SOUTHERN BICOL COLLEGES

Mabini St., Masbate City

College of Engineering

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ENGINEERING ECONOMICS
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MODULE ON
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ANNUITIES
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Abstract

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This module explores the concepts of ordinary annuities and annuities due, focusing on their applications in engineering
financial decisions such as project funding, equipment purchoses, and retirement planning. It provides detailed
explanations, formulas, and practical examples to understand the valuation of periodic payments.

Members:

Bercede, Christopher
Delera, Rad Ashley
Delos Santos, Vince
Dela Cruz, Rhea Mae P.
Espinosa, Crizel-Ann B.
Pagunsan, Angelica
INTRODUCTION:

Engineering Economics is a crucial discipline for engineering students

because it provides the knowledge and tools necessary to make informed

financial decisions in engineering projects. Understanding the time value of

money, cost analysis, and investment evaluation is essential for any engineer

who wants to plan, budget, or justify projects effectively. One of the

fundamental concepts in this field is annuities, which involve a series of equal

payments made at regular intervals.

Annuities are widely used in real-life engineering and financial

applications, such as evaluating loan payments, equipment purchase plans,

insurance premiums, and retirement funds. Proper understanding of annuities

enables engineers to compare alternatives, determine the best course of

action, and ensure that financial resources are used efficiently. This module

introduces the different types of annuities, explores their calculations, and

presents examples to help students apply these concepts in practical

scenarios.

This learning module aims to strengthen students' analytical skills in

evaluating uniform cash flows and equip them with the capability to solve

complex engineering-economic problems. By mastering these concepts,

students will be better prepared to make financial decisions that optimize

project performance, sustainability, and cost-effectiveness.

LEARNING OBJECTIVES:

1. Define annuities and explain their importance in engineering

economics

2. Identify and differentiate the different types of annuities

3. Solve problems involving present worth and future worth of annuities

4. Apply annuity concepts in real-life engineering situations

ANNUITY

An annuity is a sequence of equal payments made at regular intervals.

Annuities are widely used in savings programs, loan amortizations, pension

plans, and insurance policies. The study of annuities is an essential part of

financial mathematics because it applies the concept of the time value of

money.

Basic Concepts and Definitions

Payment (R): The fixed amount paid or received at each interval.

 Interest Rate per Period (i): The interest rate applied to each

payment period.

Nominal Rate: The stated annual interest rate.

Compounding Period: The frequency at which interest is calculated.

Number of Periods (n): The total number of payments.

Future Value (FV): The accumulated value of all payments at the end

of the annuity term.

Present Value (PV): The equivalent value today of all future

payments.

TYPES OF ANNUITY:

An annuity can take different forms depending on the timing of the

payments, frequency, and other conditions. While there are several types of

annuities, the most commonly studied and practically important are:

1. Ordinary Annuity

2. Annuity Due

Note: Other types of annuities also exist, such as:

Perpetuity: An annuity that continues indefinitely.

Deferred Annuity: Payments start after a certain period.

Compounded Continuously: is a method of calculating interest where the

interest is added to the principal an infinite number of times per period,

effectively compounding constantly.

Ordinary Annuity

An ordinary annuity is an annuity in which payments are made at the

end of each payment period.

Examples of Ordinary Annuities

• Monthly loan payments

• Credit card payments

• Rent paid at the end of the month

Formula:

Where:

• P =Present Worth

• A =Periodic payment

• i = Interest rate per period

• n = Number of periods
Present Worth

(1+𝑖)𝑛 −1
P= A ⟦(1+𝑖)𝑛 (1)⟧

Future Worth

(1+𝑖)𝑛 −1
F= A ⟦ ⟧
𝑖

Example Problems:

1. The Engineer's Car Loan Problem: Engr. Santos buys a car. After the

down payment, the remaining balance is PHP 800,000. The bank offers

an auto loan at 12% compounded monthly for 5 years. Calculate the

monthly amortization (A).

Analysis:

1. Identify P: The loan amount is what you get today (Time 0).

P=800,000.

2. Identify i: Rate is 12% per year, but payments are monthly.

12%
i =1% or 0.01 per month
12 𝑚𝑜𝑛𝑡ℎ𝑠

3. Identify n: 5 years × 12 months/year = 60 periods.

4. Formula: We have P, we need A. Use Capital Recovery.

 Calculation:

(1+𝑖)𝑛 −1
P= A ⟦(1+𝑖)𝑛 (𝑖)⟧

(1+0.01)60−1
800,000=A ⟦(1+0.01)60(1)⟧

Therefore:

A=PHP 17,795.56 per month

2. At 10% interests rate, how much should you invest today to be able to

withdraw ₱ 10,000 annually for 10 years?

Given:

I= 10% = 0.10

A= ₱ 10,000

N= 10

Find P=?

