ANNUITY

Prepared by Allyssa Therese Lingat

An annuity is a fixed
income over a period
of time.
EXAMPLE: YOU GET $200 A WEEK
FOR 10 YEARS.
 ANNNUITY
PERIODIC STREAM OF EQUAL CASH
FLOW AT EQUAL TIME INTERVALS
(ANNUALLY, MONTHLY, ETC.).
FOR EXAMPLE, PAYMENT FOR A CERTAIN
ITEM SHALL BE FOR 12 EQUAL MONTHLY
INSTALMENTS OF PHP1,000.
How do you get
such an
income? You buy
it!
YOU PAY THEM ONE LARGE
AMOUNT, THEN

THEY PAY YOU BACK A SERIES

OF SMALL PAYMENTS OVER
TIME
Example: You buy an annuity
It costs you $20,000
And in return you get $400 a
month for 5 years
$400 A MONTH FOR 5 YEARS
= $400 × 12 × 5 = $24,000
 Present of an Ordinary
Annuity

1
1-
Cash Flow x (1+r)^t
r
MR. YUSOPH WANTS TO BUY A PAIR OF SHOES
WORTH P10,500. HE HAS THE OPTION OF PAYINGIT
TODAY FOR PHP10,500 OR BUYING IN INSTALMENT
WHERE HE HAS TO PAY A DOWN PAYMENT OF
PHP4,000 TODAY, AND THE BALANCE WILL BE PAID
IN TWO EQUAL PAYMENTS OF PHP4,000 EACH FOR
THE NEXT TWO YEARS. GIVEN AN INTEREST RATE OF
10%, WHICH IS THE BETTER OPTION?
PV = 4,000 + 4000 x (PVA
factor: 1.7355 period=2,
rate=10%) = PHP10,932.00 for
buying on installment vs. PV
PHP10,500 for buying today.
 THE TIME VALUE OF MONEY ANALYSIS HELPS
MANAGERS AND INVESTORS COMPARE CASH FLOWS
TODAY VERSUS
CASH FLOW IN THE FUTURE
THANK YOU FOR
LISTENING