EULOGIO “AMANG” RODRIGUEZ INSTITUTE OF SCIENCE

AND TECHNOLOGY
NAGTAHAN, SAMPALOC MANILA

ENGINEERING ECONOMY
Homework No. 1

Patrick Rain O. Santiago September 1, 2018

ECE – 4 Saturday, 8:00-11:00AM

Engr. Ronald B. Baral ECE, ECT

INSTRUCTOR
An annuity is a series of payments made at equal intervals. Examples of annuities are
regular deposits to a savings account, monthly home mortgage payments,
monthly insurance payments and pension payments. Annuities can be classified by the
frequency of payment dates. The payments (deposits) may be made weekly, monthly,
quarterly, yearly, or at any other regular interval of time.

What is an 'Ordinary Annuity'

An ordinary annuity is a series of equal payments made at the end of consecutive periods over a
fixed length of time. While the payments in an annuity can be made as frequently as every week, in
practice, ordinary annuity payments are made monthly, quarterly, semi-annually or annually. The
opposite of an ordinary annuity is an annuity due, which is when payments are made at the
beginning of each period.

What is a 'Deferred Annuity'

A deferred annuity is a type of annuity contract that delays income, installment or lump-sum
payments until the investor elects to receive them. This type of annuity has two main phases: the
savings phase, which is when you invest money into the account, and the income phase, which is
when the plan is converted into an annuity begins paying the account owner. A deferred annuity
can be variable or fixed.

What is 'Annuity Due'

Annuity due is an annuity whose payment is due immediately at the beginning of each period. A
common example of an annuity due payment is rent, as landlords often require payment upon the
start of a new month as opposed to collecting it after the renter has enjoyed the benefits of the
apartment for an entire month.

What does 'Perpetuity'

Perpetuity refers to an infinite amount of time. In finance, perpetuity is a constant stream of
identical cash flows with no end. The present value of a security with perpetual cash flows can be
determined as:

The concept of a perpetuity is also used in a number of financial theories, such as in the dividend
discount model (DDM).
Perpetuity Formula
The basic method used to calculate a perpetuity is to divide cash flows by some discount rate. The
formula used to calculate the terminal value in stream of cash flows for valuation purposes is bit
more complicated. It is the estimate of cash flows in year 10 of the company, multiplied by one plus
the company’s long-term growth rate, and then divided by the difference between the cost of
capital and the growth rate. Simplified, the terminal value is some amount of cash flows divided by
some discount rate, which is the basic formula for a perpetuity.

What is 'Depreciation'
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life
and is used to account for declines in value. Businesses depreciate long-term assets for both tax and
accounting purposes. For tax purposes, businesses can deduct the cost of the tangible assets they
purchase as business expenses; however, businesses must depreciate these assets according
to IRS rules about how and when the company can take the deduction.

Straight-Line Depreciation
The straight-line method uses the estimated salvage value (scrap value) of an asset at the end of its
life and then subtracts that value from its original cost. The difference is equal to the value that is
lost during the asset's productive use. Once figured, this number is divided by the management's
best-guess estimate of the number of years that the asset will be useful.

Declining Balance Depreciation

The declining balance method, a type of accelerated depreciation, is a method used to write off
depreciation costs more quickly and minimize tax exposure. The most common form of declining
balance is the double-declining balance, which is calculated by multiplying the straight-line rate by
two (2).
Usually, the declining balance method applies a higher depreciation charge to the first year of an
asset's life and then gradually decreases depreciation expenses for future years.

Sum-of-the-Years' Digits Depreciation

The sum-of-the-years' digits method offers as depreciation rate that accelerates more than the
straight-line method but less than the declining balance method. Annual depreciation is separated
into fractions using the number of years of the asset's useful life.
For example, an asset with a useful life of five years will have a sum-of-the-years value of 15 (5 + 4 +
3 + 2 + 1). The first year is assigned a value of 5, the second year a value of 4 and so on. The
depreciation rate for the first year is the straight-line value multiplied by the first year's fraction (5
÷ 15, or one-third).
Units of Production Depreciation
Units of production assign an equal expense rate to each unit produced, which makes it most useful
for assembly or production lines. The formula involves using historical costs and estimated salvage
values and then determining the expense for the accounting period, multiplied by the number of
units produced.