E E C O 10 1

ENGINEERING ECONOMY
M od u l e 2 – Pa r t 4
Deferred Annuity
Deferred Annuity
• Annuity in which periodic payment (A) is neither at the
beginning nor end of each payment interval but some later
date.

• Deferment Period is the length of time for which there are no

payments.

• First payment occur after the deferment period.

Example
Fn
P0 F7
P2
A

0 1 2 3 4 5 6 7 8 … n
Present Value of a Deferred Annuity:
Textbook Formula
• The value of the annuity at point 0

• Compute the present value (P) of the ordinary annuity of the

𝒏 payments of 𝑨 at point 𝒅

• Discount 𝑷 for 𝒅 periods

o 𝒏 – number of payments made

o 𝒅 – number of payments missed

&'
1− 1+𝑖 &%
𝑃% = 𝐴 1+𝑖
𝑖
Present Value of a Deferred Annuity:
Textbook Formula
• Difference between the present value of the assumed and
actual payments and the present value of the assumed
payments

• 𝑃! = 𝑃𝑉 𝑜𝑓 (𝒅+𝒏)𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 − 𝑃𝑉 𝑜𝑓𝒅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

o 𝒏 – number of payments made

o 𝒅 – number of payments missed

&(%7') &%
1− 1+𝑖 1− 1+𝑖
𝑃% = 𝐴 −
𝑖 𝑖
Ordinary Annuity Technique: Finding P
when given A
Fn
P0 F7
P2
A

0 1 2 3 4 5 6 7 8 … n
1+𝑖 "−1 #"
𝐹! = 𝐴 𝑃! = 𝐹" 1 + 𝑖
𝑖
or
1+𝑖 "−1 #$
𝑃# = 𝐴 𝑃! = 𝑃$ 1 + 𝑖
𝑖 1+𝑖 "
Amount of a Deferred Annuity:
Textbook Formula

!"#
𝐹! = 𝑃! 1 + 𝑖
Ordinary Annuity Technique: Finding F
when given A
Fn
P0 F7
P2
A

0 1 2 3 4 5 6 7 8 … n
1+𝑖 "−1 %#"
𝐹! = 𝐴 𝐹% = 𝐹" 1 + 𝑖
𝑖
or
1+𝑖 "−1 %#$
𝑃# = 𝐴 𝐹% = 𝑃$ 1 + 𝑖
𝑖 1+𝑖 "
Example #1: During your first job, you opened an
account having an interest rate of 8% per year wherein
you made annual deposits of $5,000. Five years later,
you moved into a new job and opened another bank
account. How much can you withdraw from the first
account 35 years later?
Solution #1: Textbook
P0 F40
Solve for Pd using A. n=5, d=0
1 − 1 + 𝑖 %&
𝑃$ = 𝐴 1 + 𝑖 %$
𝑖
1 − 1 + 0.08 %" %'
𝑃' = $5000 1 + 0.08
0.08 0 1 2 3 4 5 … 40
𝑃' = $19,963.55

Then solve for Fd using P0. n=5, d=35

𝐹$ = 𝑃$ 1 + 𝑖 $(& $5,000
𝐹$ = $19963.55 1 + 0.08 )"("

𝐹$ = $433,698.58
Solution #1: Technique 1
P0 F40
Solve for 𝑃! using A.
1+𝑖 &−1
𝑃' = 𝐴
𝑖 1+𝑖 &
1 + 0.08 " − 1
𝑃' = $5,000
0.08 1 + 0.08 " 0 1 2 3 4 5 … 40
𝑃' = $19,963.55

Then solve for F40 using P0.

𝐹*' = 𝑃' 1 + 𝑖 &
$5,000
𝐹*' = $19963.550185 1 + 0.08 *'

𝐹*' = $433,698.58
Solution #1: Technique 2
F5 F40
Solve for 𝐹& using A.
1+𝑖 &−1
𝐹" = 𝐴
𝑖
1 + 0.08 " − 1
𝐹" = $5,000
0.08
0 1 2 3 4 5 … 40
𝐹" = $29,333.00

