Ordinary Annuity

Present worth of Ordinary Interest

Future worth for Ordinary Interest
Annuity Due
Present worth for annuity due
Future worth for annuity due
Deferred Annuity
Sample Problems
1. My son Liam is now 2 years old. I want to plan for his college education once he reached 17 yo until he finished his studies at
the age of 22 yo. I am willing to spend P10,000.00 today with a rate of return of 14%, in order to finance his college studies.
How much will Liam receive every end of the year starting at his 17th birthday until he finished his college studies at the age
of 22?

Analysis:
Given
Deferment side
P = P10,000.00
r = 0.14, no mention of particular compounding frequency means it is yearly
mk = 1 period per year
nk = 17 - 2 = 15 years
K = (1) (15) = 15 periods

Annuity side
A=?
mA = 1 period per year
n = 22 - 17 = 5 years
nA = mA . n = (1) (5) = 5 periods
i = (1+r/mk)(mk/mA) -1 = (1+0.14/1) (1)(1) - 1 = 0.14 (take note that finding first the value of i is the critical part of solving the deferred
annuity problems)
Practice Problems:

1. $2000 is deposited at the beginning of each year for 15 years. Starting at the beginning of the 25th year, the account
makes equal annual payments forever. If the account earns 6% effective per year what is the amount of these annual
payments? (ans. $4, 718.91)
2. A couple sets up a college fund for their child in hopes of accumulating $50,000 in the account by making annual
deposits of $2,000 in an account that earns an effective annual interest rate of
5%. If they make the first deposit today, how many deposits are needed to achieve their goal and what drop payment
(deposit) is needed at the end? (ans. = $49, 680.73)
3. Suppose you get a student loan for $8,000, and your payments are deferred until after you graduate, 2 years from
now. Then, you will make 15 yearly payments (starting 2 years from now). What are your payments? The interest
rate is 8%/year. (ans. $ 934)
4. Your father is about to get downsized out of his position. He has been with the previous company through 3
previous mergers, and is disgusted with that nature of the business. He is considering retiring rather than seeking a
new job. What would his retirement savings have to be worth today in order to withdraw $50,000/year for the next 15
years? He expects to invest conservatively, earning 5% per year during his retirement years. (ans. $519,000)