ANNUITIES Annuity — consists of a series of equal payments at equal intervals of time. ‘Annuities occur in the following instances: 1) Payment of debt by a series of equal payments at equal intervals of time. 2), Accumulation of a certain amount by setting equal amounts periodically 3) Substitution of a series of equal amounts periodically in lieu of a lump sum at retirement of an individual. Types of Annuities: a) Ordinary Annuity -is one where the equal payments are made at the end of each payment period starting from the first period. F r Number of periods en hg eet aie 3: 5 foe boob A p= apy and Fe apGet=t) ) Deferred Annuity ~is one where the payment ofthe first amount is deferred a certain number of periods after the first 1 Fl tr | ‘Number of periods Om, BGP 07 ayy F (1+iyin kis the number of deferred periods 38©) Annuity Due ~ is one where the payments are made at the start of each period, beginning from the first period. Number of periods 1 and Fe ap @eumet Peat + eo 4) Perpetuity ~ is an annuity where the payment periods extend forever or in which the periodic payments continue indefinitely. Number of periods on { approaches infinity ) no future worth 19Examples: 1) Acondominium was purchased in an instalment basis wherein the buyer pays 30% of the cash price as down payment. After such, remaining balance be paid by an equal end of a monthly payments of P30, 000. 00 for a period of ten years. if money is worth 12% effective, what was the cash price of the said property? F ' | | r (cash price ) ( Ordinary Annuity ) nend of every month for 10 years i = 12% effective | | ak i 4 119___120 \ | 0.3P \ a A ar ; | P30, 000 Note that interest rate should coincides with the given periodic payments ( monthly } thus we need to find the nominal rate (compounded monthly). With given ERI as 12% : 0.12 = (1+4)"-1 —; i= 0.1139 or 11.39% compounded monthly Let P be the cash price of the property and present worth be the focal point, we have: For ordinary annuity: p= apa ca (4+ 28808 yee (.P - 0.3P ) = P30, 000. 00 ['———axr##—— ] O.7P = P2, 143, 364. 56 P = P3,061, 949.38 Alternate Solution: Let Future worth be your focal point: B= apes 02189, x20 23289 y20 (.0.7P (1+ 232 yn0 = 30,000.00; 2* Hap = * y 2 2.17484P = P6,659, 239. 44 P = P 3,061,944. 53 202) Ayoung engineer purchased a new car worth P 2.25 million if paid in cash. Instalment basis is an option wherein down payment is not necessary. However, the engineer needs to pay an equal-beginning of a quarterly payments for a period of five years after the purchased. If money is worth 10% compounded quarterly, what was the amount of the equal quarterly payments? F foam ( Annuity Due ) | | | | nin quarterly payments for years ; i = 10% compounded quarterly o eg ge a 20 Notice that interest rate coincides already with periodic payments, therefore proceeds with present worth as focal point: Geom P= A[i + Ue P 2,250,000.00 = At 1+ *—“*F a" | A P 140, 810.77 Alternate solution: Future worth as reference point arom FeAl 1) +S yaa al —a—*:1) P 2,250, 000( 1 +5* ‘A = P 140,810.77 3) AS-year educational scholarship was granted by CHED to 25 poor deserving freshmen electrical engineering students of different state universities. A grantee automatically receives P 200, 000. 00 at the start of the enrolment and after a year will receives an equal end of a monthly allowances of P 15, 000. 