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Solved Problems For Deferred Annuity

The document contains 10 solved problems regarding deferred annuities, sinking funds, and compound interest calculations. The problems involve calculating payments, interest rates, present and future values over various time periods. Formulas for annuity payments, sinking funds, and interest compounds are used to solve for unknown values like payment amounts, interest rates, and lump sums.

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jaine ylevreb
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46K views6 pages

Solved Problems For Deferred Annuity

The document contains 10 solved problems regarding deferred annuities, sinking funds, and compound interest calculations. The problems involve calculating payments, interest rates, present and future values over various time periods. Formulas for annuity payments, sinking funds, and interest compounds are used to solve for unknown values like payment amounts, interest rates, and lump sums.

Uploaded by

jaine ylevreb
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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SOLVED PROBLEMS FOR

DEFERRED ANNUITY

PROBLEM 1

A BUSINESSMAN BORROWED P500,000 WITH INTEREST AT THE RATE OF 8% COMPOUNDED


SEMI-ANNUALLY. HE AGREES TO DISCHARGE HIS OBLIGATION BY PAYING A SERIES OF 8 EQUAL
SEMI-ANNUAL PAYMENTS , THE FIRST BEING DUE AT THE END OF 5 ½ YEARS . FIND THE SEMI -
ANNUAL PAYMENT .
SOLUTION:
𝐴 [(1 + 𝑖)𝑛 − 1]
P1 =
(1 + 𝑖)𝑛 𝑖

𝐴 [(1.04)8 − 1]
P1 =
(1.04)8 (0.04)

P1 = 6.7327 A

P1 = P(1 + 𝑖)N

6.7327 𝐴 = 500,000 (1.04)10

𝐴 = 109,928.74

PROBLEM 2

IF MONEY IF WORTH 8% COMPOUNDED SEMI-ANNUALLY, FIND THE PRESENT VALUE OF A


SEQUENCE OF 12 SEMI-ANNUALLY PAYMENTS AT P300 EACH, THE FIRST OF WHICH IS DUE AT
THE END OF 4 ½ YEARS.
SOLUTION:
𝐴 [(1 + 𝑖)𝑛 − 1]
P1 =
(1 + 𝑖)𝑛 𝑖
0.08
𝑖= = 0.04
2
300 [(1.04)12 − 1]
P1 =
(1.04)12 (0.04)

P1 = 2815.52
P1
P=
(1 + 𝑖)𝑛
2815.52
P=
(1.04)8

P = 2057.27

PROBLEM 3

THE RTU SCHOOL OF ENGINEERING NEEDS P50M TO PAY FOR THE BUILDING RENOVATION IN 6
YEARS. TO GENERATE THIS SUM , A SINKING FUND CONSISTING OF FOUR ANNUAL PAYMENTS IS
ESTABLISHED NOW . FOR TAX PURPOSES , NO FURTHER PAYMENTS WILL BE MADE AFTER FOUR
YEARS. WHAT ARE THE NECESSARY IS WORTH 20% PER ANNUM ?
SOLUTION:
50
𝐹=
(1.2)2

𝐹 = 34.72 𝑀
𝐴 [(1 + 𝑖)𝑛 − 1]
𝐹=
𝑖
𝐴 [(1.2)4 − 1]
34.72 =
0.2
𝐴 = 6.45 𝑀

PROBLEM 4
MR. ARAGON LOANS P200,000 FROM A BANK WITH INTEREST AT 6% COMPOUNDED ANNUALLY.
HE AGREES TO PAY HIS OBLIGATIONS BY PAYING 8 EQUAL ANNUAL PAYMENTS, THE FIRST BEING
DUE AT THE END OF 10 YRS. FIND THE ANNUAL PAYMENTS.
SOLUTION:
𝐴 [(1 + 𝑖)𝑛 − 1]
P1 =
(1 + 𝑖)𝑛 𝑖

𝐴 [(1.06)8 − 1]
P1 =
(1.06)8 (0.06)

𝑃1 = 6.21 𝐴

𝑃1 = 𝑃2 (1 + 𝑖)𝑛

6.21𝐴 = 200,000 (1.06)9

𝐴 = 54,413.37

PROBLEM 5

A PARENT ON THE DAY THE CHILD IS BORN WISHES TO DETERMINE WHAT LUMP SUM WOULD
HAVE TO BE PAID INTO AN ACCOUNT ANNUALLY, IN ORDER TO WITHDRAW P40,000.00 EACH ON
THE CHILD’S 18TH, 19TH, 20TH, AND 21ST, BIRTHDAYS.
SOLUTION:
𝐴 [(1 + 𝑖)𝑛 − 1]
P1 =
(1 + 𝑖)𝑛 𝑖

40,000 [(1.05)4 − 1]
P1 =
(1.05)4 (0.05)

𝑃1 = 141,838.0202
141,838.0202
𝑃2 =
(1.05)17

𝑃2 = 61,883.46
PROBLEM 6

IN FIVE YEARS, P32,000 WILL BE NEEDED TO PAY FOR A BUILDING RENOVATION. IN ORDER TO
GENERATE THIS SUM , A SINKING FUND CONSISTING OF THREE ANNUAL PAYMENTS IS
ESTABLISHED NOW . FOR TAX PURPOSES , NO FURTHER PAYMENT WILL BE MADE AFTER THREE
YEARS. WHAT PAYMENTS ARE NECESSARY IF MONEY IS WORTH 12% PER ANNUM ?

