EE 313 Engineering Economy

1st Semester 2023-2024

Practice Problem 3

TOPIC: Annuity
Direction: Read and analyze each problem. Provide a complete solution. You are only allowed to
round off in your final answer. Box your final answer.
Note: 1 point deduction for each erasure.
1. What is the present worth of a P500 annuity starting at the end of the third year and
continuing to the end of the fourth year, if the annual interest rate is 10%?
2. Today, a businessman borrowed money to be paid in 10 equal payments for 10 quarters. If the
interest rate is 10% compounded quarterly and the quarterly payment is P 2,000, how much
did he borrow?
3. What annuity is required over 12 years to equate with a future amount of P 20, 000? Assume
i= 6% annually.
4. Find the annual payment to extinguish a debt of P 10,000 payablefor6yearsat 12% interest
annually.
5. A manufacturer desires to set aside a certain sum of money to provide funds cover the yearly
operating expenses and the cost of replacing every year the dyes of a stamping machine used
in making radio chassis as model changes for a period of 10 years.
Operating Cost per year P500.00
Cost of dye P1,200.00
Salvage value of dye P600.00
The money will be deposited in a saving account which earns 6% interest. Determine the sum
of money that must be provided, including the cost of the initial dye.
6. A factory operator bought a diesel generator set for P 10,000.00 and agreed to pay the dealer
uniform sum at the end of each year for 5 years at 8% interest compounded annually, that the
final payment will cancel the debt for principal and interest. What is the annual payment?
7. A man paid 10% downpayment of p 200,000 for a house and lot and agreed to pay the 90%
balance on monthly installment for 60 months at an interest rate of 15% compounded
monthly. compute the amount of the monthly payment.
8. what is the present worth of a 3-year annuity paying P 3,000.00 at the end of each year, with
interest at 8% compounded annually?
9. What is the accumulated amount of five-year annuity paying P 6,000 at the end of each year,
with interest al 15% compounded annually?
10. A debt of P 10,000 with 10 % interest compounded semi-annually is to be amortized by semi-
annual payment over the next 5 years. The first due in 6 months. Determine the semi-annual
payment.
11. A man borrowed P 300, 000 from a lending institution which will be paid after 10 years at an
interest rate of 12% compounded annually. If money is worth 8% per annum, how much
should he deposit to a bank monthly in order to discharge his debt 10 years hence?
12. A man loans P 187,400 from a bank with interest at 5% compounded annually. He agrees to
pay his obligations by paying 8 equal annual payments, the first being due at the end of 10
years. Find the annual payments.
13. Money borrowed today is to be paid in 6 equal payments at the end of 6 quarters. If the
interest is 12% compounded quarterly. How much was initially borrowed if quarterly payment
is P 2,000.00?
14. A person buys a piece of lot for P 100, 000 downpayment and 10 deferred semi-annual
payments of P 8, 000 each, starting three years from now. What is the present value of the
investment if the rate of interest is 12% compounded semi-annually?