00 for a period of two years and then an equal end of the quarter allowances of P 50, 000.00 for the last remaining two years. Money is worth 14% effective. a) What minimum amount of money should the CHED must invest now to ensure that this scholarship be given smoothly? b) If the scholarship be an equal- beginning of semi-annual allowances, what would be the amount of this grant equivalent to the amount of the grants stated above? 2Solution: cashFlow Tt Ta invest) ( Deferred Annuity } i = 14% effective | Fe | k(one year) | nin months for 2 years F,| nin quarters for 2years Fi’ | | | o ages | a! bud i 200,000 15,000 1 a) Since grants are of different periods, solve for nominal interest: For compounded monthly : 0.14 = (1+ 3)? -1 = 0.1317 = 13.17% For compounded quarterly : O.14 = (145 )*-1 = 0.1332 = 13.32% Find the present scholarship amount each of the grantee will received by using the present worth as focal point. p= APG ya 4i)* ( - P200,000) = P15,000( Ate (as 0.317 2 1214 x 0.332 + P50,000[ ———sr*+———_ ] (1 + P 200,000.00 + P 276,312.96 + P 233, 639.63 P 703, 952, 59 Therefore minimum amount to be invested by CHED now willbe 25 ( P 709, 952. 59 ) Atleast P17, 748, 814.75 2Alternate solution: Let the future worth be your focal point: ForP: (P - 200,000 ){ 1+ 0.14 )§ = 1.9254P - P 385,080.00 = F Monthly payments: ( Ordinary Annuity ) p= arent] (14 SBE yee Fr = p15,000 | <** py” ] = P-409, 313.67 Then two years after: Fy’ = P409,313.67(1+0.14 7 = P531,944.05 For quarterly payments: (Ordinary Annuity ) = 449, 857. 63 Therefore: 1.9254P - P385, 080.00 P 531,944.05 + P 449, 857. 63 P = P709, 920.89 Then; 709, 920.89 (25) = Atleast P 17, 748, 022.25 b) For compounded semi-annually : 0.14 = (1 + $)? - 1 = 0.1354 = 13.54% Let P be the focal point ( equal beginning of 10 semi-annual grants ) For Annuity Due: re (+ St j P709,952.59 = A[1 + ———“sre+—— ] Grom A = P93, 667.97 234) Agovernment employee starts to pay a retirement plan in which he needs to pay an equal end of a quarterly payments of P 35,000 for a period of five years. After such payments, he needs to wait another five years more before he can receive an equal end of a monthly pension as long as he lives. If money is 8% effective, what would be the amount of the monthly pension? Ff { nin quarters for five years TA monfrs | n approaches co oss Bes a ge be 4 1 \ \ ——p-35,000. Saat Fe Since payments are in quarters, find the nominal rate of interest: 0.08 = (1+ > )'-1 = 0.0777 = 7.77% Find F* ( Ordinary Annuity ) f= apes Ca + 2 yo P35, 000 [ ———strry —— ] = P845, 555. 83 Waiting for another five years ( Compound interest ) : FY = P845,555.83( 1+ 0.08 )§ = P 1,242, 398.92 Then F” = P ( Perpetuity ), let X be the monthly pension: Formonthly: 0.08 = (1+)? - 1 = 0.772 = 7.72% 4 Par er. x wr P 1, 242, 398. 92 X = P7,992.77 (monthly pension ) 24Alternate Solution: Let the reference point be the present value: ( Ordinary annuity ) hi +" P= Al ] P = 35,000 {>To} = 575, 488. 55 Future worth using compoun jerest for 10 years: F = P575,488.55( 1 + 0.08 )!? P 1, 242, 436. 