ANNUITY

 An annuity is a series of equal payments occurring at equal periods of time.

TYPE OF ANNUITIES
1. Ordinary Annuity
- payments are made at the end of each period
2. Deferred Annuity
- payments are deferred for several periods of time
3. Annuity Due
- payments are made at the beginning of each period
4. Perpetuity
- similar to ordinary annuity except that the payments continue infinitely.

ORDINARY ANNUITY
 an ordinary annuity is one where the payments are made at the end of each period

FORMULA:

[ ]
'
where,
( 1+i )n −1
F= A F = value or sum of money at some future
i time
P = value or sum of money at present
P= A ¿ A = a series of periodic equal amounts of
money
n = number of interest periods
i = interest rate per interest period

Example 1: If ₱500 is invested at the end of each year for 6 years at an annual amount
interest rate of 7%, what is the total peso amount upon the deposit of the 6th payment?
Given:
A = ₱500
n=6
i= 7% or 0.07
Required:
F = Future Worth

Solution:

[ ]
'

( 1+i )n −1
F= A
i

F=500 [
( 1+ 0.07 )6−1
0.07 ]
Answer: F=₱3576.645

Example 2: A man paid 10% down payment of ₱200,000 for a house and lot and agreed to
pay the 90% balance of monthly installments for 60 months at an interest rate of 15%
compounded monthly. Compute the amount of monthly payment.
Amount of Down Payment = Cost of House (% down)
₱200,000 = CoH(0.10)
Balance = ₱2,000,000 – ₱200,000
Balance = ₱1,800,000

Given:
P = ₱1,800,000
i = 15%/12 or 0.15/12
n’ = 60
n = 60
Required:
A = monthly payment
Solution:
P= A ¿

1800000=A ¿
Answer: A = ₱42,821.87

Example 3: A man inherited a regular endowment of ₱100,000 every end of 3 months for x
years. However, he may choose to get a single lump of ₱3,702,939.80 at the end of 4 years. If
the rate of interest was 14% compounded quarterly. What is the value of x?

Given:
F = ₱3,702,939.80
A = ₱100,000
i = 14% or 0.14
m=4
n=4
Required:
x = years

Solution:
F
P=
¿¿
3702939.80
P=
¿¿
P = ₱2,135,507.27

P= A ¿

2,135,507.27=100000 ¿

Answer: x = 10 years

Example 4: A machine is under consideration for investment the cost of the machine is
₱25,000. Each year it operates, this machine will generate savings of ₱15,000. Given an
effective annual interest rate of 10%, what is the discounted payback period, in years on the
investment in the machine?
Given:
P = ₱25,000
A = ₱15,000
i = 18% or 0.18
Required:
x = discounted payback period

Solution:
P= A ¿
25000=15000 ¿
Answer: x = 2.16 years

DEFERRED ANNUITY
 is the type of annuity where the payments are deferred for several periods of time.
FORMULA:
where,
A F = value or sum of money at
P= ¿ some future time
i P = value or sum of money at
present
A = a series of periodic equal
A amounts of money
F= ¿ n = number of interest periods
i
i = interest rate per interest
period

Example 1: On the day his grandson was born a man deposited to a trust company a
sufficient amount of money so that the boy could receive five annual payments of ₱10,000 each
for his college tuition fees, starting his 18th birthday. Interest at the rate of 12% per annual was
to be paid on all amounts on deposit. There was also a provision that the grandson could elect
to withdraw no annual payments and receiving single lump amount on his 25 th birthday. The
grandson chose this option.
a.) How much did the noy receive as the single payment?
b.) How much did the grandfather deposit?

Given:
A = ₱10,000
i = 12% or 0.12
n=3
n’ = 5

Solution:
a.)
A
F= ¿
i
10000
F= ¿
0.12
F = ₱63,528.47
F@25=P(1+i)n
F = 63528.47(1+0.12)3
Answer: F = ₱89,252.93

b.)
F
P=
¿¿
89252.93
P=
¿¿
Answer: P = ₱5,250.15

Example 2: A debt of ₱40,000 whose interest rate is 15% compounded semi-annually is to be

discharged by a series of 10 semi-annual payments made at the end of each compounding
period. The first payment to be made six months after consummation of the loan. The first 6
payments will be ₱6,000 each, while the remaining payment will be equal and such amount that
the final payment will liquidate the debt. What is the amount of the last four payments?

