Course Code / Title

ECON 423
ENGINEERING ECONOMICS
Course Outcome and Learning Outcome

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 Teaching – Learning Activity

• TLA 1 : Interactive Discussion

• TLA 2 : Power Point Presentation

• TLA 3: Problem Solving

• TLA 4: Assessment

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ANNUITY

Is a sequence of equal payments made at equal interval

of time usually monthly, quarterly, semi-annually
and annually
Some examples of annuities are:
Installment payments
Rental payments
Life insurance premiums
Weekly wages
Periodic pensions

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TYPES OF ANNUITIES

• ANNUTIES IN ENGINEERING IS USUALLY CLASSIFIED

INTO FOUR CATEGORIES
• 1. ORDINARY ANNUITY
• 2. DEFERRED ANNUITY
• 3. ANNUITY DUE
• 4. PERPETUITY

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 TYPES OF ANNUITIES

It is also defind as one where equal payments are made at the end
of each payment period starting from the first period.

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TYPES OF ANNUITIES

• DEFERRED ANNUITY = is one where the payment of the

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

• ANNUITY DUE – is one where the payments are

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

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TYPES OF ANNUITIES

• PERPETUITY = is an annuity where payment period

extend forever or in which the periodic payments continue
indefinitely.

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ORDINARY ANNUITY

• THE FOUR ESSENTIAL ELEMENTS OF AN ORDINARY

ANNUITY ARE:
• 1. The amounts of all payments are equal.
• 2. the payments are made at equal intervals of time
• 3. The first payment is made at the end of of the first period and all
payments thereafter are made at the end of the corresponding
period.
• 4. Compound interest is paid on all amounts in the annuity.

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ORDINARY ANNUITY

• Graphical representation of an ordinary annuity where each

payment is P 1.00

0
A

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ORDINARY ANNUITY
• FORMULAS

1+𝑖 𝑛 −1 1 −( 1+𝑖 )− 𝑛
• P =A =A = P = (P/A , i%, n)
1 1+𝑖 𝑛 𝑖

1+𝑖 𝑛 −1
• F =A F = (F/A, i%, n)
𝑖
Where :
A = amount of each payment of an ordinary
annuity
P = present of the n PA payments
F = future worth or accumulated amounts
of the n PA payments
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PROBLEM

• 1. Determine the value of each of the following annuity factors.

• a. (P/A, 4%, 8)
• b.( A/P, 14.5%, 10)
• c. (F/A, 9.8%, 21)
• d. (A/F, 6.3%, 15)

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 1 −( 1+𝑖 )− 𝑛
•A
𝑖

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• A steam boiler is purchased on the basis of guaranteed
performance. However , initial test indicates that the operating cost
• Will be P 400 more per year than guaranteed . If the expected life
is 25 years and money is worth 10% . What deductions from the
purchase price would compensate the buyer for the additional
operating cost?

1 −( 1+𝑖 )− 𝑛
• FORMULA P =A
𝑖

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• A one – bagger concrete mixer can be purchased with a
downpayment of 8, 000 and equal installments of P 500 each paid
at the end of every month for the next 12 months. If money is worth
• 12% compounded monthly , determine the equivalent cash prize of
the mixer

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EXAMPLE 3

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EXAMPLE 4

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EXAMPLE 5

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DEFERRED ANNUITY

• 1. In deferred annuity the first payment is made at a period later

than the first.
• 2. After the first payment is made, all the succeeding payments are
paid at the end of the periods extending to the end of the annuity.
• 3. it will be observed that in an annuity which has been deferred k
periods, the first payment is made at the end of the ( k+1) period.