62 Using Perpetuity: 4 F=p=4 P 4,242, 436.62 = sore X = P7,993.01 (monthly pension ) 5) Ayoung entrepreneur wants to invest on a business 5 years from now. To be able to prepare for such, he starts to deposits an equal beginning of a monthly amount of P75, 000 on a bank that earns 12% effective until a period of three years and will change mode of deposits by equal end of a quarter amount of P 180, 000 for the last remaining period. How much amount of starting capital would the entrepreneur has once he will starts his business? Solution: i = 12% effective F FY P 180, 000 ’ 25.Solve for nominal interest rate: For monthly: 0.12 (1+5)2-1 = 11.39% 8 For quarterly: 0.12 = (1+ t yo-4 = 11.49% For monthly deposits: ( Annuity due ) Solving for its future worth: pe ap GtO™=2 4] F = p75,000{ 2 dhe—* - 1) = P3,231, 124.81 After two years: (Compound ) Fy = P3,231, 124.81 (1+ 0.12 )? = P4,053, 122.96 For quarterly deposits: ( Ordinary Annuity ) oa ye Fr = 180,000 [ <** sar | = P 1,593, 396.87 Therefore: Capital will be Fy’ + F” = P 4,053, 122.96 + P 1,593, 396. 87 = P 5,646, 519.83 26Alternate solution: Present worth be the reference point: For the P 75, 000 deposits ( annuity due ) ae-caeent P=A[1+ = 01139 yas, = P75, 000 [1 + rom J = P 2,299, 615. 14 For the P 180, 000 deposits ( deferred annuity ) P= t+ Pe = P180, 000 [ Se 1(1 + 2M? )2 = pgo4, 355.19 Then: P= Pi + Po P = P 2,299,615. 14 + P904, 355. 19 P = P3, 203, 968. 33 Therefore after 5 years ( using compound ) = 3, 203, 968. 33 ( 1+ 0.12 )° = P5,646, 486.94 76) A house and lot is for sale at a cash price of PS million. However, a buyer has an option to buy it on an instalment basis wherein he needs to pay P 1.5 million as down payment. Remaining balance be paid by an equal amount at the beginning of every month for a period of two years wherein first monthly payment happens six months after the purchased. Interest rate is 6% compounded monthly. What was the amount of the equal monthly payments? Solution: Tesm Pp k (six months ) nin months for 2 years i = 6% compounded | monthly | 2 $ ——1___2___3.__ . .23___24 1 , See | Y P1SM A Using annuity due: aati t P Al1+ re cag S888 pe a(i+ “ne | = 22.6768 ( P'5, 000,000 - P 1, $00, 000 ) = 22. 676A ( 1 + SE ye A = P-159, 036. 92 Alternate Solution: ( deferred annuity ) Pe AGA ya yiye ( P5,000, 000 - ER fe Gee 0.06 + 000, 000 - P 1, 500,000) = A {~—“Aiz (1 + 208) 1 B ‘A = P159,039. 16 28CAPITALIZED COST Case 1. No Replacement, only maintenance and or operation every period. cc First Cost + Present worth of perpetual operation or maintenance cc= Fo + * Case 2. Replacement only, no maintenance and or operation. s =a thas cc = FC+X s cca FC + OG i SEFC: SV Let: ‘S — amount needed to replace a property every k periods. X—amount of principal invested at a rate i%, the interest on which will amount S every k Periods. Xi interest on X every period, the periodic deposit towards the accumulation of S. Note: In some situation, Case 1 and 2 are combined, thus; = * ape Examples: 1) Agenerator was purchased amounting to P 4.5 million including tax. Transportation and installation charges totals an amount of P 325, 000 with a miscellaneous expenses of P 150, 000 before operation. It is expected to last for 12 years with a scrap value of P.275, 000 having an annual maintenance of P 20, 000. If money is worth 10% effective, what is the capitalized cost of the generator? 29Solution: Notice that the generator has an annual maintenance and at the same time it will be replaced after 12 years, this is a combination of case 1 and 2. First Cost = P-4, 500,000 + P 325,000 + P 150,000 = 4,975,000 SV = P275,000 k=12years A=P20,000 i = 10% effective c= FC + Aa = oa t* Ganka 20000 , ( P4975,000 ~ P275,000 ) on (i+ onye=a CC = P4,975,000 + CC = P4,975,000 + P200,000 + P 2,197, 875.81 CC = P7,372, 875.81 2) Anuclear reactor was purchased at an initial price of P 2. 