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Annuity Due and Perpetuity Sample Problems

1) A farmer bought a tractor for PHP 25,000 payable in 10 semi-annual installments. Each installment is PHP 4,077.20. 2) Two bids were submitted to buy a manufacturing plant. The first bid offered PHP 200,000/year for 5 years. The second bid PHP 120,000 first year, PHP 180,000 second year, and PHP 270,000 for the next 3 years. The second bid has a higher present value so it should be accepted. 3) Mr. Ayala borrowed PHP 100,000 at 10% annual interest to repay over 30 years in monthly installments. Each monthly payment is PHP 839.19.

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Ervin Russel Roña
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2K views

Annuity Due and Perpetuity Sample Problems

1) A farmer bought a tractor for PHP 25,000 payable in 10 semi-annual installments. Each installment is PHP 4,077.20. 2) Two bids were submitted to buy a manufacturing plant. The first bid offered PHP 200,000/year for 5 years. The second bid PHP 120,000 first year, PHP 180,000 second year, and PHP 270,000 for the next 3 years. The second bid has a higher present value so it should be accepted. 3) Mr. Ayala borrowed PHP 100,000 at 10% annual interest to repay over 30 years in monthly installments. Each monthly payment is PHP 839.19.

Uploaded by

Ervin Russel Roña
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Problem No.

1:
A farmer bought a tractor costing P25,000 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.

Given:
P=₱25,000
i=in=26% ; m=2
n=10

Req’d: A

Sol’n:

( )
1 − (1 + 𝑖)
𝑃 =𝐴 1+
𝑖

( )
1 − (1 + 𝑖)
𝐴 =𝑃 1+
𝑖

.
Where; 𝑖= = 0.13 and 𝑛 = 10

( )
1 − (1.13)
𝐴 = 25,000 1 +
0.13

𝑨 = 𝑷𝟒, 𝟎𝟕𝟕. 𝟐𝟎
Problem No.2:
A certain manufacturing plant is being sold and was submitted for bidding. Two
bids were submitted by interested buyers. The first bid offered to pay P200,000
each year for 5 years, each payment being made at the beginning of each year.
The second bidder offered to pay P120,000 the first year, P180,000 the second
year, and P270,000 each year for the next 3 years, all payments being made at
the beginning of each year. If money is worth 12% compounded annually,
which bid should the owner of the plant accept?

Given:
Bid 1: A=₱200,000 ; n=5 ; i=12%
Bid 2: Payment 1=₱120,000 ; Payment 2=₱180,000 ; A=₱270,000
i=12% ; n=3

Req’d: P

Sol’n:

For Bid 1:

( )
1 − (1 + 𝑖)
𝑃 =𝐴 1+
𝑖

Where; 𝑖 = 0.12 and 𝑛=5

( )
1 − (1.12)
𝑃 = 200,000 1 +
0.12

𝑷𝟏 = 𝑷𝟖𝟎𝟕, 𝟒𝟔𝟗. 𝟖𝟕
For Bid 2:

( )
1 − (1 + 𝑖)
𝑃 = 120𝐾 + 180𝐾(1 + 𝑖) +𝐴 1+ (1 + 𝑖)
𝑖

Where; 𝑖 = 0.12 𝑛=3 and 𝑀 = 2

( )
1 − (1.12)
𝑃 = 120𝐾 + 180𝐾(1.12) + 270𝐾 1 + (1.12)
0.12

𝑷𝟐 = 𝑷𝟖𝟓𝟗, 𝟕𝟐𝟕. 𝟏𝟖

Since P2 > P1 , therefore, the plant owner should accept the second bid.
Problem No.3:
Mr.Ayala borrows P100,000 at 10% effective annual interest. He must pay back
the loan over 30 years with uniform monthly payments due on the first day of
each month. What does Mr.Ayala pay each month?
Given:
P=₱100,000
ie=10%
n=Nm=30(12)=360

Req’d: A

Sol’n:

( )
1 − (1 + 𝑖)
𝑃 =𝐴 1+
𝑖
( )
1 − (1 + 𝑖)
𝐴 =𝑃 1+
𝑖

Also,
𝑖 = (1 + 𝑖) − 1

𝑖 =𝑖

(1 + 0.10) − 1 = (1 + 𝑖) −1

1.10 = (1 + 𝑖)

𝑖 = 0.007974

So, 𝑖 = 0.007974 and 𝑛 = 360

( )
1 − (1.007974)
𝐴 = 100𝐾 1 +
0.007974

𝑨 = 𝑷𝟖𝟑𝟗. 𝟏𝟗
Problem No.4:
It costs P50,000 at the end of each year to maintain a section of kennon road in
Baguio City. If money is worth 10%, how much would it pay to spend
immediately to reduce the annual cost to P10,000?

Given:
A=₱50,000-₱10,000=₱40,000
i=10%

Req’d: P

Sol’n:

𝐴
𝑃=
𝑖
40,000
𝑃=
0.10

𝑷 = 𝑷𝟒𝟎𝟎, 𝟎𝟎𝟎

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