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ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

ANNUITY

- Annuity is a series of uniform quarterly payments made at equal

ANNUITY and PERPETUITY intervals of time.

Annuities are established for the following purposes:

1. As payment of a debt by series of equal payment at equal time
intervals, also known as amortization.
BSCE 2-1 | April 19, 2024 | 7:00 AM – 9:00 AM
2. To accumulate a certain amount in the future by depositing equal
amounts at equal time intervals. These amounts are called sinking
fund.
Engr. LORDLEY M. ABELLAR
Planning Officer II |Assistant Professor I 3. As a substitute periodic payment for a future lump sum payment.

Department of Civil Engineering and Architecture

ENGS31 ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

Elements of Annuity TYPES OF ANNUITY

A. Ordinary Annuity
A = periodic payment In ordinary annuity, the payment is made at the end of
P = present worth of all periodic payments each period starting from the first period, as in the diagram
F or S = future worth or sum of all the periodic shown below.
payments after the last payment is made.
i = interest rate per payment
n = number of payments

Department of Civil Engineering and Architecture Department of Civil Engineering and Architecture
 20/04/2024

ENGS31 ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

TYPES OF ANNUITY TYPES OF ANNUITY

A. Ordinary Annuity (Cont.) A. Ordinary Annuity (Cont.)

Future worth of A. The future worth of A is: Value of A with known F (sinking-fund). The value of
A if F is known is:
𝐴 (1 + 𝑖) −1 𝐹𝑖
𝐹= 𝐴=
𝑖 (1 + 𝑖) −1

( )
The factor is called equal-payment-series compound- The factor is known as equal-payment sinking-fund
( )
amount factor and is denoted as (F/A, i, n) factor and is denoted as (A/F, i, n)
Department of Civil Engineering and Architecture Department of Civil Engineering and Architecture

ENGS31 ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

TYPES OF ANNUITY TYPES OF ANNUITY

A. Ordinary Annuity (Cont.) A. Ordinary Annuity (Cont.)

Present worth of A. The present worth of A is: Value of A with known P (capital recovery). The
𝐹 𝐴 (1 + 𝑖) −1 value of A with known P is:
𝑃= = 𝑃(1 + 𝑖) 𝑖
(1 + 𝑖) (1 + 𝑖) 𝑖 𝐴=
(1 + 𝑖) −1
( )
The factor is known as equal-payment-series present-
( ) ( )
worth factor and is designed as (P/A, i, n) The factor is known as the equal-payment-series-
( )
capital-recovery factor and is designated as (A/P, i, n)
Department of Civil Engineering and Architecture Department of Civil Engineering and Architecture
 20/04/2024

ENGS31 ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

Example No.1 TYPES OF ANNUITY

B. Deferred Annuity
A contract calls for semiannual payments of
P40,000.00 for the next 10 years and an In this type, the first payment is deferred a certain number of
periods after the first. Consider the cash flow diagram below.
additional payment of P250,000.00 at the end of
that time. Find the equivalent cash value of the
contract at 7% compounded semiannually?

Department of Civil Engineering and Architecture Department of Civil Engineering and Architecture

ENGS31 ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

Example No. 2 TYPES OF ANNUITY

C. Annuity Due
You need a P40,000.00 per year for four years to
go to college. Your father invested P50,000.00 in If the payment is made at the beginning of each period
starting from the first period, the annuity is called annuity due.
a 7% account for your education when you were
born. If you withdraw the P40,000.00 at the end
of your 17th, 18th, 19th, and 20th years, how much
money will be left in the account at the end of
your 21st year?
Department of Civil Engineering and Architecture Department of Civil Engineering and Architecture
 20/04/2024

ENGS31 ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

TYPES OF ANNUITY TYPES OF ANNUITY

C. Annuity Due (Cont.) C. Annuity Due (Cont.)
From the diagram shown: From the previous examples, the formula for
P can be generalized as:
𝐴 (1 + 𝑖) −1
𝐹=
𝑖
𝐴 (1 + 𝑖) −1
𝐹 𝐴 (1 + 𝑖) −1 𝑃=
𝑃= = (1 + 𝑖) 𝑖
(1 + 𝑖) (1 + 𝑖) 𝑖
where n is the number of payments and n’ is
the number of periods from zero (0) period
up to the last payment.
Department of Civil Engineering and Architecture Department of Civil Engineering and Architecture

ENGS31 ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

Example No. 3 PERPETUITY

Perpetuity is an annuity where the payment periods
A farmer bought a tractor costing P12,000.00 if extend forever or the periodic payments continue indefinitely.
paid in cash. The tractor may also be purchased
by installment to be paid within 5 years. Money is If the payment is made at the end of each period starting
worth 8% compounded annually. Determine the from the first period, the present worth of perpetuity is:
amount of each annual payment if the payment 𝐴
𝑃=
is made at the beginning of each of the 5 years. 𝑖

Department of Civil Engineering and Architecture Department of Civil Engineering and Architecture
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ENGS31
ANNUITY and PERPETUITY ENGINEERING ECONOMICS
April 19, 2024 | ES 302

Example No. 4

Find the present value in pesos, of a perpetuity of

P15,000.00 payable semi-annually if money is
worth 8%, compounded quarterly.

Department of Civil Engineering and Architecture