ENEECO30 -Engineering Economy

PROBLEM SET # 4

ANNUITY

PROBLEM #1:

At age 25, Anthony establishes an Individual Retirement Account (IRA). If he invests

P10,000 per year for 30 years in an ordinary annuity, the account earns 7.75% per year, how much

will he have in the account at age 55?

Given:
𝑃 = 𝑃ℎ𝑝 10,000.00
𝑖 = 7.75%
𝑛 = 30 𝑦𝑒𝑎𝑟𝑠

Solution:
( )
 𝐹 = 𝐴[ ]
( . )
 𝐹 = 10,000
.

 𝐹 = 𝑃ℎ𝑝 1,082,169.97

Answer:
𝑭 = 𝑷𝒉𝒑 𝟏, 𝟎𝟖𝟐, 𝟏𝟔𝟗. 𝟗𝟕

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #2:

Juwita buys a two-year-old Honda from a car dealer for P450,000. She puts P150,000

down and finances the rest through the dealer at 13% effective interest rate. If she agrees to make

36 monthly payments, find the size of each payment.

Given:
𝑃 = 𝑃ℎ𝑝 450,000.00
𝐹 = 𝑃ℎ𝑝 150,000.00
𝐸𝐼𝑅 = 13%
𝑛 = 36

Solution:
Get the value of interest
 𝐸𝐼𝑅 = (1 + 𝑖) − 1
 0.13 = (1 + 𝑖) −1 note: m = 12 since payments will be made monthly
 𝑖 = 0.0102 𝑜𝑟 1.2%
Get the value of monthly equal payments
( )
 𝑃 =𝑃 +𝑃 Note: 𝑃 = 𝐹 and 𝑃 = 𝐴
( )
 𝑃 =𝐹 +𝐴
( . )
 𝑃ℎ𝑝 450,000 = 𝑃ℎ𝑝 150,000 + 𝐴
.

 𝐴 = 𝑃ℎ𝑝 9,998.71

Answer:
𝑨 = 𝑷𝒉𝒑 𝟗, 𝟗𝟗𝟖. 𝟕𝟏

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #3:

Suppose you decide to save P3,000 per month for the next three years. If you invest all of

these savings in an account which will pay you 5% compounded monthly, determine (a) the total

amount in the account after 3 years and (b) the amount of interest earned.

Given:
𝐴 = 𝑃ℎ𝑝 3,000.00
𝑛 = 3 𝑦𝑒𝑎𝑟𝑠
𝑚 = 12
𝑖 = 5% 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦

Solution:
First get the value of Future worth
( )
 𝐹=𝐴
. ( )( )

 𝐹 = 3,000 .

 𝐹 = 𝑃ℎ𝑝 116,260.01
Then get the present worth
( )
 𝑃=𝐴
. ( )( )

 𝑃 = 3,000 .

 𝑃 = 𝑃ℎ𝑝 100,097,10
Then get the value of Interest
 𝐹 =𝑃+𝐼
 𝐼 =𝐹−𝑃

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

 𝐼 = 𝑃ℎ𝑝 116,260.01 − 𝑃ℎ𝑝 100,097.10

 𝐼 = 𝑃ℎ𝑝 16,162.91

Answer:
𝑭 = 𝑷𝒉𝒑 𝟏𝟏𝟔, 𝟐𝟔𝟎. 𝟎𝟏
𝑰 = 𝑷𝒉𝒑 𝟏𝟔, 𝟏𝟔𝟐. 𝟗𝟏

PROBLEM #4:

You overhear your friend saying that he is repaying a loan at P5,000 every month for the

next three years. The interest rate he has been charged is 12% compounded monthly. Figure out

the size of the loan, and the amount of interest involved.

Given:
𝐴 = 𝑃ℎ𝑝 5,000.00
𝑛 = 3 𝑦𝑒𝑎𝑟𝑠
𝑚 = 12
𝑖 = 12% 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦

Solution:
First get the value of Future worth
( )
 𝐹=𝐴
. ( )( )

 𝐹 = 3,000 .

