963.5502+21,738.9709+57,899.1860

( ( 1+i )n −1
) (
( 1+i )n −1
) P=Php 99,601.7071
3 2

F 3= A3 ( 1+ i ) −A 3 (1+i )
i i

F 3=540,000 (1+ 0.20 ) (

( 1+ 0.20 )5−1
0.20 )
−540,000 ( 1+0.20 ) (
( 1+0.20 )2−1
0.20 )
F 3=3,396,556.8

F=F 1+ F 2+ F3
F=288,000+518,400+3,396,556.8
F=Php 4,202,956.8000

Bidder 2 is better than Bidder 1

10. A fund donated by a wealthy person to PSME is to

provide annual scholarships to deserving ME
students. The fund will grant P5,000 for each of the
first five years, P8,000 for the next 5 years, and
P10,000 for each year thereafter. The scholarship will
start at the end of the year as soon as the fund is
established. If the fund earns 8% interest, what is the
amount of the donation?
Given:
A1=5,000
A2= 8,000
A3 = 10,000
n1 =first 5 years
n2 =next 5 years (6th -10th)
n3 =years thereafter (11th-onwards)
i= 8%
Solution:
1−( 1+i )−n 1

P1= A1 ( )
i
−5
1− (1+0.08 )
P1=5,000( )
0.08
P1=19,963.5502