BES 02 ENGINEERING

ECONOMICS
ECO
102
Ronel E. Romero, RCE, MCE
Instructor
President Ramon Magsaysay State University
ANNUITIES
ANNUITY-a fixed sum of money paid to someone at regular
intervals, subject to a fixed compound interest rate.

A sequence of equal payments made at equal periods of

time.

Annuities can be used

(1) To accumulate funds ( e.g. when you make regular deposits in a
savings account)
(2) To pay out funds (e.g. when you receive regular payments from a
pension plan after you retire)
ANNUITIES
ORDINARY ANNUITY-is an annuity where payments are made at
the end of each period and the frequency of the payments is the
same as the frequency of compounding the interest.

ANNUITY DUE – is an annuity where payments are made at the

beginning of each period.

DEFERRED ANNUITY – the first payment is deferred a certain

number of compounding periods after the first.

PERPETUITY – is an annuity where the payment period extends

forever, which means that the periodic payments continue
indefintely
 ORDINARY ANNUITY

Suppose P1500 is deposited at the end of each year for the next 6
years in an account paying 8% interest compounded annually. Find
the future value of this annuity.
1 2 3 4 5 6

P1500 P1500 P1500 P1500 P1500 P1500

 
F= Compound interest formula
 
i = = 0.08 n =5  
1+x+
TOTAL  =  
+  
+
 
=  
+  
+  
+
 =  

  1.08 n − 1   1.08 6 −1   F=
¿ 1500 𝑥
1.08 −1
¿ 1500 𝑥
0.08
¿ 𝑃 11,003.8
 ORDINARY ANNUITY

ANNUITIES
ORDINARY ANNUITY-is an annuity where payments are made at
the end of each period and the frequency of the payments is the
same as the frequency of compounding the interest.
 

F= 9
Equal-payment-series compound-amount
factor or
(F/A,i%,n)
 Where
F=
A = equal payments or annuity FUTURE VALUE OF AN
I = interest rate per period
ORDINARY ANNUITY
n = number of periods
 ORDINARY ANNUITY

EXAMPLE:
An engineer signed his first 7 year contract. To prepare for his
future, he deposits P150,000 at the end of each year for 7 years in
an account paying 6% compounded monthly. How much will he
have in the account after 7 years.  

  F= 9
A = P150,000
i = = 0.005
n = 12 x 7 = 84
 
F=  
=
 ORDINARY ANNUITY
EXAMPLE:
Suppose that at the end of each year, for the next 10 years, P500 is
deposited in a savings account paying 7% interest compounded
annually. (a) How much is in the account at the end of 10 years?
  (b) How much money
  would have been to be
A = P500 deposited in one lump sum 9
F =today (at the same
i = = 0.07 compound interest rate) in order to produce
exactly the same balance at the end of 10 years?
n = 1 x 10 = 10
 
 
F= F=
 
 
P=
=
 P =
     
F= P= P=
 P =

10 PRESENT VALUE OF AN
ORDINARY ANNUITY
ORDINARY ANNUITY
FORMULAS
 
F= 9 F=A(F/A,i%,n)
 
P= 10 P=A(P/A,i%,n)
Equal-payment-series present-worth factor
or
(P/A,i%,n)
 ANNUITY DUE
ANNUITY DUE – is an annuity where payments are made at
the beginning of each period.
1 2 3

1 period
Ordinary annuity at n periods
F’ F
 
   
F’ = F=
F= 11
FUTURE WORTH OF
ANNUITY DUE
 ANNUITY DUE
ANNUITY DUE – is an annuity where payments are made at
the beginning of each period.
1 2 3

P F
 
 
P=
P= 12
PRESENT WORTH OF
ANNUITY DUE
 ANNUITY DUE
EXAMPLE:
Engr. Aramay borrows P100,000 from Engr. Romero at 10%
effective annual interest. He must pay back the loan over 30 years
with a uniform monthly payment due on the first day of each
month. What does Engr. Aramay pay each month?
 
 
P = P100,000
P= 12
i = = 0.00833
n = 12 x 30 = 360
 
100,000 =
 
A=
 ANNUITY DUE
EXAMPLE:
Engr. Romero took a loan of P100,000 from Engr. Aramay at 10%
compounded annually. How much is his monthly payment if he is
required to pay at the beginning of the first day of the month for a
period of 30 years?
 
P = P100,000
P= 12
n = 12 x 30 = 360
 i =  =
= 0.00833
 =

 0.797% = 0.00797 (monthly interest)

100,000 =  
A=
A man bought an equipment costing P60,000 payable in 12
quarterly payments, each installment payable at the beginning of
each period. The rate of interest is 24% compounded quarterly.
What is the amount of each payment?
DEFERRED ANNUITY n periodS

m periodS

 
P’ =
 
P= Present worth of Ordinary annuity at n
periods
PERPETUITY
 
P=
What amount of money invested today at 15% interest can provide
the following scholarships: P30,000 at the end of each year for 6
years; P45,000 for the next 6 years and P60,000 thereafter?
TRY THIS!

1. A man paid 10% down payment of P200,000 for a house and lot
and agreed to pay the remaining balance on monthly
installments for 60 months at an interest rate of 15%
compounded monthly. Compute the amount of the monthly
payment.
2.A man inherited a regular endowment of P 100,000 every end of
3 months for 10 years. However, he may choose to get a single
lump sum payment at the end of 4 years. How much is this lump
sum if the cost of money is 14% compounded quarterly?
3. What is the present worth of a P500 annuity starting at the end
of the third year and continuing to the end of the fourth year, if
the annual interest rate is 10 %?