75 million with a governmental tax of 5%. Transportation and installation charges totals an amount of P 26, 000 with miscellaneous expenses of P 18, 000 before operation. It is expected to last for 35 years with a scrap value of P 350, 000 having an annual maintenance of P 17, 500. A steam reactor is an alternative and will last for 28 years before replacement with a scrap value of P:250, 000 having an annual maintenance of P 15, 000. Transportation including, installation charges amounts to P 30, 000 with a miscellaneous expenses of P 14, 000 before operation. Tax due to importation is 8% of the initial cost of the steam reactor. If the capitalized cost of the steam reactor is 12% lower than that of the nuclear reactor, what is the initial cost of the steam reactor if money is 11% effective? Solution: Find first the capitalized cost of the nuclear reactor. First Cost = P 2, 750,000 + 0.05 ( P 2, 750,000) + P 26,000 +P 18, 000 = P 2, 931, 500 SV =P350,000 A= P17,500 k = 35years i = 11% effective comic y 4 .* (epee cc 2,931,500 + 227500 , (2931.50 — p 350.000 ) oat (a+ On = 4 CC = P2,931,500 + P 159,090.91 + P 68, 702.87 = P3, 159, 293.78 30For steam reactor ; Let X be the initial cost: First Cost = X + 0.08X + P30,000 + P.14,000 = 1,08X + P.44,000 SV = P250,000 A = P15, 000 k= 28 years i = 11% effective CC of the Steam Reactor ( 1 - 0.12 ) CC of the Nuclear Reactor 0.88 ( P 3, 159, 293.78 ) = P 2, 780, 178.52 Thus: ajgps eis bau Gt08=1 cc = FC + 15000 | ( 1.08x+P 44,000 ) - 250,000 oat (1+ 01-2 P 2, 780, 178. S2 = (1.08X + P 44,000) + 1.08x ~ P 206,000 17.58 P 2, 780, 178. 52 1.08X + P 44,000 + P 136, 363.64 + Solving for X : P 2, 287, 941.31 More Examples: 1) Acertain amount of debt earning an interest rate of 11% effective is being paid by an ‘equal-beginning of a monthly amount of P 33, 500 fora period of four years. If this debt is to be paid by an equal-end of a semi-annual amounts for a period of five years, what will be the value of this equal-end semi-annual payments? Solution: Annuity Due: ( monthly) O11 =(1+4)2-1 a i = 0.1048 = 10.48% compounded monthly aay T 7 0 Ata+ P33,500[1+*—tng@ "= 4,320, 345.93 7 atOrdinary Annuity (semi-annual } 0.11 (a+ 2 -1 3 i = 0.1071 = 10.71% compounded semi-annually P= ae = ] P 1,320, 345.93 = A[ ~~ Same A = P 174,233.85 2) Acertain parcel of land was offered for sale in an instalment basis without a down payment. However, buyer needs to pay the said property immediately in two different ways within a period of five years : first by an equal-beginning of a quarterly payments of P 78, 500 for three years and then after such by an equal-end of a monthly payments of P 25, 000 for the remaining two years. If money is worth 8% compounded quarterly, what would be the price of this parcel of land seven years after purchased? (Assume land appreciates its value with the same interest rate ) Equivalent Cash Flow: nin 12 quarters nin 24 months: i = 8% compounded quarterly P78, 500 Solution: Price of land seven years after: eR = (149%) 4 = 0.0824 = 8.24% = fms oosz4 = (1+ -41 ; 7.94% compounded monthly 32Using Present worth as reference point: Annuity Due ( quarterly ) , (apy P=a(i+ . ae cae ME yon P= 78,500 [1 +*—*pt— J = P 846, 767. 57 Deferred Annuity (monthly ) Ps aCe asi) cae St 20794 6 25,0000 | Css (a+ et = P.436, 208. 