Engineering Economy 5

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Engineering Economy

Engineering Economy
 Topic 7 – Annuities

 Topic 8 – Gradients

 Topic 9 – Application of Money Time Relationship

Engineering Economy
Introduction to Annuity

What is an Annuity?

An annuity is a series of payments made at


equal intervals.

An annuity consists of a series of equal


payments made at equal intervals of time

Example: You get $200 a week for 10 years.

Engineering Economy
Types of Annuities

1. Ordinary Annuity – is one where the equal


payments are made at the end of each payment
period starting from the first period.

2. Deferred Annuity – is one where the payment of


the first amount is deferred a certain number of
periods after the first.

Engineering Economy
Types of Annuities

3. Annuity due – is one where the payments are


made at the start of each period, beginning from
the first period.

4. Perpetuity – is an annuity where the payment


periods extend forever or in which the periodic
payments continue indefinitely.

Engineering Economy
Ordinary Annuity
P F

n periods

0 1 2 3 4 5 6 7

Payments

P =A [ F =A [

Ordinary Annuity – is one where the equal payments are made at the
end of each payment period starting from the first period.

Engineering Economy
Deferred Annuity
P F

n periods

0 1 2 3 4 5 6 7 8 9

Deferment period Payments

P =A [ F =A [

Deferred Annuity – is one where the payment of the first amount is


deferred a certain number of periods after the first.

Engineering Economy
Annuity Due
F
P

n periods

0 1 2 3 4 5 6 7

Payments

P =A [ F =A [

Deferred Annuity – is one where the payment of the first amount is


deferred a certain number of periods after the first.

Engineering Economy
Perpetuity

n periods
n
0 1 2 3 4 5 6 ……

Payments

P =[
Perpetuity – is an annuity where the payment periods extend forever
or in which the periodic payments continue indefinitely.

Engineering Economy
Annuity Formula

UNIFORM SERIES PRESENT WORTH FACTOR


(P/A)

P = A (P/A, i%, n) P =A [

UNIFORM SERIES CAPITAL RECOVERY FACTOR


(A/P)

A = P ( A/ P, i%, n) A=P[

Engineering Economy
Annuity Formula

UNIFORM SERIES COMPOUND AMOUNT FACTOR


(F/A)

F = A ( F/ A, i%, n) F =A [

UNIFORM SERIES SINKING FACTOR (P/A)

A = F (A/F, i%, n) A=F[

Engineering Economy
Sample Problem -Perpetuity

Company “DITO” pays P8.00 in dividends annually


and estimates that they will pay the dividends
indefinitely. How much are investors willing to pay for
the dividend with a required rate of return of 5%?
P =[

P = 8/5% = P160
An investor will consider investing in the company if
the stock price is P160 or less.

Engineering Economy
Sample Problem – Breaking into 2
Cash Flows

A young couple has decided to make advance plans


for financing their 3 year old daughter’s college
education. Money can be deposited at 8% per year,
compounded annually.

What annual deposit on each birthday, from the 4th to


the 17th (inclusive), must be made to provide $7,000
on each birthday from the 18th to the 21st (inclusive)?

Engineering Economy
Sample Problem – Breaking into 2
Cash Flows
DIAGRAM:
Solution: $7 000
4 17

0 18 21 yrs
A?

Given: WITHDRAWALS18-21 = $7 000 ; i = 8%/yr. com. yearly


FIND A4-17
P17 = A(F/A,i,n) = A(P/A,i,n)
= A(F/A,8%,14) = 7 000(P/A,8%,4)
= A(24.2149) = 7 000(3.3121)
 A = $957

Engineering Economy
Practice Problems

1. Determine the value of each of the following


annuity factors:
(P/A, 4%,8) (A/P,14.5%,10)
(F/A,9.8%,21) (A/F,6.3%,15)

Engineering Economy
Practice Problems

2. What are the present worth and the


accumulated amount of a 10-year annuity
paying P1,500 at the end of each year, with
interest at 12% compounded annually?

Engineering Economy
Cont

3. A truck was bought on an installment basis with a


monthly installment of P3,000 for 36 months. If the
effective rate of interest is 12% co. yearly,
calculate the cash price of the truck?

Engineering Economy
Cont

4. How many years will it take for a uniform annual


deposit of size A to have the same value as a
single deposit now that is 10 times the size of one
annual deposit? The rate of return is 8% per year
compounded yearly.

Engineering Economy
5. As rental for building, the owner received two offers:
a) 50,000 a year for 8 years, the rental for each year
being paid at the start at the end of each year
b) 30,000 for the first year, 40,000 for the second year,
50,000 for the third year and 60,000 for the next 5 years
with all rentals paid at the beginning of each year.

If the money is worth 12%, which is better offer?

Engineering Economy
Homework No.4

1. Consider a principal amount of $1,000 to be invested for


three years at a nominal rate of 12% compounded semi
annually. What would be the effective annual interest rate
for one year?
2. Janine has a bank loan for $10,000 to pay for his new
truck. This loan is to be repaid in equal end month
installments for five years with a nominal interest rate of
12% compounded monthly. What is the amount of each
payment?
3. Suppose that a $100 lump sum amount is invested for 10
years at a nominal interest rate of 6% compounded
quarterly. How much is it worth at the end of tenth year?

Engineering Economy

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