ANNUITY

Annuity (A) is defined as a series of equal payments “A” occurring at equal intervals of time.
When an annuity has a fixed time span, it is known as annuity certain.
Classification of Annuity:
1. Simple annuity- payment period is the same as the interest period. If the payments are
made monthly then the conversion of money also occurs monthly.
2. General annuity- payment period is not the same as the interest period however it can be
converted to a simple annuity by making the payment period the same as the compounding
period by the concept of effective rates.
Types of Annuities:
1. Ordinary annuity- one where equal payments is made at the end of each payment period
starting from the first period.
From the cash flow diagram above, the future amount F is the sum of payments starting
from the end of the first period to the end of the n th period. Observe that the total number of
payments is n and the total number of compounding periods is also n. Thus, the ordinary
annuity, the number of payments and, the number of compounding periods are equal.
2. Annuity due- In annuity due, equal payments are made at the beginning of each
compounding period starting from the first period. The diagram below shows the cash flow in
an annuity due.
3. Deferred annuity- is one where the payment of the first amount is deferred a certain
number of periods after the first.
a. Accumulation Stage. A single payment is allowed to earn interest for a specified duration.
There are no annuity payments during this period of time, which is commonly referred to as
the period of deferral.
b. Payments Stage. The annuity takes the form of any of the four annuity types and starts at
the beginning of this stage as per the financial contract. Note that the maturity value of the
accumulation stage is the same as the principal for the payments stage.
4. Perpetuity or Perpetual Annuity- annuity where the payment periods extend to forever or
in which the periodic payments continue indefinitely. There is no definite future in perpetuity,
thus, there is no formula for the future amount.

DEPRECIATION
Depreciation -(is defined as the decrease in the value of a property, such as machinery,
equipment, building, or other structure, due to the passage of time. (Matias Arreola) .
Excluded from this definition are properties whose values increase with time, such as
antiques, paintings of the masters, rare stamps, rare coins, and in most cases, land.
The depreciation cost depends upon the physical or economic life of the equipment and its
first cost.
1. The physical life of the equipment is the length of time during which it is capable of
performing the function for which it was designed and manufactured.
2. The economic life of the equipment is the length of time during which it will operate at a
satisfactory profit. Thus, even though the equipment can still perform its function, if it can
only operate at a loss, then it is considered economically dead.
3. The life of any property is usually difficult to determine accurately. In many cases, the
determination of life is dependent to a great extent upon the experience of the men managing
the enterprise in the use of similar equipment.
4. The first cost (Co) of any property includes the original purchase price, freight and
transformation changes to the site, installation expenses, initial taxes, permits to operate, and
all other expenses needed to put the equipment into operation
The amount to be recovered, equal to the depreciation cost, is the difference between the first
cost and the salvage or scrap value of the equipment.
5. Salvage value (Cn), sometimes called second
-hand value is defined to be the amount for which the equipment or machine can be sold as
second hand. It implies that the machine can still perform its function.
6. Scrap or junk value is the amount the equipment can be sold for when disposed of as junk.
This implies that the equipment cannot be used anymore for the function for which it was
designed.
7. Book value(Cm) present value or current value of the asset

Properties of Different Depreciation Methods

The Straight-Line Methods- a method that is simple and most widely used than any other
method. Also, a method of calculating depreciation assumes that an asset will lose an equal
amount of value each year.
Sinking Fund Method- a method of depreciation that assumes that there is a savings account
set up to replace an asset at the end of its life. In this method, it is assumed that a sinking fund
is established in which funds will accumulate for replacement purposes.
Declining Balance Method -a method of depreciation that assumes that annual depreciation
is a fixed percentage of the growing value of the property per year. This method is sometimes
known as the Constant Percentage Method or Matheson Formula.
Let = ratio of the depreciation in any one year to the boo This is constant throughout the life
of the property. The k must be k value at the beginning of that year. A decimal or value less
than 1.
Sum of the Years-Digit (SYD) Method- this method is based on the assumption that assets are
generally more productive when they are new and their productivity decreases as they become
old.