40 Thus: P = Py + Pp = P846,767.57 + P436, 208.40 = P 1, 282,975.97 Value seven years after: Fy = P41, 282, 975.97 ( 1 + 0.0824 )” Fy = P2, 233,227.71 Alternate Solution: Let Future worth be the reference point. ( 7 years) Annuity Due; ( quarterly ) Fe a[GtO™=1_ 1) (three years) F = P78, 00 | A fa - = P 1,073, 906.02 After4 more years: Fi = P 1,073, 906.02( 1 + 0.0824)* = P 1,474, 067.64 Ordinary annuity ( monthly ) he ap aeit= } 20784 24 P25, 000 | aise ] = P647, 949, 32 After two years : Fz = P-647, 949.32 ( 1 + 0.0824)? = P759, 130.79 Thus: Value of the land = Fi + Fo = P 1,474, 067.64 + P 759,130.79 = P 2,233, 198.433) Acertain NGO receives an amount of P35 million as a donation from an unknown millionaire. That amount was immediately invested by the NGO to a trust fund that earns 14% effective. Two years after the said investment, the fund will be used to support a college scholarship program for 75 deserving poor students. Each scholars will receives an amount of equal-end quarterly grants of P 50, 000 as long as the fund will be available. a) How long the scholarship will lasts? b) What amount of money will be available on the fund after the last grants? Sol P = P35, 000, 000 i = 14% effective After two years : F2 = P35,000,000( 1 + 0.14 ? = P45, 486, 000. 00 Lye * O14 = (145)*-1 5 i = 13.32% compounded quarterly Cash Flow for the whole scholarship: P50,000 x 75 = P3,750,000. 00 ( end of a quarter grant ) ff P45, 486, 000 nin quarters P 3, 750, 000 34Ordinary Annuity { quarterly ) P= At") =r P 3,750,000 | ———rrmm*—— ] P45, 486, 000 n = 15.79 quarters a) [twill last for only 15 quarters b) Solve Future value of the Ordinary Annuity: n = 15 quarters b= ap Seet=4y cag sie an F = P3, 750,000 [ sfx] = P71, 457, 583. 52 But the investment on the 15! quarter: Fis = P45, 486,000 ( 1+ “8 y15 = p74, 348, 838. 44 Therefore; Balance on the fund = P 74, 348, 838.44 - P71, 457,583.52 = P 2,891,254. 92 4) Aconcrete electric post needs to be purchase by an electric cooperative for distribution of electrical power at a cash price of P 205, 000. 00 with a 4% governmental tax due to importation, Freight and installation expenses amounts to P 17, 500. 00 with a total miscellaneous expenses of about P 11, 400. 00 before operation. The concrete electric post has a 25-year span with a scrap value of P 16, 800. 00 and does not need annual maintenance. A wooden electric post can be an alternative wherein freight and installation expenses amounts to P 22, 000. 00 with a total miscellaneous expenses of about P 15, 200.00 before operation. The wooden electric post has an 18-year span without a scrap value and needs an annual maintenance of P 3, 250 until replacement. Importation tax is 5% of the cash price and money is worth 11% effective. What is the cash price of the wooden electric post if its capitalized costs is 15% lower than that of the concrete post? 35Solution: For concrete post: FC = P 205,000.00 + 0.04(P 205,000.00) + P 17,500.00 + P11, 400. 00 FC = P 242,100.00 k= 2Syears SV =P16,800 A=0 i = 11%effective (P 242,10 (a+ om 16, ©) = P260, 001. 60 CC = P242,100 + : For wooden post: Let X_ be the price of the wooden post. FC = X + 0.05X + P22,000 + P15,200 = 1.05X + P37,200 k = 18years A=P3,250 sv=0 11% effective CC (wooden ) = ( 1- 0.15) CC(concrete) = 0.85( P 260,001.60 ) = P 221, 001.36 Thus: P 221,001.36 = 1,05X + P37,200 + 23250 , (105K + Pa7zo0 - 0) oat C1s0 nyo 1.05X + P37, 200 + P29,545.45 + (105K + P37.200 - 0) Ci+om yea X = P14, 115,13 36GRADIENTS A) Uniform Arithmetic Gradient ~a series wherein the change in succeeding period is constant. t f | o 2 3 Ms