Solution:

(1+0.01)10−1
P= 10,000 ⟦(1+0.01)10 (10)⟧

Therefore:

P= 61,445.67
3. Money borrowed today is to be paid in 6 equal payments at the end of

six quarters. If the interests is 12% compounded quarterly, how much

was initially borrowed if quarterly payment is ₱ 2,000?

Given:

M= 4

N= 6

i= 12% = 0.12

0.12
i= = 0.03
4

A= ₱ 2,000

Find P?

Solution:

(1+0.03)6 −1
P= 2000 ⟦(1+0.03)6(0.03)⟧

Therefore:

P= ₱ 10,834.38

4. What is the present worth and accumulated amount of a ten year

annuity paying ₱ 10,000 at the end of each year with interest at 15%

compounded annually?

Given:

Annuity payment (A) = ₱10,000

Interest rate (i) = 15% = 0.15

Number of years = 10

Payments are made at the end of each year → ordinary annuity

We are asked to find:

• Present Worth (P)

• Accumulated Amount / Future Worth (F)

1. Present Worth (P)

Formula for present worth of an ordinary annuity:

(1+𝑖)𝑛 −1
P= A ⟦(1+𝑖)𝑛 (𝑖)⟧

Substitute the given values:

(1+0.15)−10−1
P= 10,000 ⟦(1+0.15)−10 (0.15)⟧

Therefore:

P= 50,187.69

2. Accumulated Amount / Future Worth (F)

Formula for future worth of an ordinary annuity:

(1+𝑖)𝑛 −1
F= A ⟦ ⟧
𝑖
 Substitute the values:

(1+0.15)10−1
F= 10,000 ⟦ ⟧
0.15

Therefore:

F= 203,037.18

5. An investment yields ₱30,000 annually for 3 years at 7% interest.

What's the present worth?

Given: i = 7% = 0.07

n=3

A = ₱30,000

Find: P=?

Solution:

(1+𝑖)𝑛 −1
P= A ⟦(1+𝑖)𝑛 (𝑖)⟧

Substitute the given values:

(1+0.07)3 −1
P= 30,000⟦(1+0.07)3 (0.07)⟧

Therefore:

P= ₱ 78,729.48
Annuity Due

An annuity due is a financial arrangement involving a series of equal

payments made at the beginning of each period over a specified length of

time. It is commonly encountered in real-life situations such as rent payments,

insurance premiums, tuition fees, and savings plans, where payments are

required in advance.

What distinguishes an annuity due from an ordinary annuity is the

timing of payments. Because payments in an annuity due are made earlier,

each payment earns interest for one additional period, resulting in a higher

present value and future value compared to an ordinary annuity with the same

payment amount, interest rate, and number of periods.

Understanding annuity due is important in finance and business

mathematics, as it helps individuals and organizations accurately evaluate the

true value of payments made in advance under different compounding periods

such as monthly, quarterly, or semi-annually.

An annuity due is an annuity where payments are made at the beginning

of each period.

Examples of Annuity Due

• Rent paid at the beginning of the month

 • Insurance premiums paid in advance

• Lease payments

Formula:

Present Worth

(1+𝑖)𝑛−1 −1
P= A ⟦(1+𝑖)𝑛−1 (1) + 𝐴⟧

Future Worth

(1+𝑖)𝑛+1 −1
F= A ⟦ − 𝐴⟧
𝑖

Example Problems:

1. A person deposits ₱2000 at the beginning of each month into a

savings account that earns 6% annual interest compounded monthly

for 3 years. Find the future value.

Given:

A=₱2000

I=6% or 0.06

Monthly rate: i = 0.06/12= 0.005

Find F=?

(1+𝑖)𝑛+1 −1
F =𝐴 [ ]-A
𝑖
 (1+0.005)36+1
F = 2000[ ] − 2000
0.005

Therefore:

F=₱ 79,067.57

2. An insurance policy requires ₱5,000 paid at the beginning of each

year 8 years. The interest rate is 7% per year. Find the present value.

Given:

A = ₱5,000

i = 7% or 0.07

n= 8 years

Find P=?

[(1+𝑖)𝑛−1 ]
P=A +𝐴
(1+𝑖)𝑛−1

[(1+0.07)8−1]
P=5000 (1+0.07)8−1 +5000

Therefore:

F=₱ 31, 946.45

3. On retirement, Anthony finds that his company pension calls for

payment of ₱300 to him or to his estate, if he dies, at the beginning

 of each month for 20 years. Find the present value of this pension at

5% compounded annually.

Given:

I=5% or 0.05

A= ₱300

n= 20X12=240

Monthly rate: i=0.05/12 = 0.00417

Find P=?

