A deferred annuity is a type of annuity where the first payment does not begin until some later date

in the cash flow.

n1 n2
0 5 10

A A A A A
P1
P
F

Formula:

Present worth, P

A[1 − (1 + i)−n2 ](1 + i)−n1

P=
i
Future worth, F

A[(1 + i)n2 − 1]
F=
i
Sample Cash Flow Diagram:
How to determine n1 and n2
ntotal = n1 + n2
n2 = number of payments

1. 10 equal annual payments the first due at the end of 9 year

n1 = 8 n2 = 10

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

A A A A A A A A A A
(since it is annually, first payment is when n = 9)

2. 8 equal semi-annual payments, the first being due at the end of 5 ½ years

n1 = 10 n2 = 8

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

8 A A A A
A A A A
 (since it is semiannual payment, first payment is when n =11 after 51/2 years )
(1 year = 2 semi-annual = 2 periods)
3. 8 quarterly payments, first payment at the then of two years

n1 = 7 n2 = 8

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

A A A A A A A A

(since it is quarterly payment, first payment is when n = 8 after 2 years )

(1 year = 4 quarters = 4 periods)

Application Problems

1. A lathe for a machine shop costs P60, 000 if paid in cash. On the instalment plan, a purchaser should pay
P20, 000 down payment and 10 quarterly instalments, the first due at the end of the first year after
purchase. If money is worth 15% compounded quarterly, determine the quarterly instalment.

Given:
Total Cost = P 60,000.00
DP = P 20,000.00
Balance = P 60,000.00 − P 20,000.00
Balance = P 40,000.00
𝑛2 = 10
𝑛1 = 3 (The first due at the end of first year after purchase, so
𝑛1 𝑖𝑠 3 𝑏𝑒𝑐𝑎𝑢𝑠𝑒 𝑎 𝑦𝑒𝑎𝑟 ℎ𝑎𝑑 4 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑠)
n1 =3 n2 = 10

0 1 2 3 4 5 6 7 8 9 10 11 12 13

A A A A A A A A A A
m = 4(Compounded quarterly)
i = 0.15

Required:
Quarterly Payment, 𝐴

Solution:
A[1 − (1 + i)−n2 ](1 + i)−n1
P=
i
Pi
A=
[1 − (1 + i)−n2 ](1 + i)−n1

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 0.15
P 40,000 ( 4 )
A=
0.15 −10 0.15 −3
[1 − (1 + 4 ) ] (1 + 4 )
𝐀 = 𝐏 𝟓, 𝟒𝟑𝟗. 𝟏𝟖

2. A man loans P187, 400 from a bank with interest at 5% compounded annually. He agrees to pay his
obligation by paying 8 equal annual payments, the first being due at the end of 10 years. Find the annual
payments.

Given:
P = P 187,400.00
n2 = 8
n1 = 9 (Because the 1st payment is at the 10th year)
m = 1(Compounded Annually)
i = 0.05

n1 = 9 n2 = 8

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

A A A A A A A A

Required:
Annual Payment, 𝐴

Solution:
A[1 − (1 + i)−n2 ](1 + i)−n1
P=
i
Pi
A=
[1 − (1 + i)−n2 ](1 + i)−n1
P 187,400.00(0.05)
A=
[1 − (1 + 0.05)−8 ](1 + 0.05)−9
𝐀 = 𝐏 𝟒𝟒, 𝟗𝟖𝟎. 𝟓𝟔

3. A house and lot can be acquired by a down payment of P500, 000 and a yearly payment of ten P100, 000
at the end of 5 years from the date of purchase. If money is worth 14% compounded annually, what is the
cash price of the property?

Given:
DP = P 500,000.00
A = P 100,000.00
n2 = 10
n1 = 4

n1 = 4 n2 = 10

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

A A A 10A A A A A A A
 m = 1(Compounded Annually)
i = 0.14

Required:
Cash Price of the property, 𝐷𝑃 + 𝑃

Solution:
A[1 − (1 + i)−n2 ](1 + i)−n1
P=
i
P 100,000.00[1 − (1 + 0.14)−10 ](1 + 0.14)−4
P=
0.14
P = P 308,835.92
Total Cash Price = DP + P
Total Cash Price = P 500,000.00 + P 308,835.92
𝐓𝐨𝐭𝐚𝐥 𝐂𝐚𝐬𝐡 𝐏𝐫𝐢𝐜𝐞 = 𝐏 𝟖𝟎𝟖, 𝟖𝟑𝟓. 𝟗𝟐

4. A Civil Engineering student borrowed P2, 000 to meet college expenses during his senior year. He
promised to repay the loan with interest at 4. 5% in 10 equal compounded semi-annual instalments, the
first payment to be made 3 years after the date of the loan. How much will this payment be?

Given:
P = P 2,000.00
𝑛2 = 10
𝑛1 = 5
n1 = 5 n2 = 10

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

A A A A A A A A A A

m = 2 (Semi − Annually)
i = 0.045
Required:
Semi-annual Payment, 𝐴

Solution:

A[1 − (1 + i)−n2 ](1 + i)−n1

P=
i
Pi
A=
[1 − (1 + i)−n2 ](1 + i)−n1

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 0.045
P 2,000.00 ( 2 )
A=
0.045 −10 0.045 −5
[1 − (1 + 2 ) ] (1 + 2 )
𝐀 = 𝐏 𝟐𝟓𝟐. 𝟏𝟐

5. A man invested P 1,000.00 per month on a bank that offers 6% interest. How much can he get after 5
years?
Given:
A = P 1,000.00
𝑛2 = 5
m = 12 (Monthly)
𝑖𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦 = 0.06

Required:
Future worth, 𝐹

Solution:
Solve the 𝑖𝑚𝑜𝑛𝑡ℎ𝑙𝑦 based on monthly compounding: because the investment is by monthly.
ir(monthly) = ir(annually)
𝑁𝑅𝑚𝑜𝑛𝑡ℎ𝑙𝑦 12 0.06 1
[1 + ] − 1 = [1 + ] − 1
12 1
Using either analytical or numerical method, the value of 𝐍𝐑 𝐦𝐨𝐧𝐭𝐡𝐥𝐲 will be:
𝐍𝐑 𝐦𝐨𝐧𝐭𝐡𝐥𝐲 = 𝟎. 𝟎𝟓𝟖𝟒 𝐨𝐫 𝟓. 𝟖𝟒%

A[(1 + i)n2 − 1]
F=
i
0.0584 (12)(5)
P 1,000.00 [(1 + 12 ) − 1]
F=
0.0584
12
𝐅 = 𝟔𝟗, 𝟒𝟖𝟑. 𝟖𝟗
References:

1. Fundamental of Engineering Economics by Chan S. Park 2004

2. Engineering Economy by Jaime R. Tiong 2002
3. Engineering Economy 10th Edition by William Sullivan 1997
4. Engineering Economy 3rd Edition by Matias Arreola 1993
5. Engineering Economy 2nd Edition by Hipolito Sta. Maria 1993
6. Engineering economics 2nd Edition by Venancio I. Besavilla Jr. 1989

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