Le Asinze A+(n-1)G P=P,tPe and F= Fat Fo (+ if increasing gradient and - if decreasing gradient ) where ‘Ac uniform periodic amount equivalent to the arithmetic gradient series. G— arithmetic gradient change in the periodic amounts at the end of each pi Pc present worth of the uniform gradient. Fe — future worth or accumulated amount of the uniform gradients at the end of n periods. Pa~ present worth as that of an ordinary annuity. Fa—future worth as that of an ordinary annuity. Present worth of the gradient: Poe Sf cae in t ae Future worth of the gradient: =O, CHa fae Glee a] Uniform annual amounts: igifee on Ae = GUT > Gane) ‘Sum of Arithmetic Progression: Fl 2a: + (n-1)d) ; dis the difference between two consecutive integers. 78) Geometric Gradients ~a series sequence consisting of end-of-period payments, where each payment increases or decreases by a fixed percentage. Payment begins at the end of the first period. 0 A. 2% q | cla+r) | c(1+rye | c(1trP | c(1+ry? | casey SC(L#N)T + C(1F1)2 (14) # C(LFID (LF EP + cnecsnene CC LAN (14) —cp tg ty (er? (aery pis Gf mi * (Hy ~ (44+)? ci (a+iy* ] air * ‘ let: w = 27 ( + increasing percentage and ~ decreasing percentage ) Thus; ye 2 3 P=—[wtwewe.. Ter 2 eee ; = " © atl ee, . F POLE Sum of Geometric Progression: a1 [ +=" ] ; ratio of two consecutive integer 38Examples: 1) Adepositor started to deposits an amount of P5,000.00 on an account on a bank that earns an interest rate of 12% compounded monthly. After such, the depositor wishes to increase his deposits by PS0O every end of a month for two years without withdrawals. What expected amount would be on his account after the last deposit? Cash-Flow Diagram: " fn inmonths ; i = 12% compounded monthly G = PS00 P 5,500 +(22)G | 4 P5,500+(23)G Notice that the first deposit happens at 0, therefore P 5, 500 becomes A with increasing arithmetic gradient G as P 500. Thus, using present worth as focal point: P = Pa + Po + P5,000.00 Cie Pa = P5,500[ a ] = P 116, 838.63 i 212 yas 500 , 1 Po = fae = cep ] = P2117, 090.01 P = P 116, 838.63 + P 117,090.01 + P5, 0000.00 = P 238,928. 64 Therefore: F = P238,928,64( 1+ 22 4 = p-303, 375.97 39Using future worth as focal point : F = Fa + Fo + future worth of P 5,000 Caealt peed Fa = P5,500[ rr ] = P148, 354. 06 Fo = Page; CA Pt og | = pas, 673.24 F(P5,000) = P5,000( 1 + “2 )%* = p6, 348.67 P 148, 354.06 + P 148,673.24 + P6,348. 67 P 303, 375. 97 2) Acertain property was offered for sale amounting to PS million if paid in cash. However, a buyer has an option to purchase it in an instalment basis wherein he needs to pay 25% of the cash price as down payment. Remaining balance be paid at the end of every quarter after purchased for a period of S years. However, quarterly payment decreases an amount of P20,000 every quarter thereof until the last quarterly payment. If money is 10% effective, a) _what was the amount of the first quarterly payment? b) what was the amount of the 15" quarterly payment? ¢) find the sum of all the payments. d) find the equivalent uniform quarterly payments for the given period. Cash ~ Flow Diagram: th =p sm | | fn in quarters for 5 years i = 10% effective | jo. de 2 aan te | ] | | 4, 4 4 | ¥ X-18(PZOK) X-19( P20K) 25% of P | X—2( P20K ) (1,250,000 ) 4 40Since payments are in quarters; find nominal rate from the given ERI: 0.10 = (1+ )*-1 = 0.0965 = 9.65% compounded quarterly. If present worth be the reference point, then: P5,000, 000 = P 1,250,000 + Pa - Po (decreasing arithmetic gradient } P3, 750,000 = Pa - Ps Let X be the first quarterly payment (A) andG = P 20, 000: a= (1 4 20888 0 POS Le eR Ls Bex P 20000 , 1- (1+ 2 Po = “gyes-[ ———pasx*#——_ - ] = P 2,738, 326.81 ae a Therefore: P3, 750,000 = 15.7188X - P 2, 738, 326.81 X = P412, 774,95 a) first quarterly payment is P 412, 774.95 b) 15t quarterly payment = P 412, 774.95 - 14( P 20,000) = P 132,774.95 ¢)_ Sum of all the payments P 1,250,000 + =[ 2(P 412, 774.95) +(19)( -P 20, 000)] P 1,250,000 + P4, 455, 499.00 = P5, 705, 499. 00 a C14 288 yz d) P3, 750,000 = Al ———s55¢—— _] A = P 238, 567.98 a1Alternate Solution: Future worth be the focal point. F = P3, 750, 000(1 + “5 yo = p6, 040, 746. 70 F = Fa- Fe (14 20088 a0 Fa= X{ "fie ] = 25. 3209X nwoas! init Fo = Samane ; (At a * | 20] = P4,411,076.96 Therefore: P 6,040, 746.70 = 25.3209X - P-4,411, 076.96 X = P412,774.57 3) Ayoung engineer purchased a new car in an instalment basis wherein he pays an amount of P 200, 000 as down payment. Remaining balance be paid at the beginning of every month for a period of two years starting an amount of P 10, 000. However first monthly payment happens six months after the purchased and increases 5% every Month thereof until the last monthly payment. If money is 8% compounded monthly, a) what was the cash price of the car? b)_what was the amount of the 20" monthly payment? ¢) find the sum of all the payments. Solution: Cash-Flow Diagram: t P Pp i = 8% compounded monthly k = 5months p 1 in months for two years | P 123.4 Sf Fg Heats 29 30 | 3. 24 | 4 | r j | P 10K | 1.05(P10K) 4g 4 P 200K (1.05 )?( P10K ) (1.05 )?3( P10K ) 42Since we are looking for the cash price of the car, let Present worth be the focal point: Thus, solve forw: risapositiveo.0s =; w = * the = 1.043 Notice that monthly payment is at the beginning, thereby we have to adjust one month on the deferred period to make it look likes at the end of every period wherein k= 5 and n= 24 (1.043 1.063 P.403, 536. 96 Therefore: a) P = P200,000 + P.403, 536.96( 1 + = P590, 350. 62 Alternate solution: If we will consider deferred period be six months, n = 23 and equation becomes: pr = p0,000 + 22=creng00), 2 Cums Pp” = P10,000. + P396, 244.82 = P 406, 244.82 Therefore: P = P200,000 + P.406,244.82( 1+“ )* = P590, 367. 55 1.05 )'9(P 10,000) = P25, 269.50 b) 20" monthly payment = 105 4 1 105 P 200,000 + P10,000[ ©) Sum ofall payments P 200, 000 + P-445,019.99 = P645,019.99 4) A P14 million debt which includes interest is to be paid five years from now. In order for the debtor to fulfil such payment, he plans to starts an end of a quarterly investment on a fund now that earns a 14% effective rate until the last period. His first quarterly investment is P 1 million and quarterly investment decreases by 10% until the last investment. Would his money on the fund be enough to pay his obligation after the said period? If not, how much more is needed? Find also, sum of the investments. Even without a cash- flow diagram, automatically P14 million is a future worth and problem is an ordinary geometric gradients wherein percentage is decreasing. Find first the value of nominal interest and w ( use 1—r for decreasing percentage ) 43Solution: Cash - Flow Diagram: t P14M??? 1 in quarters for S years = 14% effective ° 4 2 ee es (0.9 (PIM) 4 | 4 (0.9 (PAM) y 0.9(P 1M) P1M 0.44 = (14 4)*- 1 = 0.1332 = 13.32% compounded quarterly we Ay = 0.871 Find P first (end of a quarter, C = P 1, 000, 000 and nis 20 quarters ) P0990; 1= (0871 "| - 7, 028, 369.94 0871 V+ thus: F = P7, 028, 369.94( 1 + 0.14 } F = P 13,532, 525.97 Therefore ; NO.....needs ( P14, 000, 000 - P 13, 532, 525.97) = P 467, 474.03 109)” ) - ps, 784,233. 