𝐴[(1+𝑖)𝑛−1 ]
P= (1+𝑖)𝑛−1(𝑖) +A

300[(1+0.00417)240−1 ]
P=(1+0.00417)240−1(0.00417)+300

Therefore:

P=₱45,361.87

4. Engr. Nielmar borrows ₱100,000.00 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 Engr.

Neilmar pay each month?

Given:

i=10% or 0.10

P= ₱100,000

n=30x12=360

Monthly rate i= 0.10/12=0.00833

 A=?

𝐴[(1+𝑖)𝑛−1 −1]
P= +A
(1+𝑖)𝑛−1 (𝑖)

𝐴[(1+0.00833)360−1 −1]
100,000=(1+0.00833)360−1(0.00833)+A

Therefore:

A=₱870.03

5. Under a factory savings plan, Raymond deposits ₱25.00 at the

beginning of each month for 4 years, and the management

guarantees accumulation at 6% compounded annually. How much

stands to the work man’s credit at the end of 4 years.

Given:

i=6% or 0.06

Monthly rate: i=0.06/12=0.005

n=4x12=48

Amount = ₱ 25.00

𝐴[(1+𝑖)𝑛+1 −1]
F= -A
𝑖

𝐴[(1+0.005)48+1 −1]
F= -25
0.005

Therefore:

F=₱1359.21
 SUMMARY COMPARISON TABLE

Feature Ordinary Annuity Annuity Due

Payment timing End of each period Beginning of each

period

First payment End of period 1 Time 0

Interest earned Less More

Present worth Lower Higher

Future worth Lower Higher

Typical Examples Loans, mortrages Rent, leases

IMPORTANT NOTE FOR STUDENTS

If payments are made at the beginning of the period → ANNUITY DUE

If payments are made at the end of the period → ORDINARY ANNUITY This

distinction is critical because it directly affects the value of money over time

and the final answer in engineering-economic analysis.

STUDENT WORKSHEET

Instructions: Solve the following problems. Show your box for the final

answer. Pay close attention to whether the payment is at the beginning or end

of the period.

Exercise Set 1: Concept Check

1. If you miss a payment in a series, can you still use the standard Annuity

formula for the whole duration? (Yes/No)

2. Which results in a higher Present Worth: Paying $100/year at the end of

the year, or $100/year at the start?

Exercise Set 2: Calculation

Problem 1: The High-Tech Laptop You purchase a high-performance laptop

for CAD work. The price is PHP 85,000. You pay PHP 15,000 down payment.

The rest is financed at 18% compounded monthly for 24 months.

A) What is the principal amount financed (P)?

B) What is the monthly payment (A)?

Problem 2: Retirement Goals A young engineer, age 25, decides to save

for retirement. She deposits PHP 20,000 at the end of every year. The account
earns 7% interest. She plans to stop depositing when she turns 60 (35

deposits).

• Calculate the total amount in the fund when she turns 60.

Problem 3: The Insurance Premium Your company pays a liability

insurance premium of PHP 12,000 at the start of every year. If the company

could invest money at 10%, what is the equivalent Present Worth of 5 years

of premiums?

Problem 4: Finding the Time (n) How many years will it take to save PHP

1,000,000 if you deposit PHP 50,000 at the end of each year with an interest

rate of 6%? (Hint: Use algebra to solve for n in the Future Worth formula)
QUIZ 1 ENGINEERING ECONOMICS ORDINARY ANNUITY

PART I – MULTIPLE CHOICE

Encircle the letter of the correct answer.

1. An ordinary annuity is characterized by payments made:

A. At the beginning of each period

B. At the end of each period

C. Irregularly

D. Continuously

2. Which of the following is an example of an ordinary annuity?

A. Rent paid at the beginning of the month

B. Tuition paid at the start of the semester

C. Monthly car loan payment

D. Insurance premium paid in advance

3. In an ordinary annuity, the first payment occurs:

A. At time zero

B. At the end of Period 1

C. At the middle of the period

D. After the last period

4. The present worth formula for an ordinary annuity is:

(1+𝑖)𝑛 −1
A. P= A ⟦ ⟧
𝑖

(1+𝑖)𝑛 −1
B. P= A ⟦(1+𝑖)𝑛 (1)⟧
 C. P= A (1+i)𝑛

D. P= A x n

5. Compared to an annuity due, an ordinary annuity has:

A. A higher future worth

B. A higher present worth

C. The same value

D. A lower value

6. A 12% nominal rate compounded monthly corresponds to an interest

rate per period of:

A. 12%

B. 1%

C. 0.12%

D. 6%

7. Loan amortization schedules commonly use:

A. Annuity due

B. Perpetuity

C. Ordinary annuity

D. Deferred annuity

8. The number of periods n is equal to:

A. Interest rate × time

B. Time ÷ interest rate

C. Payment × compounding frequency

 D. Time × compounding frequency

9. The future worth of an ordinary annuity represents:

A. The value of the first payment

B. The value of all payments at time zero

C. The accumulated value at the end of n periods

D. The nominal sum of payments

10. Ordinary annuity payments earn interest:

A. Before payment

B. For an extra period

C. After payment

D. Continuously

PART II – PROBLEM SOLVING

11. Monthly Loan Payment (10 points) An engineer borrows ₱500,000 to

be paid over 5 years at 12% interest compounded monthly.

a. Determine the monthly interest rate.

b. Determine the total number of payments.

c. Compute the monthly payment.

