FUTURE VALUE

MATHEMATICS OF
ANNUITIES
[ ( )
]
𝑖 𝑚𝑡
1+ −1
(
𝐴= 𝑅 1+
𝑖
𝑚 ) 𝑚
𝑖
𝑚

[ ( )
]
𝑖 𝑚𝑡
1+ −1
𝑚
𝐴= 𝑅
𝑖
𝑚
FUTURE VALUE
MATHEMATICS OF
ANNUITIES
[ ( )
]
𝑖 𝑚𝑡
1+ −1
(
𝐴= 𝑅 1+
𝑖
𝑚 ) 𝑚
𝑖
𝑚

[ ( )
]
𝑖 𝑚𝑡
1+ −1
𝑚
𝐴= 𝑅
𝑖
𝑚
FUTURE VALUE
MATHEMATICS OF
ANNUITIES
[ ( )
]
𝑖 𝑚𝑡
1+ −1
𝑚
𝐴= 𝑅
𝑖
𝑚

[ ( )
]
𝑖 𝑚𝑡
1+ −1
(
𝐴= 𝑅 1+
𝑖
𝑚 ) 𝑚
𝑖
𝑚
 Mang Jose wants to start a business with an
initial capital of P50,000. He decided to put up a
fund with deposits made at the end of each
months. If he wants to gain the initial capital after
two years, how much monthly deposit must be
made?
In most cases where houses, cars or any
properties are purchased, a series of payments is
needed at certain points in time. Such transaction
is called annuity.
 An annuity is a sequence of equal payments
(or deposits) made at a regular interval of
time.
If payments are made at the end of every
period, the annuity is referred as ordinary
annuity (or annuity-immediate).
If payments are made at the beginning of
every period, the annuity is referred as
annuity-due.
 If the frequency of payments is the same as the
compounding period (say payments are made
monthly and the interest is also compounded
monthly), then the annuity is called simple
annuity.
The term annuity refers to a simple ordinary
annuity, unless otherwise stated.
Future Value of Ordinary Annuity

[ ( )
]
𝑚𝑡
𝑖
1+ −1
𝑚
𝐴= 𝑅
𝑖
𝑚
where
A – future value
R – regular payments
i – nominal interest rate
m – compounding period
t – time in terms of years
Example 1
Suppose you deposit P1,000 at the end of every
month for 2 years in a bank account providing 5%
annual interest compounded monthly. What is the
worth of your account at the end of 2 years?
Given:

[ ]
R = 1,000
( )
𝑚𝑡
𝑖
1+ −1
t = 2 years 𝑚
𝐴= 𝑅
i = 5% or 0.05 𝑖
m = 12 𝑚
A=?
Continuation:

[ ( )
]
𝑚𝑡
𝑖
R = 1,000 1+ −1
𝑚
t = 2 years 𝐴= 𝑅
𝑖
i = 5% or 0.05 𝑚

[ ]
m = 12
( )
(12) (2 )
0.05
1+ −1
12
𝐴=1000
0.05
12

𝐴=Php 25,185.91
Example 2
Find the future value of an ordinary annuity with
regular payment of P1,000 at 5% interest rate
compounded quarterly for 3 years. How much is the
interest earned?
Given:

[ ]
R = 1,000
( )
𝑚𝑡
𝑖
1+ −1
t = 3 years 𝑚
𝐴= 𝑅
i = 5% or 0.05 𝑖
m=4 𝑚
A=?
Continuation:

[ ( )
]
𝑚𝑡
𝑖
R = 1,000 1+ −1
𝑚
t = 3 years 𝐴= 𝑅
𝑖
i = 5% or 0.05 𝑚

[ ]
m=4
( )
( 4) (3 )
0.05
1+ −1
4
𝐴=1000
0.05
4

𝐴=Php 12,860.36
Continuation:
R = 1,000 𝐼 = 𝐴 − 𝑅𝑡𝑚
t = 3 years
12,860.36
i = 5% or 0.05
m=4 𝐼 =12,860.36 − 12,000
A = 12,860.36
𝐼 = Php 860.36
Future Value of Annuity-Due

