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Math 012 g5 Simple Annnuities 094300

The document discusses simple annuities and ordinary annuities, providing definitions and examples of how to calculate the future value and present value of annuity cash flows using formulas. It explains that the future value formula can determine how much you will have in the future from regular investments earning interest, while the present value formula calculates the current worth of future cash flows discounted at a given interest rate. Worked examples are provided to illustrate applying the formulas to annuity problems.

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20 views5 pages

Math 012 g5 Simple Annnuities 094300

The document discusses simple annuities and ordinary annuities, providing definitions and examples of how to calculate the future value and present value of annuity cash flows using formulas. It explains that the future value formula can determine how much you will have in the future from regular investments earning interest, while the present value formula calculates the current worth of future cash flows discounted at a given interest rate. Worked examples are provided to illustrate applying the formulas to annuity problems.

Uploaded by

jbiventotabw
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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University of Cebu

College of Teacher Education


Sanciangko Street, Cebu City

MATH 012
(Mathematics of Investment)

Schedule: 7:30AM-8:30AM (MWF) Date: March 20, 2024

Topic: SIMPLE ANNUITIES


Subtopic: Ordinary Annuities
Title: Finding the present value and amount at the end of the term

Definition of Terms:
Simple Annuities- defined as an investment vehicle designed to accept, grow, and, upon
annuitization, payout a stream of income. Annuities are offered by insurance companies. The
insurance company is in charge of your money and is contractually obligated to see that you get
paid the agreed upon amounts.
Ordinary Annuity- payments are required at the end of each period. For instance, straight
bonds usually make coupon payments at the end of every six months until the bond’s maturity
date.

Calculating the Future Value


Try to check out these statements:
* If you know how much you can invest per period for a certain time period, the future value
(FV) of an ordinary annuity formula is useful in finding out how much you would have in the
future.
* If you are making payments on a loan, the future value is useful in determining the total cost
of the loan.
*If you know how much you plan to invest each year and the fixed rate of return your annuity
guarantees-or, for loans, the amount of your payments and the given interest rate- you can
easily determine the value of your account at any point in the future.

Example 1. Consider the following annuity cash flow schedule:


To calculate the future value of annuity, we have to calculate the future value of each cash
flow. Let’s assume that you are receiving $1, 000 every year for the next five years, and you
invest each payment at 5% interest. The following diagram shows how much you would have at
the end of the five- year period:

Since we have to add the future value of each payment, you may have noticed that if you have
an ordinary annuity with many cash flows, it would take a long time to calculate all the future
values and then add them together. Fortunately, mathematics provides a formula that serves as
a shortcut for finding the accumulated value of all cash flows received from an ordinary
annuity:

Where:
c= cash flow per period
i= interest rate
n= number of payments

Using the above formula for Example 1, this is the result:

$1,000x [5.53] =$5,525.63

Note that the one- cent difference between $5, 525.64 and $5, 525.63 is due to rounding error
in the first calculation. Each value of the first calculation must be rounded to the nearest penny-
the more you have to round numbers in calculation, the more likely rounding errors will occur.
So, the above formula not only provides a shortcut in finding the FV of an ordinary annuity, but
also gives a more accurate result.

Calculating the Present Value

Try to check out these statements:


* The present value of an annuity is simply the current value of all income generated by the
investment in the future. This calculation is predicated on the concept of the time value of
money, which states that a dollar now is worth more than a dollar earned in the future.
* If you would like to determine today’s value of a future payment series, you need to use the
formula that calculates the present value (PV) of an ordinary annuity. This is the formula you
would use as part of a bond pricing calculation. The PV of an ordinary annuity calculates the
present value of the coupon payments that you will receive in the future.

Example 2: To obtain the total discounted value, we need to take the present value of each
payment and, as we did in example 1, add the cash flow together.

Short method; use the formula:

Where:

c= cash flow per period

i= interest rate

n= number of payments

The formula provides us with the PV in a few easy steps. Here is the calculation of the annuity
represented in the diagram for Example 2.
$1,000x [4.33] = $4,329.48

More Examples:
1. Braden Company, a small producer of plastic toys, wants to determine the most it should
pay to purchase a particular annuity. The annuity consists of cash flows of $700 at the end of
each 5 years. The firm requires the annuity to provide a minimum return of 8%.
A- Asked: Present Value

R- Represent:

Given;

Cash Flow Per Period (C) = Php 700


Interest (i)= 8%
Number of payments= 5 years
E- Equation:

S- Solve:

PV Ordinary Annuity = 700 * 1- (1+ 0.08)-5


0.08
= 700 * (3.9927)

= Php 2, 794.90

C- Conclusion:
Therefore, the Braden Company should pay Php 2, 794.90 to purchase a particular annuity.

2. You have an investment account that has 6% annual interest rate. At the end of each year,
you invest an additional $2000. You want to know how much will have in your investment
account over the next 5 years.
A- Asked: Future Value (FV)

R-Representation:

Given:

Number of payments (n)= 5

Cash flow per period (C)= $2, 000


Interest Rate= 6% or 0. 06

E- Equation

S- Solve:

FV Ordinary Annuity = 2000 * (1+0.06)5-1


0.06
= 2000 * (5.63709296)

= $11, 274. 19

C- Conclusion:

In this case, the future value of this annuity and the total cash value of your investment over the course of 5 years would be

$11, 274.19

Group 5 Members

ARAGON, CLARISE
CATAYAS, MARY RUSSEL
ESTOCONING, ADONIS
INVENTO, JAN BRYLE

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