 12. Present Worth Calculation (10 points) How much should be invested

today to receive ₱18,000 annually for 10 years at 8% interest compounded

annually?

PART III – SHORT ANSWER

13. Explain why ordinary annuity payments are less valuable than annuity

due payments.

14. Give two real-life examples of ordinary annuities in engineering or

finance.

QUIZ 2 ENGINEERING ECONOMICS ORDINARY ANNUITY

PART I – MULTIPLE CHOICE

1. An annuity due is characterized by payments made:

A. At the end of each period

B. At the beginning of each period

C. At irregular intervals

D. After the final period

2. Which of the following is an example of an annuity due?

A. Monthly mortgage payment

B. Credit card payment

C. Rent paid at the beginning of the month

 D. Loan amortization

3. In an annuity due, the first payment is made:

A. At the end of Period 1

B. After one period

C. At time zero

D. At the end of the annuity

4. The present worth of an annuity due is computed by:

A. Dividing the ordinary annuity value by (1+i)

B. Using the same formula as ordinary annuity

C. Multiplying the ordinary annuity present worth by (1+i)

D. Subtracting one payment

5. Annuity due has a higher value because:

A. Payments are larger

B. Interest rate is higher

C. Payments earn interest for one extra period

D. There are more payments

6. Which formula represents the future worth of an annuity due?

(1+𝑖)𝑛−1 −1
A. P= A ⟦(1+𝑖)𝑛−1 (1) + 𝐴⟧

(1+𝑖)𝑛+1 −1
B. P= A ⟦ − 𝐴⟧
𝑖

𝐴
C. P=
(1+𝑖)𝑛
 D. P= A x n

7. Which type of payment commonly follows an annuity due pattern?

A. Loan amortization

B. Credit card balance

C. Lease payments

D. Mortgage payments

8. Compared to ordinary annuity, annuity due always has:

A. Lower future worth

B. Lower present worth

C. Equal value

D. Higher present and future worth

9. An annuity due payment at time zero earns interest for:

A. Zero periods

B. One period

C. Two periods

D. No interest

10. Insurance premiums paid in advance are examples of:

A. Ordinary annuity

B. Deferred annuity

C. Annuity due

D. Perpetuity
 PART II – PROBLEM SOLVING

11. Present Worth of Rent (10 points) An engineer pays ₱20,000 at the

beginning of each month for 3 years. If the interest rate is 9% compounded

monthly, compute the present worth of the rent payments.

12. Future Worth of Savings (10 points) A company deposits ₱30,000 at

the beginning of each year for 6 years into a fund earning 7% interest

annually. Find the future worth.

PART III – SHORT ANSWER

13. Explain the main difference in timing between ordinary annuity and

annuity due.)

14. Why is annuity due more appropriate for rent and lease agreements?

STUDENT WORKSHEET

Instructions: Solve the following problems. Show your box for the final

answer. Pay close attention to whether the payment is at the beginning or end

of the period.

Exercise Set 1: Concept Check

1. If you miss a payment in a series, can you still use the standard Annuity

formula for the whole duration? (Yes/No)

2. Which results in a higher Present Worth: Paying $100/year at the end of

the year, or $100/year at the start?

Exercise Set 2: Calculation

Problem 1: The High-Tech Laptop You purchase a high-performance laptop

for CAD work. The price is PHP 85,000. You pay PHP 15,000 down payment.

The rest is financed at 18% compounded monthly for 24 months.

A) What is the principal amount financed (P)?

B) What is the monthly payment (A)?

Problem 2: Retirement Goals A young engineer, age 25, decides to save

for retirement. She deposits PHP 20,000 at the end of every year. The account

earns 7% interest. She plans to stop depositing when she turns 60 (35

deposits).

• Calculate the total amount in the fund when she turns 60.
Problem 3: The Insurance Premium Your company pays a liability

insurance premium of PHP 12,000 at the start of every year. If the company

could invest money at 10%, what is the equivalent Present Worth of 5 years

of premiums?

Problem 4: Finding the Time (n) How many years will it take to save PHP

1,000,000 if you deposit PHP 50,000 at the end of each year with an interest

rate of 6%? (Hint: Use algebra to solve for n in the Future Worth formula)