[ ( )
]
𝑚𝑡
𝑖
1+ −1
𝐴= 𝑅 1+
𝑖
𝑚 ( ) 𝑚
𝑖
𝑚
where
A – future value
R – regular payments
i – nominal interest rate
m – compounding period
t – time in terms of years
Example 3
Find the future value of the annuity-due with a
regular payment of P1,500 at 4% interest rate
compounded quarterly for 2 years and 6 months.
Given:
R = 1,500

[ ( )
]
𝑚𝑡
t = 2.5 years 𝑖
1+ −1
i = 4% or 0.04
m=4
(
𝐴= 𝑅 1+
𝑚
𝑖
) 𝑚
𝑖
𝑚
A=?
 [ ]
Continuation:
( )
𝑚𝑡
𝑖
1+ −1
R = 1,500
t = 2.5 years
𝐴= 𝑅 ( 1+
𝑖
𝑚 ) 𝑚
𝑖
𝑚
i = 4% or 0.04

[ ]
m=4
( )
( 4) (2.5 )
0.04
1+ −1
𝐴=1500 1+
0.04
4 ( ) 4
0.04
4

𝐴=(1515 )(10.46221254 )
𝐴= Php 12,860.36
Example 4
What is the value of P10,000-deposits made at the
beginning of each year at 5% effective interest rate at
the end of 20 years? Determine the total amount of
interest earned in all deposits.
Given:
R = 10,000

[ ( )
]
𝑚𝑡
t = 20 years 𝑖
1+ −1
i = 5% or 0.05
m=1
(
𝐴= 𝑅 1+
𝑖
𝑚 ) 𝑚
𝑖
𝑚
A=?
 [ ]
Continuation:
( )
𝑚𝑡
𝑖
1+ −1
R = 10,000 𝐴= 𝑅
t = 20 years ( 1+
𝑖
𝑚 ) 𝑚
𝑖
𝑚
i = 5% or 0.05

[ ]
m=1
( )
( 1)( 20)
0.05
1+ −1
𝐴=10,000 1+ (
0.05
1 ) 1
0.05
1

𝐴=(10,500 )( 33.0659541)
𝐴=Php 347,192.52
Continuation:
R = 10,000 𝐼 = 𝐴 − 𝑅𝑡𝑚
t = 20 years
i = 5% or 0.05
m=1 𝐼 =   347,192.52 − 20 0,000
A=
𝐼 =Php 147,192.52
Practice Exercises
1. Find the future value of the following:
a. an ordinary annuity with P12,000 regular payment
at 3% compounded semi-annually for 5 years
b. an ordinary annuity with P2500 regular payment at
2% compounded quarterly for two years
c. an annuity-due with P10,000 regular payment at
3% compounded monthly for one year
d. an annuity-due of P200,000 regular payment at 2%
compounded quarterly for 3 years
Practice Exercises
2. In a savings account crediting 3% annual interest
rate compounded monthly, P1,000 is deposited at the
end of each month. What is the value the account at
the end of 18 months? How much interest is earned
in all deposits?
3. In a certain account providing an interest rate of r
compounded quarterly, P2,500 is deposited every end
of the quarter. What value of r will make the future
value of the account P5,200 in six months?
Practice Exercises
4. A 50-year old employee wants to retire in 10 years.
At his retirement he wants to treat his extended
family to a vacation. He estimated that he needs
P100,000 at the end of 10 years. In order to have this
amount, he opened an account that gives 3% interest
compounded annually. How much should he deposit
in the account at the end of each year to accumulate
P100,000 in 10 years?
Practice Exercises
5. To start a business, Mang Juan wants to save a
certain amount of money at the end of every month
to put in an account providing 2% interest
compounded monthly. His estimated start-up capital
is P150,000. If he wants to start business in one and a
half year, how much monthly deposit must he put into
the account?
Answers:
1. a. Php 128,432.66; b. Php 20,353.52;
c. Php 121,967.99; d. Php 2,479,448.03
2. A = Php 18,387.65; I = Php 387.65
3. r = 0.32 or 32%
4. R = Php 8,723.05
5. R = Php 8,215.90