Annuity and Capitalized Cost
Define annuity and capitalized cost
Distinguish between the different types of
annuities.
Solve problems regarding annuity and
capitalized cost
Annuity is defined as a series equal
payments occurring at equal interval of
time.
When an annuity has a fixed time span, it
is known as annuity certain.
Ordinary Annuity
Deferred Annuity
Annuity Due
When an annuity does not have a fixed
time span but continues indefinitely,
then it is referred to as perpetuity.
Symbols and their meaning:
P = value or sum of money at present
F = value or sum of money at some future time
A = a series of periodic, equal amounts of money
n = number of interest periods
i = interest rate per interest period
Ordinary annuity is a type of annuity where the
payments are made at the end of each period
beginning from the first period
Finding P when A is given:
The quantity in brackets is called the uniform
series present worth factor and is designated by
the functional symbol P/A, i%, n, read as P given A
at i percent in n interest periods.
( )
(
+
=
i
i 1 1-
A P
-n
n) i%, A(P/A, P=
Finding F when A is given:
The quantity in brackets is called the uniform
series compound amount factor and is designated
by the functional symbol F/A, i%, n, read as F
given A at i percent in n interest periods.
( )
(
+
=
i
1 i 1
A F
n
n) i%, A(F/A, F=
The quantity in brackets is called the capital
recovery factor and is designated by the functional
symbol A/P, i%, n, read as A given P at i percent in
n interest periods.
( )
(
+
=
n -
i 1
i
P A
1
n) i%, P(A/P, A =
Finding A when P is given:
The quantity in brackets is called the sinking fund
factor and is designated by the functional symbol
A/F, i%, n, read as A given F at i percent in n
interest periods.
( )
(
+
=
1
n
i 1
i
F A
n) i%, F(A/F, A =
Finding A when F is given:
1. What are the present worth and the accumulated
amount of a 10-year annuity paying P10,000 at the
end of each year, with interest at 15% compounded
annually?
2. What is the present worth of P500 deposited at the
end of three months for 6 years if the interest rate
is 12% compounded semi-annually.
3. A business man needs P50,000 for his operations.
One financial institution is willing to lend him the
money for one year at 12.5% interest per annum
(discounted). Another lender is charging 14%, with
the principal and interest payable at the end of one
year. A third financier is willing to lend him P50,000
payable in 12 equal monthly instalments of P4,600.
Which offer is best for him?
Deferred annuity is a type of annuity
where the first payment does not begin
until some later date in the cash flow b
Cash-Flow Diagram given A to find P
m) i%, n)(P/F, i%, A(P/A, P=
( )
( )
m -
n
n
i) (1
i) 1 i
1 i 1
A P +
(
+
+
=
Examples
1. A man invests P10,000 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 18
th
to the 22
nd
birthday?
2. If P10,000 is deposited each year for 9 years,
how much annuity can a person get annually
from the bank every year for 8 years starting 1
year after the 9
th
deposit is made. Cost of
money is 14%.
A debt of P40,000, whose interest rate is
15% compounded semi-annually, is to be
discharged by a series of 10 semi-annual
payments, the first payment to be made 6
months after consumption of the loan. The
first 6 payments will be equal and such
amount that the final payment will liquidate
the debt. What is the amount of the last
payments?
Annuity Due is one where the payments
are made at the start of each period,
beginning from the first period.
1)] - n i%, (P/A, [1 A n) i%, A(P/A, P + = =
1] - 1) n i%, [(F/A, A n) i%, A(F/A, F + = =
1. A farmer brought a tractor costing P25,000
payable in 10 semi-annual payments, each
instalment payable at the beginning of each
period. If the rate of interest is 26%
compounded semi-annually, determine the
amount of each instalment. How much
money will he save if he paid the tractor in
cash?
Perpetuity is an annuity where the
payments continue indefinitely
i
A
P =
1. What amount of money invested today at 15%
interest can provide the following scholarships:
P30,000 at the end of each year for 6 years;
P40,000 for the next 6 years and P50,000
thereafter?
2. If money is worth 8% compounded quarterly,
compare the present values of the following
a. An annuity of P1,000 payable quarterly for
50 years;
b. An annuity of P1,000 payable quarterly for
100 years;
c. A perpetuity of P1,000 payable quarterly.
capitalized cost is an application of
perpetuity
The capitalized cost of any structure or
property (equipment, machinery, building,
etc.) is the sum of its first cost and the
present worth of all costs for replacement,
operation, and maintenance for a long time
forever.
Capitalized Cost = First Cost + Cost of Perpetual Maintenance
FC = First Cost of the Structure
S = the amount needed to replace or maintain the
property every k periods
X = the amount of principal invested at i% per period,
the interest on which will amount to S every k periods
( ) 1 +
+ = + =
k
i 1
S
FC X FC Cost d Capitalize
1. A manufacturing plant installed a new boiler at a total
cost of P150,000 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 P5,000. if the interest is 12%
compounded annually, determine its capitalized cost.
2. A research foundation wishes to set up a trust fund
earning 10% compounded annually to
a. Provide P2,000,000 for the lot and building and
P1,000,00 for the initial equipment of a Structural
Engineering and Materials Laboratory;
b. Pay P400,000 for the annual operating costs every
year, and
c. Pay P500,000 for the purchase of new equipment and
replacement of some equipment every 5 years beginning
5 years from now.
How much money should be paid into the fund for the
building and equipment to pay for perpetual operation
and equipment replacement?
Amortization is any method of repaying
debt, the principal and interest included,
usually by a series of equal payments at
equal interval of time.
Example
1. A debt of P50,000 with interest at 12%
compounded semi-annually is to be
amortized by equal semi-annual payments
over the next 3 years, the first due in 6
months. Find the semi-annual payments
and construct an amortization schedule.
