Annuity

Annuity - is a series of equal payments occurring at equal

interval of time.
Types Of Annuity
1. Ordinary Annuity
Payments that starts at the end of each period starting from the first
period. F

 (1 + i)n − 1 R R R R R R R
A. P = R  n 
 (1 + i) i 
0 1 2 3 4 5 6 n
P
 (1 + i)n − 1
B. F = R  
 i 
Annuity

 R   R + Fi 
ln   ln  
n =  R − Pi  n =  R 
C. Or ln (1 + i)
ln (1 + i)

D. The most convenient solution in solving i is by “trial

and error” method by the substitution of the given
values in the given choices.
Where:
P = present worth F = future worth
i = interest rate per period = in / m n = no. of periods = m y
R = uniform amount per period
Practice Problems
1. If P50 was invested at 6% on January 1, year 1, what an equal
year-end withdrawals could be made each year for ten years,
leaving nothing in the fund after the tenth withdrawal.
2. Mr. Robles plans a deposit P500.00 at the end of each month for
10 years at 12% annual interest, compounded monthly. The
amount that will be available in two years is:
3. How much could be accumulated in a fund earning 6% at the end
of ten years P20,000 is deposited at the end of each year for ten
years?
Annuity

2. Deferred Annuity
Payments start at any period after the first period.
A. Solving for the present worth P: F
 (1 + i)6 − 1 R R R R R R
P1 = R  
6
 (1 + i) i 
0 1 2 3 4 5 6 7 8 9 10

P1 P P1
P=
(1 + i)4
 (1 + i)6 − 1
B. F = P (1 + i)10 F = R 
 i 
Practice Problems
1. A house and lot can be acquired a down payment of P500,000.00
and a yearly payment of P100,000 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 of the property?
2. A mother borrowed P100,000 with 2% interest monthly and
promised to pay the amount by 30 equal monthly installments
starting 1 year from now. Determine the monthly payment.
Annuity

3. Annuity Due
Payments start at the beginning of each period starting
from n = 0. R R R R R R R R R R
F
0 1 2 3 4 5 6 7 8 9 10

P
 (1 + i)9 − 1 B. F = P (1 + i)10
A. P = R   +R
 (1 + i)9 i 
 (1 + i)10 − 1 1
F = R  (1 + i)
 i 
Practice Problems
1. An employee borrowed P200,000 with 16% interest compounded semi-
annually promised to pay every 6 months for 10 years starting today.
What amount should he pay every 6 months?
2. A contractor bought a concrete mixer at P120,000 if paid in cash.
The mixer may also be purchased by installment to be paid within 5
years. If money worth 8%, the amount of each annual payment, if
all payments made at the beginning of each year, is:
Annuity

4. Perpetuity
Is an annuity that continues indefinitely (n → ∞).

R R R R R R R

0 1 2 3 4 5 6 7 n→∞
P

R
P=
i
Practice Problem
1. What is the present value of perpetuity making quarterly
payments in arrears in the amount of $9,475 per quarter, and the
appropriate annual rate of interest is 10.5%?
 R+(n-1)G
UNIFORM GRADIENT CASH FLOW
R+3G
1. For increasing value R+2G

R+G F
R

0 1 2 3 4 n
P
 (1 + i)n − 1  (1 + i)n − 1 n 
A. P = R    G − 
n n 2 n
 (1 + i) i   (1 + i) i (1 + i) i 
 (1 + i)n − 1  (1 + i)n − 1 n  G = gradient
B. F = R    G −  Use + if increasing
Use – if decreasing
 i   i2 i 
Practice Problem
1. The maintenance cost of a machine this year is expected to be
P1,000. The cost will increase P200 each year for the subsequent 9
years. The interest is 15% compounded annually. What is the
approximate worth of maintenance for the machine over the full 10
years?