 𝐹 = 𝑃ℎ𝑝 129,230.64
Then get the present worth
( )
 𝑃=𝐴

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

. ( )( )

 𝑃 = 3,000 .

 𝑃 = 𝑃ℎ𝑝 90,322.52
Then get the value of Interest
 𝐹 =𝑃+𝐼
 𝐼 =𝐹−𝑃
 𝐼 = 𝑃ℎ𝑝 129,230 − 𝑃ℎ𝑝 90,322.52
 𝐼 = 𝑃ℎ𝑝 38,908.12

Answer:
𝑭 = 𝑷𝒉𝒑 𝟏𝟐𝟗, 𝟐𝟑𝟎. 𝟎𝟎
𝑰 = 𝑷𝒉𝒑 𝟗𝟎, 𝟑𝟐𝟐. 𝟓𝟐

PROBLEM #5:

A car financing firm offers the following scheme for an entry level Toyota Rush 2021

model:

 Selling Price P983,000

 Down Payment Method 50%
 Payment Term 60 months
 Monthly Payment P13,057.52
What nominal rate is applied and what is the effective rate?

Given:
𝑃 = 𝑃ℎ𝑝 993,000.00
𝐹 = 50% (𝑃)
𝑛𝑚 = 60 𝑚𝑜𝑛𝑡ℎ𝑠
𝐴 = 𝑃 13,057.52

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

Solution:
Evaluate the problem by focusing on Present Worth
 𝑃 = 𝑃 + 𝑃
Note:
𝑃 = 𝐹 where 𝐹 = 50%(𝑃 ) therefore 𝑃 = 0.5𝑃
Also,
( )
𝑃 = 𝐴[ ]
( )
 𝑃 = 0.5𝑃 + 𝐴
( )( )
 993,000 = 0.5(993,000) + (13,057.52)

 𝑖 = 0.01637 𝑜𝑟 1.64%
Solve for Nominal rate

 𝑖=

 𝑖 = 𝑖𝑚 = (12)(1.64%)
 𝑖 = 0.019649 𝑜𝑟 19.65%
Solve for Effective Interest Rate
 𝐸𝐼𝑅 = (1 + 𝑖) − 1
 𝐸𝐼𝑅 = (1 + 0.01637) −1
 𝐸𝐼𝑅 = 0.2152 𝑜𝑟 21.52%

Answer:
𝒊𝒏 = 𝟏𝟗. 𝟔𝟓% compounded monthly
𝑬𝑰𝑹 = 𝟐𝟏. 𝟓𝟐%

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #6:

A new engineer wants to save up P1,000,000. He will contribute P5,000 annually to an

investment earning 10% compounded monthly. How many annual deposits does he need

and what will be the size of the concluding deposit if needed?

Given:
𝐹 = 𝑃ℎ𝑝 1,000,000.00
𝐴 = 𝑃ℎ𝑝 5,000.00
𝑖 = 10% 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦

Solution:
For number of annual payments
( )
 𝐹=𝐴

.
Note: 𝑖 = =
.

 𝑃ℎ𝑝 1,000,000.00 = 𝑃ℎ𝑝 5,000.00 .

 𝑛 = 118.19 or 119 years

For total number of urgently required deposit

 𝑃 = 𝐹(1 + 𝑖)
. .
 𝑃 = 1,000,000 1 +

 𝑃 = 𝑃ℎ𝑝 375,000.00
 Answer:
𝒏 = 𝟏𝟏𝟗 𝒚𝒆𝒂𝒓𝒔
𝑷 = 𝑷𝒉𝒑 𝟑𝟕𝟓, 𝟎𝟎𝟎. 𝟎𝟎

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #7:

Maintenance costs stuff on equipment is 20,000 pesos a year for two years, 40,000 pesos

at the end of four years, and 80,000 pesos at the end of eight years. Compute the semiannual

amount that must be set aside for this equipment. Money is worth 10% compounded annually.

