Professional Documents
Culture Documents
ANNUITY
Types of annuity:
1. Ordinary Annuity
is a type of annuity where the payments are made at the end of each
period beginning from the first period.
2. Annuity Due
is a type of annuity where the payments are made at the beginning of
each period starting from the first period.
3. Deferred Annuity
is a type of annuity where the first payment does not begin until some
later date in the cash flow.
4. Perpetuity
When an annuity does not have a fixed time span but continues
indefinitely, then it is referred to as a perpetuity. The sum of perpetuity is an
infinite value
What is the accumulated amount of the five year annuity paying 6,000 at the
end of each school year, with interest at 15% compounded annually?
Solution:
Example Problem #2
A 2001 model car can be purchased with a down payment of 109,000 and
equal monthly installments of 12,000 for 20 months. If money is worth 11%
compounded monthly, what is the equivalent cash price of the car?
Solution:
Example Problem #3
A mother wish to earn 50,000 from an investment after 6 years so that she will
have enough money to celebrate her daughter’s 7 th birthday. What equal amounts
should the mother invest every year for 6 years if interest on the investment is 9%
compounded quarterly?
Solution:
Example Problem #1
A 12,000.00 loan is payable at the beginning of each month for 1 year. If the
interest is 10% compounded monthly, how much is the monthly payment?
Solution:
Example Problem #2
Solution:
Example Problem #3
Example Problem #4
Solution:
Example Problem #5
How much equal deposit should you make at the beginning of each year for
10 years to be able to withdraw 24,000.00 yearly for 8 years?
The first withdrawal is a year after your last deposit. Interest is 13% compounded
annually.
2. A man wishes to provide a fund for his retirement such that from his 60th to 70th
birthdays he will be able to withdraw equal sums of P18, 000 for his yearly
expenses. He invests equal amount for his 41st to 59th birthdays in a fund
earning 10% compounded annually. How much should each of these amounts
be?
ANS. 2,285.25
3. A civil engineer plans to own a 300 m 2 lot after 5 years for an estimated cost of
570,000. To accumulate this amount, he will make equal year-end deposits in a
fund earning 12% compounded annually. However, at the end of the 2 nd year, he
married his girlfriend and decided to build a 250,000 worth house on the lot he is
planning to buy. What should be his annual deposits for the last 3 years?
ANS. P 163,810.80
4. How much could BTU Oil & Gas Fracking afford to spend on new equipment
every start of the year for 3 years, if it expects a profit of P50 million at the
beginning of the 3rd year, assumed rate of return is 20% per year.
ANS. 13,736,263.74
5. A certain manufacturing plant is being sold and was submitted for bidding. Two
bids were submitted by interested buyers. The first bid offered to pay 200,000.00
each year for 5 years, each payment being made at the beginning of each year.
The second bidder offered to pay 120,000.00 the first year, 180,000.00 the
second year and 270,000.00 each year for the next 3 years, all payments being
made at the beginning of each year. If money is worth 12 % compounded
annually, which bid should the owner of plant accept?
ANS. BID 2 MUST BE ACCEPTED; bid 1 = 807,469.87; bid 2 = 859,727.18
Example Problem #1
Engr. Garcia deposited 100,000 now so that his 2 years old daughter will
receive 5 equal amounts of money yearly starting on her 17 th birthday. If money
earns 11% compounded annually, how much will the girl receive yearly?
Solution:
Example Problem #2
Solution:
Refer to problem #2. If in case the seller agrees to the buyer’s proposal to pay
the supposedly 40,000 down payment on 12 monthly instalments, what would be the
amount of the monthly payments using the same rate of interest? The first payment
is to be made at the end of the first month after the purchase.
Solution:
Example Problem #4
A ten-wheeler, second-hand truck is offered for sale. The owner offers two
methods of payment. The first method requires 200,000 down payment and 15,000
monthly instalments for two years. The second method requires 100,000 down
payment and monthly payments of 30,000 for the first year and 15,000 for the
second and third year. If the rate of interest for both methods of payment is 5%
compounded monthly, which method of payment is better for the buyer and how
much?
Option 1:
Option 2:
Example Problem #5
Solution:
Example Problem #1
Solution:
Example Problem #2
Solution:
Example Problem #3
Solution:
1. Mr. Reyes borrows P600, 000 at 12% compounded annually, agreeing to repay
the loan in 15 equal annual payments. How much of the original principal is still
unpaid after he has made the 8th payment?
ANS. 162,378.06
3. An asphalt road requires no repairs until the end of 2 years. At the end of 3 rd
year, P90, 000 will be needed for repairs for the next 5 years, then P120, 000 at
the end of each year for the next 5 years. If money is worth 14% compounded
annually, what is the present value of the repair cost and its equivalent uniform
annual cost for the 12-year period?
ANS. P = 402,386.46, A = 71,089.35
5. If money is worth 4%, find the present value of perpetuity of 100.00 payable at
the beginning of each year.
ANS. P 2600
6. What perpetual amount will you receive annually starting next year if you were
able to deposit 130,000.00 five years ago at 10.5% interest compounded
annually?
ANS. P 22,487.65