ANNUITIES

LESSON 4
ANNUITY
Annuity is a series of equal payments occurring at equal periods of time.
ORDINARY ANNUITY
It is one where the payments are made at the end of each period.
FINDING P WHEN A IS GIVEN

Cash Flow
diagram
to find P
given A
Thus, solving for P gives,

(2- 12)

WHERE:
P = value or sum of money at present
A = a series of periodic, equal amount of money
n = number of interest periods
i = interest rate per interest period

The quantity in brackets is called “uniform series present worth factor” and
is designated by the functional symbol P/A, i%, n, read as “P given A at I per cent in n
interest periods.” Hence Equation (2-12) can be expressed as

(2- 13)
FINDING A WHEN P IS GIVEN

(2- 14)

The quantity in brackets is called “capital recovery factor” and is designated

by the functional symbol A/P, i%, n, read as “A given P at i per cent in n interest
periods.” Hence

(2- 15)

WHERE:
P = value or sum of money at present
A = a series of periodic, equal amount of money
n = number of interest periods
i = interest rate per interest period
FINDING F WHEN A IS GIVEN

Cash Flow
diagram
to find F
given A

Thus, solving for F gives,

(2- 16)
 The quantity in brackets is called “uniform series compound amount factor”
and is designated by the functional symbol F/A, i%, n, read as “F given A at I per cent
in n interest periods.” Hence Equation (2-14) can be expressed as

(2- 17)

FINDING F WHEN A IS GIVEN

(2- 18)

The quantity in brackets is called “sinking fund factor” and is designated by

the functional symbol A/F, i%, n, read as “A given F at I per cent in n interest
periods.” Hence
(2- 19)

WHERE:
P = value or sum of money at present
A = a series of periodic, equal amount of money
n = number of interest periods
i = interest rate per interest period
 Relationship between A/P, i%, n and A/F, i%, n

THUS,
Sinking fund factor + 𝑖 = 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑓𝑎𝑐𝑡𝑜𝑟 (2- 20)
EXAMPLE 1:
What are the present worth and the accumulated amount of a 10-year
annuity paying Php 10, 000 at the end of each year, with interest at 15%
compounded annually?
m
GIVEN: A = Php 10,000 i = 15% n = 10 years X 1
SOLUTION: t
EXAMPLE 2:
What is the present worth of Php 500 deposited at the end of every three
months for 6 years if the interest rate is 12% compounded semiannually?
m
GIVEN: A = Php 500 n = 6 years X 4
SOLUTION: t

Solve for the interest rate per quarter ( ),

.

( )
EXAMPLE 3:
Using compound interest of 8% find the equivalent uniform annual cost for
a proposed machine that has a first cost of Php 100,000 an estimated salvage value
of Php 20,000 and an estimated economic life of 8 years. Annual maintenance will
amount Php 2000 a year and periodic overhaul costing Php 6,000 each will occur at
the end of the second and fourth year.
DEFEERED ANNUITY
It is one where the first payment is made several periods after the
beginning of the annuity.
FINDING P WHEN A IS GIVEN

Cash Flow
diagram
to find A
given P

(2- 21)

1 − (1 + 𝑖)
P=𝐴
𝑖
1+𝑖 (2- 22)
EXAMPLE 4:
On the day his grandson was born, a man deposited to a trust company a
sufficient amount of money so that the boy could receive five annual payments of
Php 10,000 each for his college tuition fees, starting with his 18th birthday. Interest
at the rate of 12% per annum was to be paid on all amounts on deposit. There was
also a provision that the grandson could elect to withdraw no annual payments and
receive a single lump amount on his 25th birthday. The grandson chose this option.
a) How much did the boy receive as the single payment?
b) How much did the grandfather deposit?
SOLUTION:
Let P = the amount deposited
w = the amount withdrawn
This was what actually happened, P was deposited today and W will withdrawn 25
years later.
using today as focal date, the equation of value is
EXAMPLE 5:
If Php 10, 000 is deposited each year for 9 years, how much annuity can a
person get annually from the bank every year for 8 years starting 1 year after the 9th
deposit is made. Cost of money is 14%.
ANNUITY DUE
Is one where the payment is made at the beginning of each period.
FINDING P WHEN A IS GIVEN

(2- 23)

( )
(2- 24)
FINDING F WHEN A IS GIVEN

(2- 25)

(2- 26)
EXAMPLE 6:
A man bought an equipment costing Php 60, 000 payable in 12 quarterly
payments, each instalment payable at the beginning of each period. The rate of
interest is 24% compounded quarterly. What is the amount of each payment?
GIVEN:
P = Php 60, 000 n = 12 i = 24%/4 = 6%
SOLUTION:
( )

( )
EXAMPLE 7:
A certain property is being sold and the owner received two bids. The first
bidder offered to pay Php 400, 000 each year for 5 years, each payment is to be
made at the beginning of each year. The second bidder offered to pay Php 240, 000
first year. Php 360, 000 the second year and Php 540, 000 each year for the next 3
years, all payments will be made at the beginning of each year.
If money is worth 20% compounded annually, which bid should the owner
of the property accept?
PERPETUITY
Is an annuity in which the payments continue indefinitely.
FINDING P WHEN A IS GIVEN

(2- 27)
EXAMPLE 8:
What amount of money invested today at 15% interest can provide the
following scholarships: Php 30, 000 at the end of each year for 6 years; Php 40, 000
for the next years and Php 50, 000 thereafter?
THANK YOU!!!