Annuity- Deferred Annuity

Exercises
 Exercise 1
To withdraw the following $1,000 payment series, determine the
minimum deposit (P) you should make now if your deposits earn an
interest rate of 10%, compounded annually. Note that you are making
another deposit at the end of year 7 in the amount of $500. With the
minimum deposit P, your balance at the end of year 10 should be zero.
 Answer
Solving using present:

P= 1000(P/A,10%,6) -500(P/F,10,7) +1000(P/A,10,3)(P/F,10,7)

P=1000(4.3553) – 500(0.5132) + 1000(2.4869)(0.5132)
P=5374.9

Solving using future:

F= 1000(F/A,10%,6)(F/P,10,4) -500(F/P,10,3) +1000(F/A,10,3)

F=1000(7.7156)(1.4641) – 500(1.331) + 1000(3.31)
F=13941

P=13941(P/F,10%,10)= 13941(0.3855)=5374.2
 Exercise 2
• What value of C makes the two annual cash flows
equivalent at an annual rate of 10%?
 Answer
Equating at the present
P= 100+100(P/F,10,1)+150(P/A,10,4)(P/F,10,1)
P= 100+100(0.9091)+150(3.1699)(0.9091)
P=623.17

P= C+ C(P/A,10,4)(P/F,10,1)
P= C+ C(3.1699)(0.9091)=C +2.881C= 3.881 C

Equating both diagrams:

623.17= 3.881 C
C= 160.56
 Exercise 3
• If you borrow $20,000 at an interest rate of 10%,
compounded annually, with the repayment
schedule as follows, what is the amount A?
 Answer

Equating at the present :

20000=A(P/A,10%,5)(P/F,10%,3) + A(P/A,10%,2)
20000=A(3.791)(0.7513) + A(1.736)= 4.584A
A=4363
 Exercise 4
Today is your birthday and you decide to start
saving for your retirement. You will retire on your
65th birthday and will need $50,000 per year at
the end of each of following 20 years. You will
make a first deposit 1 year from today in an
account paying 8% interest annually and continue
to make an identical deposit each year up to and
including the year you plan to retire. If an annual
deposit of $6,851 will allow you to reach your
goal, what birthday are you celebrating today?
 Answer
@EOY 65
Today is your birthday and you decide
to start saving for your retirement. .
You will retire on your 65th birthday .
and will need $50,000 per year at .
the end of each of following 20 .
years. You will make a first deposit 1 .
year from today in an account paying
8% interest annually and continue to .
make an identical deposit each year .
up to and including the year you .
.
plan to retire. If an annual deposit of
$6,851 will allow you to reach your
goal, what birthday are you
celebrating today?
Copy right Amina Ashi
 Answer
Equating at EOY 65
F65=P65
@EOY 65
6851(F/A,8,N)=50000(P/A, 8,20)
.
(F/A,8,N)=50000(9.818)/6851 .
(F/A,8,N)=71.654 .
.
.
(F/A,8,N)= = 71.654
.
(1.08)^N= (71.654x0.08) + 1 .
.
.
N ln (1.08)= ln 6.7323
N=25 years
65-25=40th birthday
Copy right Amina Ashi