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Engecon 3 Annuities Rev 0

The document discusses different types of annuities including ordinary annuities, annuities due, deferred annuities, and perpetuities. It provides formulas for calculating present and future values of annuity payments and includes examples of applying the formulas to sample problems.

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Clifford Anjelo Faderanga
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344 views

Engecon 3 Annuities Rev 0

The document discusses different types of annuities including ordinary annuities, annuities due, deferred annuities, and perpetuities. It provides formulas for calculating present and future values of annuity payments and includes examples of applying the formulas to sample problems.

Uploaded by

Clifford Anjelo Faderanga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Engecon

ANNUITIES
An annuity is a series of equal
payments occurring at equal periods
of time
Ordinary Annuity
Annuity Due
Deferred Annuity
Perpetuity
Symbols and their meaning
P = value or sum of money at present
F = value or sum of money at future time
A = a series of periodic, equal payments
n = number of interest periods
i = interest rate per interest period
An ordinary annuity is one where
the payments are made at the end
of each period.
ORDINARY ANNUITY
Finding P when A is given
-n
P = [A/i ][ 1- (1+i) ]
P
1 2 3 n-1 n

A A A A A
ORDINARY ANNUITY
Finding A when P is given
-n
A = [P i ][ 1/{1- (1+i) }]
P
1 2 3 n-1 n

A A A A A
ORDINARY ANNUITY
Example
What is the present worth of a 10-year
annuity paying P10,000 at the end of each
year with 15% compounded annually

P = ( 10,000/0.15 )( 1 – 1.15-10 ) = P50,188


ORDINARY ANNUITY
Example
What is the present worth of P500 deposited at the end
of every 3 months for 6 years if i = 12% compounded
semi-annually.

(1 + i/4)4 – 1 = (1 + 0.12/2)2 – 1
i = 0.11825 or 11.83% compounded quarterly
Interest per quarter = 0.1183/4 = 0.03

P = (500 / 0.03 )( 1 – 1.03 -24 ) = P8,468


ORDINARY ANNUITY
Finding F when A is given
n
F = [A/i ][(1+i) - 1]
F
0 1 2 3 n-1 n
A A A A A
ORDINARY ANNUITY
Finding A when F is given
n
A = [F i ][ 1 / {(1+i) – 1}]
F
0 1 2 3 n-1 n
A A A A A
ORDINARY ANNUITY
Example
What is the accumulated amount (or future
worth) of a 10-year annuity paying P10,000
at the end of each year with 15%
compounded annually

F = ( 10,000/0.15 )( 1.1510 - 1) = P203,037


DEFERRED ANNUITY

Is one where the first payment


is made several periods after
the beginning of the annuity.
DEFERRED ANNUITY
Finding P when A is given
-n
P = [A/i ][ 1- (1+i) ][ 1 + i ]-m
m periods n periods

P
0 1 2 n-1 n
0 1 m
A A A A
DEFERRED ANNUITY
Example
A man pays P15,000 annually starting at the end of the 5th year until at the end of the 10th
year. P20,000 at the end of the 11th year until at the end of the 15th year. P35,000
annually for the succeeding 5 years. With 10% compounding annually, what annual
payment should he pay for 20 years to settle the amount equally?

F1 = ( 15,000/0.10 )( 1.106 - 1) = P115,734.15 P1 = 115,734.15 (1.10)-10 = P44,620.525

F2 = ( 20,000/0.10)(1.105 – 1) = P122,102 P2 = 122,102 (1.10)-15 = P29,230.248

F3 = ( 35,000/0.10)(1.105 – 1) = P213,678.50 P3 = 213,678.50 (1.10)-20 = P31,761.947

PTOTAL = P1 + P2 + P3 = P105,612.72 A = 105,612.72 (0.10) [1/(1 – 1.10-20)] = P12,406


ANNUITY DUE

Is one where the payments are


made at the beginning of each
period.
ANNUITY DUE
Finding P when A is given
P = A + A/i [ 1 - (1+i) (1 – n ) ]
P
1 2 3 n-1 n
A A A A A
ANNUITY DUE
Finding F when A is given
F = [A/i ][(1+i) (n + 1) - 1] – A
F
0 1 2 3 n-1 n
A A A A A
ANNUITY DUE
Example

A farmer bought a tractor costing P25, 000 and payable in 10 semi-


annual payments. Each installment is payable at the beginning of each
period. If the rate of interest is 26% compounded semi-annually,
determine the amount of each installment.

25,000 = A + (A/0.13)[1 – 1.13(1-10)]

A = P4,078
ANNUITY DUE
Example
If P200 is deposited in a savings account at the beginning of each 15
years and the account draws interest at 7% compounded annually,
what is the value of the account at the end of 15 years?

F= (200/0.07)[1.07 (15 + 1) – 1] – 200

F = P5,378
ANNUITY DUE
Example

What is the present worth of a P100 annuity starting at the end of the third year and
continuing to the end of the fourth year if the interest rate is 8% compounded
annually.

F = (100/0.08)[1.082 – 1] = 208

F = P(1 + i)n

P = 208(1.08)-4 = P153
PERPETUAL ANNUITY (Perpetuity)
A perpetuity is an annuity in which the payments
continue indefinitely.
P = (A/i)[ 1 - (1+i)– ∞ ] = A/i
P
1 2 3 4 n ∞

A A A A
PERPETUITY
Example

What amount of money invested today at 15% interest CA can provide the following
funds: P30,000 at the end of each year for 6 years, P40,000 for the next 6 years and
P50,000 thereafter.

P = (30,000/0.15)[1 – 1.15-6 ] +
(40,000/0.15)[1 – 1.15-6 ](1.15-6) +
(50,000/0.15)(1.15-12)

P = 241,283

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