Then solve for 𝐹'! using 𝐹&

𝐹*' = 𝐹" 1 + 𝑖 &
𝐹*' = $29333.00 1 + 0.08 )" $5,000
𝐹*' = $433,698.58
Example #2: A series of eight monthly deposits of
P5,000 will start on the fifth month. If the interest rate
is 2% per month, determine the present and future
value of these cash flow.
Solution #2: Technique 1 n = 12
P0 months
F12
Solve for 𝐹($ using A.
1+𝑖 &−1
𝐹+# =𝐴
𝑖
1 + 0.02 , − 1
𝐹+# = 5,000
0.02
0 1 2 3 4 5 6 7 8 9 10 11 12
𝐹+# = 𝑃42,914.85

Then solve for 𝑃! using 𝐹($

𝐹+# = 1 + 𝑖 &
𝑃42,914.85 = 𝑃' 1 + 0.02 +#

𝑃' = 𝑃33,838.07
P5,000
n = 8 months
i = 2% per month
 Example #3: Find the present value of a deferred
annuity of P900 every three months for 5 years that is
deferred for 3 years, if money is worth 10%
compounded quarterly.
P0 = ?
Year 1 Year 2 Year 3 Year 4 Year 5

0 1 … 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

n = 20

P900
Solution #3: Technique 1

Solve for F32 using A.

1+𝑖 &−1
𝐹)# =𝐴
𝑖
0.10 #'
1+ 4 −1
𝐹)# = 900
0.10
4
𝐹)# = 𝑃22,990.19
Then solve for P0 using F32.
𝐹)# = 𝑃' 1 + 𝑖 &
𝑃22,990.19 = 𝑃' 1 + 0.1/4 )#

𝑃' = 𝑃10,432.27
Practice #1: Find the present value of an annuity of
P33,000 payable at the end of each year if the first
payment is made at the end of 3 years and the last
payment is made at the end of 9 years. Assume money
is worth 10% effective.

Answer: 𝑷𝟏𝟑𝟐,𝟕𝟕𝟓.𝟎𝟔
Practice #2: Find the quarterly payment for 21 quarters
to discharge an obligation of P120,000 if money is
worth 𝟒 𝟏/𝟐% compounded quarterly and the first
payment is due at the end of 3 years and 9 months.

Answer: 𝑷𝟕,𝟓𝟒𝟏.𝟎𝟏
Practice #3: Find the present value of a deferred
annuity of P4,800 every six months for 7 years, if the
first payment is made in 4 years, and money is worth
11% compounded semi-annually.

Answer: P 31,642,93
Practice #4: In a series of quarterly payments of P5,700
each, the first payment is due at the end of 5 years and
the last at the end of 10 years and 9 months. If money is
worth 6% compounded quarterly, find the present
value of the deferred annuity.

Answer: P 86,041.86
Practice #5: Find the present value of 10 semiannual
payments of P3,000 each if the first payment is due at
the end of 𝟑 𝟏/𝟐 years and money is worth 12%
compounded semiannually.

Answer: P 15,565.71
Practice #6: ME Board October 1996. You need P 4,000
per year for four years to go to college. Your father
invested P 5,000 in 7% account for your education
when you were born. If you withdraw P 4,000 at the
end of your 17th , 18th , 19th and 20th birthday, how much
will be left in the account at the end of the 21st year?

Answer #6: P1,699.85

Exercise #1: Find the present value of a P4,500 annuity
payable annually for 7 years and is deferred for 2 years
if money is worth 8% effective.

Exercise #2: A house costs P1.3 million cash. A buyer

bought it by paying P300,000 down payment and
would pay 48 monthly installments, the first of which is
due at the end of 1 year. If the rate of interest is 20.4%
compounded monthly, what is the monthly
installment?
Exercise #3: An investment of P5,500 is made at the
beginning of each month for 5 years and 5 months. If
interest is 15% compounded monthly, how much will
the investment be worth at the end of the term?

Exercise #4: Polly purchased a car. He paid P 150,000

as a down payment, and P 5,500 payable at the
beginning of each month for 48 months. If money is
worth 12% compounded monthly, what is the
equivalent cash price of the car?

Exercise #5: Pompei will pay off a debt of P 120,000 by

equal payments every beginning of each quarter for 10
years. If interest is charged at 11% compounded
quarterly, what will be the size of each payment?
Exercise #6: Find the present value of a series of
quarterly payments of P 950 each, the first payment is
due at the end of 2 years and 3 months, and the last at
the end of 5 years and 6 months, if money is worth 15%
compounded quarterly.

Exercise #7: Find the monthly payment for 36 periods

to discharge an obligation of P88,000, if money is
worth 12%, m=12 and the first payment is due at the
end of 1 year and 3 months.