45 09 Sum of investment = ax5) A businessman wishes to expand his business five years from now by building more affordable residential housing units. To prepare for such expansion, he invested now an amount of P 20 million pesos on a trust fund that earns 12% effective. The businessman also plans to deposit an equal-beginning of a monthly amount of P 75, 000 on a bank that earns 11% effective six months after the said investment for a period of one year. After such, he plans to increase his monthly deposits by an amount of P 20, 000 every month thereof for a period of one year. Then, he plans to switch his monthly deposits by an end of a quarterly deposits for two years wherein the first quarterly deposits be an amount of P 300, 000 wherein next quarterly deposits decreases by 10% every quarter until the last deposit. Find: a) the total amount of capital the businessman will have once he starts the said expansion. b) the amount of the 15" beginning of a month deposit. ¢) the amount of the 5 quarterly deposit, d) the sum of all of his deposits. Solution: Cash-Flow Equivalent: ( ona bank that earns 11% effective ) t F (6 more months } | t, | Pp” Pp P k=6months| n= 12 months n=12months | n=8 quarters | Jowdd 12(0) 412 Ms ee 75,000 P75K+P20K | 4 P75K + 2( P20K ) | 4 (0.9)(P300K) P7SK +12( P20K ) p01 P300K) P 300kFor nominal rates: 0.11 =(1+5)"-1 = 10.48% compounded monthly o11= (1 = 10.57 % compounded quarterly Future worth of the P 20 million investment: = P20, 000, 000( 1 + 0.12 )* = P35, 246, 833. 66 Future worth of deposits: For Geometric gradient ; C = P300,000 withr =0.10 and n = 8 quarters ; i= 10.57% aso apt = 0.877 we 1= (oar 0877 = P 1,544, 687.62 Needs 2. 5 more years in the future ( 10 quarters) Ps P 1, 544, 687. 62( 1 + “4°82 0 - p2, 004, 993.09 For Arithmetic gradient ; A = P115,000 with n = 11 months withi = 10. 48% P” = Px + Pg + P95,000 (14 208 ya Pa = P115,000 [ a i = P41, 201, 147. 84 P 20,000 ae (a+ SOB ye Fa ata Le er Cav Binrya | = P41, 026, 314. a6 — is Thus: P* = P14, 201,147.84 + P41, 026,314.86 + P95,000 = P 2, 322, 462. 70 Needs 3. 5 years in the future ( 42 months ) Fr = P2, 322, 462.70 (1 + “088 yz = pa, 346, 234. 56For Annuity due A = P75,000 ; a-cat P75,000[ 1 + +—<“* tage] = pase, 357.29 n= 12 months andi = 10. 48% pus Needs 4.5 more years to the future ( 54 months ) 1088 st =p 1, 372, 752. 36 PY = Pass, 357.29 (1+ a) Capital = Fi + FY + FY + FY P35, 246, 833. 66 + P 2, 004, 993.09 + P 3, 346, 234. 56 + P1, 372, 752. 36 = P41, 970, 813. 67 Alternate solution: P 1, 190, 058. 89, P 1,544, 687.62 (1+ yo 0.2057 4 py = Pr = P2,322, 462.70 (1+ S88 18 = p 1,985,976. 24 20088 ys = p gid, 722.79 Py” = P58, 357.29 (1+ = P3,990, 757.92 Thus: P 1, 190, 058. 89 + P 1, 985,976.24 + P.814, 722.79 Need five years to the future: F = P3,990, 757.92 ( 1+ 0.11 )§ = P6,724, 659.18 So; a) Capital = P35, 246,833.66 + P6,724, 659.18 = P 41,971, 492. 84 b) 15% beginning of amonth deposit = P7SK+3(P20K) = P135, c) S* quarterly deposit = (0.9)*(P300K) = P 196, 830.00 Annuity + Arithmetic + Geometric d) Sum = = 12(P 75,000) + 21 2(P 95,000) + 11( P20, 000) | + P 300, 000 900, 000. 00 + P 2, 460,000.00 + P 1, 708, 598.37 = PS, 068,598. 37 47