SOLUTION:
𝐴 [(1 + 𝑖)𝑛 − 1
𝐹=
𝑖
𝐴 [(1.12)3 − 1
𝐹=
0.12
𝐹 = 3.3744 𝐴
𝐹2 = 𝐹 (1 + 𝑖)𝑛
32,000 = 3.3744𝐴 (1.12)2
𝐴 = 7560

PROBLEM 7

MR. SANTOS WISHES TO PROVIDE P5000 FOR HIS SON ON HIS 21ST BIRTHDAY. HOW MUCH
SHOULD HE DEPOSIT EVERY 6 MONTHS IN A SAVINGS BANK WHICH PAYS 4% CONVERTED SEMI -
ANNUALLY, IF THE FIRST DEPOSIT IS MADE WHEN THE SON IS 3 ½ YEARS OLD?

SOLUTION:
𝑖 = 0.04 (𝑎𝑙𝑟𝑒𝑎𝑑𝑦 𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑒𝑑)
𝐴 [(1 + 𝑖)𝑛 − 1
𝐹=
𝑖
𝐴 [(1.04)36 − 1
4000 =
0.04
𝐴 = 51.55 𝑎𝑚𝑜𝑢𝑛𝑡 ℎ𝑒 𝑠ℎ𝑜𝑢𝑙𝑑 𝑑𝑒𝑝𝑜𝑠𝑖𝑡 𝑒𝑣𝑒𝑟𝑦 6 𝑚𝑜𝑛𝑡ℎ𝑠
PROBLEM 8

MS. MOLINA BORROWED P350,000 FROM A LENDING INSTITUTION WHICH WILL BE PAID AFTER
10 YRS. AT AN INTEREST RATE OF 15% COMPOUNDED ANNUALLY. IF MONEY IS WORTH 10%
PER ANNUM HOW MUCH SHOULD BE DEPOSIT TO A BANK MONTHLY IN ORDER TO DISCHARGE HIS
DEPTHS 10 YRS. HENCE ?

SOLUTION:
𝐹1 = 𝐴(1 + 𝑖)𝑛
𝐹1 = 350,000(1.15)10
𝐹1 = 1415945.207
𝐴 [(1 + 𝑖)𝑛 − 1
𝐹2 =
𝑖
𝑛 = 10(12) = 120
0.1
𝑖= = 0.00833
12
𝐴 [ (1.00833)120 − 1]
1,415,945 =
(0.00833)
𝐴 = 6,913.86

PROBLEM 9

AN OLD BOILER COST P3,000 A YEAR TO MAINTAIN. WHAT EXPENDITURES FOR A NEW BOILER IS
JUSTIFIED IF NO MAINTENANCE WILL BE REQUIRED FOR THE FIRST 3 YEARS, P500 PER YEAR
FOR THE NEXT 7 YEARS, AND P2,500 A YEAR THEREAFTER ? ASSUME MONEY AND NO OTHER
COST 3% COMPOUNDED ANNUALLY AND NO OTHER COST TO BE CONSIDERED.

SOLUTION:
𝐴 [(1 + 𝑖)𝑛 − 1]
𝑃=
(1 + 𝑖)𝑛 𝑖

500 [(1.03)3 − 1]
𝑃1 =
(1.03)3 (0.03)

𝑃1 = 1,414.31

2,500 [(1.03)10 − 1]
𝑃2 =
(1.03)10 (0.03)
𝑃2 = 21,325.51

𝑃 = 𝑃1 + 𝑃2

𝑃 = 22,739.82

PROBLEM 10

A FUND FOR REPLACEMENT OF MACHINERY IN A PLANT MUST CONTAIN P25,000 AT THE END OF
9 YEARS. IF THE FUND IS INVESTED AT 2.8% COMPOUNDED SEMI-ANNUALLY, WHAT EQUAL
DEPOSITS SHOULD BE PLACED IN THE FUND AT THE END OF EACH 6 MONTHS JUST FOR THE FIRST
FOUR YEARS?

SOLUTION:
0.028
𝑖=
2

𝑖 = 0.014

𝐹1
𝐹=
(1 + 𝑖)𝑛

25,000
𝐹=
(1.014)10

𝐹 = 21,755.07

𝐴 [ (1.014)8 − 1]
21,755.07 =
0.014

𝐴 = 2588.912

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