ANNUITY:

Sinking Fund and

Amortization
ANNUITY

 Is a series of equal payments made at

regular time intervals. It is also known as a
sinking fund which is used for future
financial obligations such as educational
expenses for children, replacement of
machine or equipment, and amortization of
loans or assets.
ORDINARY ANNUITY


   one whose payments are made at the end of each
Is
interest period. The present value P and future value
F of an ordinary annuity A are given by

Where:
A is the payment made at the end of each successive period
i is the interest per period
n is the total number of periods.
  
Example 1
A house and lot amounting to P3.5M is to be amortized
by monthly payments over 5 years at an annual interest
rate of 10%. What is the monthly payment?
Solution:
Here,, , and
Using the formula for ordinary annuity, then

⁶⁰
3,500,000=A =A(47.0654)
Example 2
An equipment costs P200,000 today and has a resale value of
P50,000 after 10 years. The inflation rate is 5% per year. The annual
interest rate earned on investment is 6%.How much money needs to be
set aside each year in order to replace the said equipment with an
identical model 10 years from now?
Solution:
Due to inflation, the value of the equipment 10 years from now
will be
F1= P(1+i)n = 200,000 (1 + 0.05)10 = P325,779
The amount to be raised in 10 years will be
F = F1 – resalevalue = 325,779 – 50,000 = 275,779
   The Amount that needs to be set aside yearly is computed as
follows:

F=A i

(1 + 0.06) 10
275,779 = A 0.06
= A ( 13.1808)
A=
= P20,923