ANNUITIES and CAPITALIZED COST

Annuity (A) - consists of a series of equal payments made at equal intervals of time

It can occur in the following instances.

1. Payment of a debt by a series of equal payments at equal interval of time

2. Accumulation of a certain amount by setting equal amounts periodically
3. Substitution of a series of equal amounts periodically on lieu of a lump sum at retirement of an
individual
1. The amount of all payments are equal

2. The payments are made at equal intervals of time

3. The first payment is made at the end of the first period and all payments thereafter are made at the
end of the corresponding period.

4. Compound interest is paid on all amount in the annuity

Problems on Ordinary Annuity:

1. A one-bagger concrete mixer can be purchased with a down payment of ₱10,000 and equal payment
of ₱2,000 each paid at the end of every month for the next 12 months. If money is worth 12%
compounded monthly, determine the equivalent cash price of the mixer and the accumulated amount.

P=? F=?
Given:
DP= ₱10,000
A = ₱2,000 0
11 12
1 2 3
n = 12 mos Month

i = 12%/12
=1% A A
A A=2000
Required: P, F DP =10000
A=2000

Solution: A [ (1+i ) n−1 ]

F = DP +
A [1−( 1+i ) - n ] i
P¿ + DP
i = 10000 +
2000[1−( 1+.01 ) - 12] 2000 [( 1+.01 ) 12−1 ]
¿ + 10000
.01 .01
= ₱ 32,510.15

Given: Solution:
F = ₱1.5M A [ (1+i ) n−1 ]
F =
n = 10 yrs i
i = 12% A [ (1+.12 ) 10−1 ]
= 0.12 1,500,000 =
2. How much money .12
would you have to Required: A A = 85,470.25
deposit for 10
consecutive years P F=1.5M
starting one year from
now if you want to be 1 2
0 3 9 10
able to withdraw a
₱1.5M cash at the end years
of 10 years. The bank
charges 12% A A A A
A= ?
compounded annually.