Time Value of Money 2 - Annuities

- Annuities = a fixed amounts to be placed in an account for a specified number of years

- Present Value of Annuities = the value of the whole amount of annuity + interest earned in today's terms.
= need to know what is the worth of the Annuities in today's terms to assess viability
= can be compared with receiving / paying the amount in whole lump sum today

- Formula: P = PMT X 1 - (1+r)^-n) (Ordinary Annuity: Amounts are received or paid at the end of
r

- Formula: P = PMT X 1 - (1+r)^-n) X (1+r) (Annuity Due: Amounts are received or paid at the beginning
r

P = Present Value of Annuity

PMT = Amounts to receive or Pay every period
r = Discount Rate
n = Number of Periods (years)
 today's terms.
rms to assess viability of the annuity
e lump sum today

d or paid at the end of each consecutive periods. Examples like Loans and Mortgages)

paid at the beginning of each consecutive periods. Examples like Rent)

Illustration: Ordinary Annuity

Jack, an investor is being given an option to receive RM50,000 every end of the year for the next 25 years or
RM650,000 today. At a discount rate of 7%, which is a better option?

P = PMT X 1 - (1+r)^-n)
r

The better option would be to receive RM650,000 today.

Illustration: Ordinary Annuity

Jack, an investor is being given an option to pay RM45,000 every end of the year for the next 20 years or
RM440,000 today. At a discount rate of 6%, which is a better option?

P = PMT X 1 - (1+r)^-n)

The better option would be to pay RM440,000 today.

 Illustration: Annuity Due

next 25 years or Jack, an investor is being given an option to receive RM50,000 every beginning of the year for the ne
RM650,000 today. At a discount rate of 7%, which is a better option?

P = PMT X 1 - (1+r)^-n) X (1+r)

r

The better option would be to receive RM650,000 today.

Illustration: Annuity Due

xt 20 years or Jack, an investor is being given an option to pay RM38,000 every beginning of the year for the next 3
RM580,000 today. At a discount rate of 7%, which is a better option?

P = PMT X 1 - (1+r)^-n) X (1+r)

r

= RM38,000 X 1-(1+0.07)^-30 X (1+0.07)

0.07
0.868633
= RM38,000 X 13.2777 12.40904 13.27767

= RM504,552

The better option will be to pay RM38,000 every year for the next 30 years.
eginning of the year for the next 25 years or

nning of the year for the next 30 years or

Tutorial 1: Ordinary Annuity

Kim, an investor is being given an option to receive RM60,000 every end of the year for the next 25 years or
RM760,000 today. At a discount rate of 5%, which is a better option?

Tutorial 2: Ordinary Annuity

An amount of RM550,000 is to be paid. This amount can be paid either immediately or every end of the year
for the next 20 years of RM40,000 each. If the discount rate is 7%, which option is better?

Tutorial 3: Annuity Due

Sam, an investor is being given an option to receive RM65,000 every beginning of the year for the next 20 years or
RM620,000 today. At a discount rate of 6%, which is a better option?

Tutorial 4: Ordinary Annuity

An amount of RM520,000 is to be paid. This amount can be paid either immediately or every end of the year
for the next 22 years of RM39,000 each. If the discount rate is 8%, which option is better?
next 25 years or PV = RM845,636 Receive RM60,000 every end of the year is a better option.

y end of the year

for the next 20 years or

y end of the year

r is a better option.