Given:
𝐴 = 𝑃ℎ𝑝 20,000
𝐴 = 𝑃ℎ𝑝 40,000
𝐴 = 𝑃ℎ𝑝 80,000
𝑛 = 2 𝑦𝑒𝑎𝑟𝑠
𝑛 = 2 𝑦𝑒𝑎𝑟𝑠
𝑛 = 4 𝑦𝑒𝑎𝑟𝑠
𝑛 = 8 𝑦𝑒𝑎𝑟𝑠 (2) = 16 𝑝𝑒𝑟𝑖𝑜𝑑
𝑖 = 10% 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦

Solution:
First get the value of total Present Worth (𝑃 )
 𝑃 = 𝑃 + 𝑃 + 𝑃

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

Solve for 𝑃
( )
 𝑃 =𝐴 ( )
( )
 𝑃 = 20,000( )

 𝑃 = 𝑃ℎ𝑝 34,710.74
Solve for 𝑃
( )
 𝑃 =𝐴 (1 + 𝑖)
( . )
 𝑃 = 40,000( )(1 + 0.1)
.

 𝑃 = Php 57,373.13
Solve for 𝑃
( ) ( )
 𝑃 =𝐴 ( )(1 + 𝑖)
( ) ( )
 𝑃 = 80,000( )(1 + 𝑖)

 𝑃 = 𝑃ℎ𝑝 173,204.86

Substitute the value to the sum of Present Worth

 𝑃 = 34,710.74 + 57,373.13 + 173,204.86
 𝑃 = 𝑃ℎ𝑝 265,288.73
Solve for equivalent semi-annual payment 𝐴

 𝐴 = 𝑃 ( )

Note:
 𝑁 = 𝑚𝑛 = (8)(2) = 16 𝑝𝑒𝑟𝑖𝑜𝑑𝑠
where m = 2 for compounded semi-annually and 𝑛 = 8 𝑦𝑒𝑎𝑟𝑠

Get the value of 𝑖 compounded semi-annually

consider 𝑖 = 10% 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦
 𝐸𝐼𝑅 = 𝐸𝐼𝑅

 1+ −1= 1+ −1

.
 1+ −1= 1+ −1

 𝑖 = 0.0976 𝑜𝑟 9.76%

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

Substitute the value to get the value of semi-annual payment

 𝐴 = 𝑃 ( )
.

 𝐴 = 𝑃ℎ𝑝 265,288.73 .

 𝐴 = 𝑃ℎ𝑝 24,269.57

Answer:
𝑨𝒔 = 𝑷𝒉𝒑 𝟐𝟒, 𝟐𝟔𝟗. 𝟓𝟕

PROBLEM #8:

Mr. Reyes borrows P600, 000 at 12% compounded annually, agreeing to repay the loan in

15 equal annual payments. How much of the original principal is still unpaid after he has made the

8th payment?

Given:
𝑃 = 𝑃ℎ𝑝 600,000.00
𝑛 = 15 𝑦𝑒𝑎𝑟𝑠
𝑖 = 12% 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦
𝑛 = 8 𝑦𝑒𝑎𝑟𝑠

Solution:
First get the value of Annual payment (A)

 𝐴=𝑃 ( )
.
 𝐴 = 𝑃ℎ𝑝 600,000 ( )
.

 𝐴 = 𝑃ℎ𝑝 88,094.54

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

Then get the value of 𝑃

( )
 𝑃 =𝐴
( . )
 𝑃 = 𝑃ℎ𝑝 88,094.54
.

 𝑃 = 𝑃ℎ𝑝 437,621.94
Get the value of 𝑃
 𝑃 =𝑃 −𝑃
 𝑃 = 600,000 − 437,621.94
 𝑃 = 𝑃ℎ𝑝 162,378.07
Answer:
𝑷𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 = 𝑷𝒉𝒑 𝟏𝟔𝟐, 𝟑𝟕𝟖. 𝟎𝟔𝟔

PROBLEM #9:

What is the future worth of P600 deposited at the end of every month for 4 years if the

interest rate is 12% compounded quarterly?

