Professional Documents
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Kinds of Annuities:
a. Ordinary Annuity
b. Deferred Annuity
c. Annuity Due
d. Perpetuity
ORDINARY ANNUITY
1 2 3 4 n-1 n
______________________________......._________
0
A A A A A A
Where:
Pi = A – A (1+i)-n
Pi = A[1 - (1+i)-n]
P = A {[1- (1+i)-n] / i }
Or if the factor (1+i) / (1+i) is multiplied to the formula we have the result:
P = A{[(1+i)n – 1] / [i(1+i)n]}
The factor {[(1+i)n – 1] / [i(1+i)n]} is called the “uniform series present worth factor” and
is sometimes represented as (P/A,i%, n) and is read as “P given A at i percent in n interest
periods.
A = P{i / [1 – (1+i)-n]}
The factor {i / [1 – (1+i)-n]} is called the “capital recovery factor” and is sometimes
represented as (A/P, i%, n) and is read as “A given P at i percent in n interest periods.”
1 2 3 4 n-1 F
______________________________......._________ n
0
A A A A A A
F = A(1+i)n-1 +A(1+i)n-2 + A(1+i)n-3 +…+A(1+i)2 + A(1+i) + A (eq. 1)
Fi = A(1+i)n – A
Or
F = A{[(1+i)n – 1] / i}
The factor [(1+i)n – 1] / i is called the “uniform series compound amount factor” and is
sometimes represented as (F/A, i%, n) and is read as “F given A, at i per cent in n interest
periods”.
{ i / [(1+i)n – 1] } + i = i / [ 1 – (1 + i)-n ]
Sinking fund factor + i = capital recovery factor
Examples:
1. A factory operator bought a generator set for P10,000 and agreed to pay the dealer a
uniform sum at the end of each year for 5 years at 8% interest compounded annually so that
the final payment will cancel the debt for principal and interest. What is the annual payment?
Solution:
P 10,000
1 2 3 4 5
_____________________________________
0
A A A A A
i = 8% compounded annually
A = P 2, 504.57 (answer)
2. A man bought a laptop for P21,000 on installment basis at the rate of 12% per year on the
unpaid balance. If he paid a down payment of P6,000 in cash and proposes to pay the balance
in 20 monthly payments, what should these monthly payments be?
Solution:
i = r/m = 12% / 12 = 1%
n = 20
P 21,000
1 2 3 4 20
________________________________ ……….._____
P 6,000 A A A A A
A = P831.23 (Answer)
Exercise:
Juan dela Cruz borrowed P2,400 at 1% per month payable in 24 equal payments. How much of
the loan remains unpaid immediately after he has paid the 12 th payment?
Answer: P1,271.60