Petroleum Department Third Stage Petroleum Economics ANNUITIES Annuity is a sequence of equal payments made at equal periods of time is called an annuity. OR An Annuity: represents a series of equal payments (or receipts) occurring over a specified number of equidistant periods, Types of Annuities There are two types of annuities: 1, Ordinary Annuity 2. Annuity Due Ordinary Annuity: Payments or receipts occur at the end of each period Annuity Due: Payments or receipts occur at the beginning of each period Parts of an Annuity: A) Ordinary Annuity. End of End of Period 1 Period 2 Period 3 NN ae $100— $100 ___- $100 i Today Equal Cash Flows Each 1 Period Apart B) Annuity Due. Beginning of Beginning of Beginning of Period 1 Period 2 Period 3 3 190 Equal Cash Flows Each 1 Period Apart Lecture3 8/12/2016Petroleum Department Third Stage Petroleum Economics > Amount (Future Value) of ordinary annuity Amount of an annuity - S$ OR FV (future value) of n payments of R dollars for n periods at a rate of i per period: Where: S: is the future value; Ris the periodic payment; i: is the interest rate per period; n: is the number of periods. Ex.15: You deposit $500 in the bank at the end of each year for 5 years. How much money will you have after the last deposit if the bank pays 5% interest compounded annually? Solution: Ex.16: For S = $50000, i = 7% compounded semi-annually with payments made at the end of each semi-annual period for 8 years, find the periodic payment (R). Solution: Lecture3 8/12/2016Petroleum Department Third Stage Petroleum Economics Ex.17: For S = $21000, payments (R) of $1500 at the end of each 6-month period i = 10% compounded semi-annually. Find the minimum number of payments to accumulate 21000. Solution: R= Periodic Cash Flow R i I La $1,000 $1,070 $1,145 $3,215 = FVA, Lecture3 8/12/2016Petroleum Department Third Stage Petroleum Economics > Amount (Present Value) of ordinary annuity Present value of an annuity (A) made up of payments of R dollars for n periods at a rate of i per period: PER poo =Ramyy ~ Ex.18: Find the present value of ordinary annuity. Payments of $890 each year for 16 years at 6% compounded annually. Solution: R = Periodic Cash Flow Lecture3 8/12/2016