Given:
𝐴 = 𝑃ℎ𝑝 600.00
𝑛 = 4 𝑦𝑒𝑎𝑟𝑠
𝑖 = 12% 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦

Solution:
First get the value of interest rate compounded monthly
 𝐸𝐼𝑅 = 𝐸𝐼𝑅

 1+ −1= 1+ −1

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

.
 1+ −1= 1+ −1

 𝑖 = 0.1188 𝑜𝑟 11.88%

Get the future worth

( )
 𝐹=𝐴
. ( )( )

 𝐹 = 600 .

 𝐹 = 𝑃ℎ𝑝 36,733.56

Answer:
𝑭 = 𝑷𝒉𝒑 𝟑𝟔, 𝟕𝟑𝟑. 𝟓𝟔

PROBLEM #10:

M purchased a small lot in a subdivision, paying P200, 000 down and promising to pay

P15, 000 every 3 months for the next 10 years. The seller figured interest at 12% compounded

quarterly.

(a) What was the cash price of the lot?

(b) If M missed the first 12 payments, what must he pay at the time the 13th is due to bring

him up to date?

(c) After making 8 payments, M wished to discharge his remaining indebtedness by a

single payment at the time when the 9th regular payment was due, what must he pay in addition to

the regular payment then due?

(d) If M missed the first 10 payments, what must he pay when the 11th payment is due to

discharge his entire indebtedness?

Given:
𝐹 = 𝑃ℎ𝑝 200,000.00
𝐴 = 𝑃ℎ𝑝 15,000.00
𝑚=4

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

𝑛 = 10 𝑦𝑒𝑎𝑟𝑠
𝑖 = 12% 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦

Solution:
Get the value of the cost of a lot (𝑃 )
 𝑃 =𝑃 +𝑃

First get the value of the lot (𝑃 )

( )
 𝑃 =𝐴
. ( )

 𝑃 = 15,000 .

 𝑃 = 𝑃ℎ𝑝 346,721.58

Substitute the value to get the cost of a lot (𝑃 )

 𝑃 =𝑃 +𝑃
 𝑃 = 200,000 + 346,721.58
 𝑃 = 𝑃ℎ𝑝 546,721.58

Amount of payment at Period 13th (𝐹 )

( )
 𝐹 =𝐴
. ( )

 𝐹 = 15,000 .

 𝐹 = 𝑃ℎ𝑝 234,270.00

Remaining amount at Period 9th where n=40-9=31

( )
 𝑃=𝐴

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

 𝑃 = 15000 .

 𝑃 = 𝑃ℎ𝑝 300,006.00

Remaining amount at Period 11th where n=40-11=29

( )
 𝑃 =𝐴
.

 𝑃 = 15000 .

 𝑃 = 𝑃ℎ𝑝 287,826.82

Compounding amount at Period 11th where n=11

( )
 𝐹 =𝐴
.

 𝐹 = 15000 .

 𝐹 = 𝑃ℎ𝑝 192,11694
Sum up the remaining period and compounding amount
 𝑇𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 = 𝑃ℎ𝑝 479,948.00
Answer:
a. 𝑷𝑻 = 𝑷𝒉𝒑 𝟓𝟒𝟔, 𝟕𝟐𝟏. 𝟓𝟖
b. 𝑭𝟏𝟑 = 𝑷𝒉𝒑 𝟐𝟑𝟒, 𝟐𝟕𝟎. 𝟎𝟎
c. 𝑷 = 𝑷𝒉𝒑 𝟑𝟎𝟎, 𝟎𝟎𝟔. 𝟎𝟎
d. 𝑻𝒐𝒕𝒂𝒍 𝒂𝒎𝒐𝒖𝒏𝒕 = 𝑷𝒉𝒑 𝟒𝟕𝟗, 𝟗𝟒𝟖. 𝟎𝟎

Instructor: Engr. Michael Benjamin M. Diaz