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GRAPHICAL REPRESENTATION OF A DEFERRED ANNUITY

• K I (P/A, I%, n) (P/A, I%, n)

1 2
k B
0
1 2 n-1 n
P 1.00
Deferment , k periods Ordinary Annuity, n periods

Deferred Annuity , (k+n) periods

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FORMULA FOR DEFERRED ANNUITY

• P = DP + A (P/A, I%, n) ( P/F, i%,k)

1 −( 1+𝑖 )− 𝑛
• P = DP + A ( 1 + i)−𝑘
𝑖
Where: P = present worth
DP= down payment
k = deferred periods
Note: for F same formula for ordinary annuity

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PROBLEM

• A lathe for machine shop costs P 60,000 if paid in cash. On the

installment plan , a purchaser should pay P 20,000 down payment
and 10 quarterly installments, the first due at the end of the first
year after purchase. If money is worth 15% compounded quarterly ,
determine the quarterly installment?

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PROBLEM

• A man invest P 10,000 now for the college education of his 2-year
old son. If the fund earns 14% effective, how much will the son get
each year starting from his 18th to the 22nd birthday?

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PROBLEM

• A person buy a piece of property for P 100,000 down payment

• And ten deferred semi-annual payments of P 8,000 each starting
three years from now. What is the present value of the investment
• If the rate of interest is 12% compounded sem-annually?

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TRY

• Have I got a deal for you! If you lend me $100,000 today, I

promise to pay you back in twenty-five annual installments
of $5,000, starting five years from today (that is, my first
payment to you is five years from today). You can earn 6%
on your investments. Will you lend me the money?

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TRY!

• Let us take the example of David who deposited a certain

amount of money today and is supposed to receive 30 annual
payments of $5,000 each. However, the annuity will start 4
years from today and the applicable rate of interest is 5%.
Calculate the amount of money deposited if the annuity
payment is supposed to be made at the end of each year.
•

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ANNUITY DUE
• – is one where the payments are made at the start of each period ,
beginning from the first period
• The figure below shows an annuity consisting of n P 1.00 payments,
each paid at the beginning of every period starign from the first.

1 −( 1+𝑖 )− (𝑛−1)
• P =A (P/A, i%, n ) = A 1 + (P/A, i%, n−1) = A 1+
𝑖

1+𝑖 𝑛+1 −1
F = A(F/A, i%,n) = A (F/A, i%, n+1) −1 = A −1
𝑖

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GRAPHICAL REPRESENTATION OF AN ANNUITY DUE

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PROBLEM

• 1. A farmer bought a tractor costing P 25,000 payable in 10 semi-

annual payments, each installment payable at the beginning of
each period. If the rate of interest is 26% compounded semi-
annually, determine the amount of each installment.
• Note: since the installment payments are paid at the beginning of
each period, the payments form an annity due.

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 1 −( 1+𝑖 )− (𝑛−1)
• A 1+
𝑖

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PROBLEM

• 2. On January 1, 2010, you win a lottery with a payoff of $2500 at

the end of every year for the next 10 years. You receive your first
payment right away. What is the minimum amount you would take
as a single payoff amount in this case? i = 7.8%

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 1 −( 1+𝑖 )− (𝑛−1)
• A 1+
𝑖

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PROBLEM

• An individual makes rental payments of $1,200 per month and

wants to know the present value of their annual rentals over a
12-month period. The payments are made at the start of each
month. The current interest rate is 8% per annum.

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 1 −( 1+𝑖 )− (𝑛−1)
• A 1+
𝑖

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PERPETUITY

• PERPETUITY = is an annuity where payment period

extend forever or in which the periodic payments continue
indefinitely.

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Perpetuity

It will be noted that the term ( 1 + n )−𝑛 b𝑒𝑐𝑜𝑚𝑒𝑠 𝑧𝑒𝑟𝑜 𝑎𝑠 𝑛

𝑎𝑝𝑝𝑟𝑜𝑎𝑐ℎ𝑒𝑠 𝑖𝑛𝑓𝑖𝑛𝑖ty or becomes indefinitely large.
1
Hence in perpetuity (P/A, i%, ∞) =
𝑖

For a perpetuity where the periodic payments are each equal

𝐴
to A , the present value is P=
𝑖
Note: obviously the future amount is infinite

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Perpetuity

• Perpetuity in the financial system is a situation where a stream of

cash flow payments continues indefinitely or is an annuity that has
no end. In valuation analysis, perpetuities are used to find the
present value of a company’s future projected cash flow stream
and the company’s terminal value. Essentially, a perpetuity is a
series of cash flows that keep paying out forever.