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15. How much must you invest today in order to withdraw p 2,000 annually for 10 years if the
interest rate is 9%?
16. How much must be deposited at 6% each year beginning on January 1, year 1, in order to
accumulate P 5,000 on the date of the last deposit, January 1, year 6?
17. A piece of machinery can be bought for P 10,000 loan or for P 2,000 down and payments of P
750 per year for 15 years. what is the annual interest rate for the time payments?
18. A company issued 50 bonds of P 1,000.00 face value each, redeemable at par at the end of 15
years to accumulate the funds required for redemption. The firm established a sinking fund
consisting of annual deposits, the interest rate of the fund being 4 %. What was the principal
in the fund at the end of the 12th year?
19. A house and lot can be acquired by a downpayment of P 500,000 and a yearly payment of P
100,000 at the end of each year for a period of 10 years, starting at the end of 5 years from
the date of purchase if money ln worth 14% compounded annually, what is the cash price of
the property?
20. A parent on the day the child is born wishes to determine what lump sum would have to be
paid into an account bearing interest at 5% compounded annually, in order to withdraw P
20,000 each on the child's 18th, 19th, 20th and 21st birthdays. How much is the lump sum
amount?
21. An instructor plans to retire in exactly one year and want an account that will pay him P
25,000 a year for the next 15 years. Assuming a 6 % annual effective interest rate, what is the
amount he would need to deposit now? (The fund will be depleted after 15 years).
22. A manufacturing firm wishes to give each 80 employees a holiday bonus. How much is needed
to invest monthly for a year al 12 % nominal interest rate compounded monthly, so that each
employee will receive a P 2,000 bonus?
23. A man purchased on monthly installment a P 100,000 worth of-land. The interest rate is 12 %
nominal and payable in 20 years. What is the monthly amortization?
24. A young engineer borrowed P 10,000 al 12 % interest and paid P 2,000 per annum for the last
4 years. What does he have to pay at the end of the fifth year in order to pay off his loan?
25. An investment of P 350,000 is made today and is equivalent to payments of P200,000 each
year for 3 years. What is the annual rate of return on investment for the project?
26. Maintenance cost of an equipment is P 200,000 for 2 years, P 40,000 at the end of 4 years
and P 80,000 at the end of 8 years. Compute the semi-annual amount that will be set aside
for this equipment. Money worth 10% compounded annually.
27. Mr. Cruz plans to deposit for the education of his 5 years old son, P 500 at the end of each
month for 1 0 years al 12o/o annual interest compounded monthly. The amount that will be
available in two years is ______________.
28. A small machine has an initial cost of P 20,000, a salvage value of P 2,000 and a life of 10
years. If your cost of operation per year is P 3,500 and your revenues per year is P 9,000,
what is the approximate rate of return (ROR) on the investment?
29. An employee is about to receive the sum of P 300.00 at the end of each year for 5 years. One
year prior to the receipt of the first sum, he decides to discount all 5 sums. If the interest rate
is 6%, what proceeds will he obtain?
30. The president of a growing engineering firm wishes to give each of 50 employees a holiday
bonusses. How much is needed to invest monthly for a year al 12% nominal rate compounded
monthly, so that each employee will receive a P1,000 00 bonus?
31. Mr. Robles plans a deposit of P 500 at the end of each month for 10 years at 12% annual
interest, compounded monthly. What will be the amount that will be available in two years?
32. Mr. Ramirez borrowed P 15,000 two years ago. The terms of the loan are 10% interest for 10
years with uniform payments. He just made his second annual payment. How much principal
does he still owe?
33. A man inherited a regular endowment of P 100,000 every end of 3 months for 10 years.
However, he may choose to get a single lump sum payment at the end of 4 years. How much
is this lump sum if the cost of money is 14% compounded quarterly?
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34. A man paid 10% down payment of P 200,000 for a house and lot and agreed to pay the
balance on monthly installments for "x" years at an interest rale of 15% compounded monthly.
If the monthly installment was P 42,821.87, find the value of x?
35. 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 21 st
year?
36. Mr. Ayala borrows P 100, 000 at 10% effective annual interest. He must pay back the loan
over 30 years with uniform monthly payments due on the first day of each month. What does
Mr. Ayala pay each month?
37. A machine is under consideration for investment. The cost of the machine is P25,000.00. Each
year it operates, the machine will generate a savings of P15,000.00. Given the effective annual
interest rate of 18%, what is the discounted payback period, in years, on the investment of
the machine?
38. A machine costs P 20,000.00 today and has an estimated scrap value of P2,000.00 after 8
years. Inflation is 2% per year. The effective annual interest rate earned on money invested is
8%. How much money needs to be set aside each year to replace the machine with an
identical model 8 years from now?
39. Engr. Sison borrows P 100, 000 at10% effective annual interest. He must pay back the loan
over 30 years with uniform monthly payment due on the first day of each month. What does
Engr. Sison pay each month?
40. Instead of paying P 100, 000 in annual rent for office space at the beginning of each year for
the next 10 years, an engineering firm has decided to take out a 10 – year P 1, 000, 000.00
loan for a new building at 6% interest. The firm will invest P 100, 000.00 of the rent saved and
earn 18% annual interest on the amount. What will be the difference between the firm`s
annual revenue and expenses?
41. A service car whose cash price was P 540,000 was bought with a downpayment of P 162,000
and monthly installment of P 10,874.29 for 5 years. what was the rate of interest if
compounded monthly?
42. What uniform annual amount should be deposited each year in order to accumulate P 100,
000.00 at the end of the 5th annual deposit if money earns 10% interest?
43. In five years, P 18, 0000 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 15% per annum?
44. Find the present value in pesos, of a perpetuity of pl 5,000 payable semiannually if money is
worth 8% compounded quarterly.
45. If P 500.00 is invested at the end of each year for 6 years, at an annual interest rate of 7Yo,
what is the total peso amount available upon the deposit oi the sixth payment?
46. How much money must you invest today in order to withdraw P 1,000.00 per year for 10 years
if the interest rale is 12%?
47. A man paid a 10% downpayment of P 200, 000 for a house and lot and agreed to pay the
balance on monthly installments for 5 years at an interest rate of 15% compounded monthly.
What was the monthly installments in pesos?
48. A man inherited a regular endowment of P 100,000.00 every end of 3 months for x years.
However, he may choose to get a single lump sum of P 3,702,939.80 at the end of 4 years. If
the rate of interest was 14o/o compounded quarterly, what is the value of x?
49. If you obtain a loan of P 1M at the rate ol112Yo compounded annually in order to build a
house, how much must you pay monthly to amortize the loan within a period of ten years?
50. Rainer Wandrew borrowed P 50,000.00 from Social Security System, in the form of calamity
loan, with interest at 8% compounded quarterly payable in equal quarterly installments for 10
years. Find the quarterly payments.

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 51. ln anticipation of a much bigger volume of business after 10 years, a fabrication company
purchased an adjacent lot for its expansion program where it hopes to put up a building
projected to cost P 4,000,000.00 when it will be constructed 10 years after. To provide the
required capital expense, it plans to put up a sinking fund for the purpose. How much must
the company deposit each year if interest to be earned is computed at 15%?
52. A man purchased a car with a cash price of P 350,000. He was able to negotiate with the
seller to allow him to pay only a downpayment of 20% and the balance payable in equal 48
end of the month installment at 1.5% interest per month. One the day he paid the 20th
installment, he decided to pay monthly payment. How much is his monthly payment?
53. A man purchased a car with a cash price of P 350,000. He was able to negotiate with the
seller to allow him to pay only a downpayment of 20% and the balance payable in equal 48
end of the month installment at 1.5% interest per month. One the day he paid the 20th
installment, he decided to pay monthly payment. What is the remaining balance that he paid?
54. A machinery supplier is offering a certain machinery on a 10% downpayment and the balance
payable in equal end of the year payments without interest for 2 years. Under this
arrangement, the price is pegged to be P 250,000. However, for cash purchase, the machine
would only cost P 195,000. What is the equivalent interest rate that is being charged on the 2-
year payment plan if interest is compounded quarterly?
55. A company has approved a car plan for its six senior officers in which the company will
shoulder 25% of the cost and the difference payable by each officer to a financing company in
48 equal ends of the month installments at an interest rate of 1.5% per month. If the cost of
each car is P 350,000, determine the amount each officer has to pay the financing company
per month?

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