1st Sem 2020 ANNUITY

ANNUITIES – a series of equal payments made at equal intervals of time.

TYPE OF ANNUITIES
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1
Ordinary Annuity - one where equal payments are made at the end of each payment period starting
from the 1st period.

Sample problems:

#185 CE Board May 1999

A man paid 10% down payment of P200,000.00 for the house and lot and agreed to pay the
90% balance on monthly installments for 60 months at an interest rate of 15% compounded
monthly. Compute the amount of the monthly payments.

Solution:

Cost of the house = 200,000 / 0.10 = P2,000,000.00

Balance = 2,000,000.00 – 200,000.00 = P 1,800,000.00

i = 0.15 / 12 = 0.0125

[ ( 1 + i )n - 1]
P = A ----------------------
( 1 + i )n 1

[ ( 1.0125 )60 - 1]
1,800,000 = A ----------------------------------
( 1.0125 )60 (.0125)

A = P 42,821.87

College of Engineering, Architecture & Technology

1st Sem 2020 ANNUITY

#186 ME Board April 1999

What is the present worth of a 3 years annuity paying P3,000.00 at the end of each year, with
interest at 8% compounded annually?
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Solution: 2

[ ( 1 + i )n - 1]
P = A ----------------------
( 1 + i )n 1

[ ( 1.08 )3 - 1]
P = 3,000 ----------------------
( 1.08 )3 (.08)

P = P7,731.29

#193 ECE Board Nov. 1998

What is the accumulated amount of the 5 year annually paying P6,000.00 at the end of each
year, with interest at 15% compounded annually?

Solution:

[ (1.15 )5 – 1 ]
F = 6,000 ----------------------
0.15

F = P40,454.29

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1st Sem 2020 ANNUITY

Deferred Annuity - it is also Ordinary annuity but the payment of the first amount is deferred a certain
number of periods after the first period.

Sample Problems:
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#323 CE Board May 1998 3
A man loans P187,400.00 from a bank with interest at 5% compounded annually.. He agrees
to pay his obligations by paying 8 equal annual payments, the first payment being due at the
end of 10 years. Find the annual payments.

Solutions:

[ ( 1.05 )8 - 1]
P = A ----------------------
( 1.05 )8 (.05)

P = 6.463 A

6.463 A
P1 = ---------------
( 1.05 )9

187,400 (1.05)9
A = -----------------------
6.463

A = P44,982.04

College of Engineering, Architecture & Technology

1st Sem 2020 ANNUITY

# 324 ME Board April 1998

A house and lot can be acquired a down payment of P500,000.00 and a yearly payment of
P100,000.00 at the end of each year for a period of 10 years, starting at the end of 5 years
from the date of purchase. If money is worth 14% compounded annually, what is the cash price Page |
of the property? 4

Solutions:

[ ( 1.14 )10 - 1]
P = 100,000 ----------------------
( 1.14 )10 (0.14)

P = 521,611.56

521,611.56
P1 = --------------------
(1.14)4

P1 = P308,835.00

Cash Price = P500,000 + 308,835.00

= P 808,835.00

College of Engineering, Architecture & Technology

1st Sem 2020 ANNUITY

Annuity Due - it is one where payments are made at the start of each period, beginning from the first
period.

Sample problem:
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#297 ME Board Oct 1996 5
Engr Sison borrows P100,000.00 at 10% effective annual interest. He must pay back the loan
over 30 years with uniform monthly payments due on the first day of each month. What does
Engr pay each month?

Solution:
A [ ( 1 + i )n - 1 - 1 ]
P = -------------------------------- + A
( 1 + i )n - 1 i

0.10
i = --------- = 0.00833
12

n = 30 (12) = 360

A [ ( 1.00833 )360 - 1 - 1 ]
100,000 = -------------------------------------- + A
( 1.00833 )360 - 1 (.00833)

A = P879.00

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1st Sem 2020 ANNUITY

#301 On retirement, a workman finds that his company pension calls for payment of P300 to him or
to his estate, if he dies, at the beginning of each month for 20 years. Find the present value of
this pension at 5% compounded monthly.

Solution: Page |
6
i = 0.05 / 12 = 0.00417

n = 20 (12) = 240

300 [ ( 1.00417 )239 - 1 ]

P = ---------------------------------- + 300
( 1.00427 )239 (0.00417)

P = P45,631.87

#302 Under a factory savings plan, a workman deposits P25.00 at the beginning of each month for 4
years, and the management guarantees accumulation at 6% compounded monthly. How much
stands to the work man’s credit at the end of 4 years.

Solution:
A [ ( 1 + i )n + 1 - 1 ]
F = -------------------------------- - A
i

i = 0.06 / 12 = .005

n = 4 (12) = 48

n + 1 = 49

25 [ ( 1.005 )49 - 1 ]
F = -------------------------------- - 25
0.005

F = P 1,359.21

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1st Sem 2020 ANNUITY

Perpetuity - it is one where payment periods extend forever or in which the periodic payments continue
indefinitely.

A P – present value of perpetuity

P = --------- A – annuity or amount of perpetuity Page |
i i - rate of interest 7

Perpetuity payable annually beginning of each year

A
P = A + ------- ( present value of perpetuity due )
i

Perpetuity payable annually with the first payment due at the end of “nth“ year

A A [ ( 1 + i )n - 1
P = --------- - ------------------- P – present value of perpetuity
i ( 1 + i )n i

Sample problem:

#615 What present sum would be needed for annual end of year payments of P15,000.00 each,
forever if money is worthy 8%.

Solution:
A 15,000
P = ----- = ------------
i 0.08

P = P187,500.00

College of Engineering, Architecture & Technology

1st Sem 2020 ANNUITY

#619 If money is worth 4%, find the present value of a perpetuity of P100 payable at the beginning of
each year.

Solution: Page |
A 8
P = A + -----
i

100
P = 100 + --------
0.04

P = P2,600.00

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