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PROBLEM

1. If money is worth 8% compounded quarterly , compare the

present value of the following
a) an annuity of P 1,000 payable quarterly for 50 years
b) an annuity of P 1,000 payable quarterly for 100 years
c) an annuity of P 1,000 payable quarterly

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PROBLEM

• Company “Rich” pays $2 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%?

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CAPITALIZED COST

• - a natural extension and application of perpetuity. The capitalized

cost of any structure or property ( equipment, machinery, building,
etc. ) is the sum of its 1st cost, and the present worth of all costs for
replacement, operation, and maintenance for a long time or forever

• Capitalized Cost = First Cost + Cost of Perpetual Maintenance

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CAPITALIZED COST

𝑆
• CAPITALIZED COST = FC + X = FC +
1+𝑖 𝑘 −1

Where: FC= first cost of the structure

S= amount needed to replace or maintain the
property every k periods
X= the amount of principal invested at i% per
period, interest on which will amount to S
every k periods
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PROBLEM

1. A manufacturing plant installed a new boiler at a total cost of

₱ 150,000 and is estimated to have a useful life of 10 years. It is
estimated to have a scrap value at the end of its useful life of
₱ 5000. If interest ia 12 % compounded annually , determine its
capitalized cost.

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PROBLEM

2. The capitalized cost of a piece of equipment was found to be

₱ 142,000. The rate of interest used in the computations was 12 %
With a salvage value of ₱10,000 at the end of a service life of 8
years. Assuming that the cost of perpetual replacement remains
Constant, determine the original cost of the equipment.

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PROBLEM

• 3. Compare the capitalized costs of the following road pavements:

• An asphalt pavement costing ₱ 100,000 which would last for 5
years with negligiblr repairs. At the end of 5 years, ₱ 5000 would be
spent to remove the old surface before ₱ 100,000 is spent again for
new surface.

• A thick concrete pavement costing ₱ 250,000 which would last

indefinitely , with cost of ₱ 20,000 for minors repairs at the end of
every 3 years. Money is worth 8% compounded annually.

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PROBLEM

• 4. A heat exchanger id needed in a chemical process. If interest is

9 % compounded annually, determine which of the following heat
exchanger is cheaper by comparing the capitalized costs
• Exchanger A costs ₱ 22,000 with a scrap value of ₱ 1000 and a
useful life of 7 years;

• Exchanger B costs ₱ 28,000 with a scrap value of ₱ 1,500 and a

useful life of 10 years

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PROBLEM

• 5. Consider the capitalized costs of the following penstocks for a

• hydro –electric plant with interest at 10%
• Timber Steel
• First Cost ₱50,000 ₱80,000
• Estimated Life 10 years 30 years
• Scrap Value ₱2,000 None
• Annual Maintenance ₱1,200 ₱200
• NOTE:Penstocks are huge pipes which transmit the water from the dam to
• the powerhouse.
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NOTE: FOR PROBLEM 5

CAPITALIZED COST = FC+ COST OF PERPETUAL REPLACEMENT+ MAINTENANCE

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PROBLEM

• 6. A dam will have a first cost of $5,000,000, an annual

maintenance cost of $25,000 and minor reconstruction
costs of $100,000 every five years. At an interest rate of
8% per year, the capitalized cost of the dam is nearest to:

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Performance Task

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Assessment

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Reference

• https://www.academia.edu/26701908/Introduction_to_Engineering_
Economy

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