Engineering Economy 5
Engineering Economy 5
Engineering Economy 5
Engineering Economy
Topic 7 – Annuities
Topic 8 – Gradients
Engineering Economy
Introduction to Annuity
What is an Annuity?
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Types of Annuities
Engineering Economy
Types of Annuities
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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.
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Deferred Annuity
P F
n periods
0 1 2 3 4 5 6 7 8 9
P =A [ F =A [
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Annuity Due
F
P
n periods
0 1 2 3 4 5 6 7
Payments
P =A [ F =A [
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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.
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Annuity Formula
P = A (P/A, i%, n) P =A [
A = P ( A/ P, i%, n) A=P[
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Annuity Formula
F = A ( F/ A, i%, n) F =A [
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Sample Problem -Perpetuity
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
Engineering Economy
Sample Problem – Breaking into 2
Cash Flows
DIAGRAM:
Solution: $7 000
4 17
0 18 21 yrs
A?
Engineering Economy
Practice Problems
Engineering Economy
Practice Problems
Engineering Economy
Cont
Engineering Economy
Cont
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.
Engineering Economy
Homework No.4
Engineering Economy