Given:
P = ₱40,000
i = 15%/2 or 0.15/2
A = ₱6,000
n = 6 , 4 , 10
Required:
A = last four payments
Solution:
P= A ¿
40000=6000 ¿
Answer: A = ₱5,454.21
Example 3: If ₱10,000 is deposited each year for 9 years, how much annuity can a person get
annually from the bank every year for 8 years starting 1 year after the 9th deposit is made. Cost
of money is 14%.

Given:
A1 = ₱10,000
i = 14% or 0.14
n1 = 9
n2 = 8
Required:
A = annuity

Solution:
10000 ¿
Answer: A = ₱34,675.19

ANNUITY DUE
 is a type of annuity where the payments are made at the beginning of each period.
FORMULA:
P= A ¿ F = value or sum of money at some
F= A ¿ future time
P = value or sum of money at
present
A = a series of periodic equal
amounts of money
n = number of interest periods
where,
i = interest rate per interest period

Example 1: If ₱500 is deposited in an account at the beginning of each year for 6 years at an
annual interest rate of 7%, how much can be withdrawn after 6 years?

Given:
A = ₱500
i = 7% or 0.07
n=6
Required:
F = Future Value

Solution:
F= A ¿
F=500 ¿
F =₱3,576.65 This will become the present value at 5th year
Use compound interest formula:
F=P ¿
F=3576.65 ¿
Answer: F = ₱3,827.02

Example 2: A man owes ₱10,000 with interest at 6% payable semi-annually. What equal
payment at the beginning of each 6 months for 8 years will discharge his debt?

Given:
P = ₱10,000
i = 6% or 0.06
n = 15

Required:
A = equal payment

Solution:
P= A ¿
10000=A ¿
Answer: A = ₱772.92

Example 3: At what rate payable quarterly will payment of ₱500 at the beginning of each 3
months for 7 years discharge a debt of ₱12,000 due immediately?

Given:
P = ₱12,000
A = ₱500
n=7
m=4
Required:
i = rate

Solution:
P= A ¿
12000=500¿
GRADIENT

 UNIFORM ARITHMETIC GRADIENT

 Cash flow series that either increases/decreases by constant amount.
FORMULA: CALCULATOR TECHNIQUE:
 n
A+ G(x−1)
F= A ¿ P=∑ ¿
x=1
¿¿

where,
F = value or sum of money at some future time
P = value or sum of money at present
A = a series of periodic equal amounts of money
n = number of interest periods
i = interest rate per interest period
G = uniform gradient amount

Example 1: A certain machine purchased today shall be paid 3 annual unequal payments
with no downpayment. If the company agrees that the first payment is ₱120,000 at the end of
the first year and you have to increase that payment by ₱30,000 per year for the first remaining
years until the end of the 3rd year. How much is the present month of the machine if the
company charges 12% annual interest?

Given:
A = ₱120,000
G = ₱30,000
i = 12% or 0.12
n=3
Required:
P = Present Worth

Solution:
F= A ¿
F=120000 ¿
F = ₱498,528
F
P=
¿¿
498,528
P=
¿¿
Answer: P = ₱354,842.38
ALTERNATIVE SOLUTION:
n
A+ G ( x−1 )
P=∑ ¿
x=1
¿¿
3
120,0000+30,000 (x−1)
P=∑ ¿
x=1
¿¿

P = ₱ 354,842.38
Example 2: The maintenance cost for a car this year in expected to be ₱5,000. The cost will increase
₱1,000 each year for 10 years. The interest is 8% compounded annually. What is the present and future
worth of the maintenance for the car over the full 10 years?

Given:
A = ₱5,000
G = ₱1,000
i = 8% or 0.08
n = 10
Required:
P = Present Worth
F = Future Worth
Solution:
F= A ¿
F=5000 ¿
Answer: F = ₱128,514.84
F
P=
¿¿
128514.84
P=
¿¿
Answer: P = ₱59,527.24

ALTERNATIVE SOLUTION:
n
A+ G ( x−1 ) F=P ¿
P=∑ ¿
x=1
¿¿ F=59527.24 ¿
10
5000+1000 ( x−1 ) Answer: F = ₱128,514.84
P=∑ ¿
x=1
¿¿

Answer: P = ₱59,527.24

Example 3: ₱500,000 is deposited in savings account that pays 8% interest compounded

semi-annually. Equal annual withdrawals are to be made from the account beginning one year
from now and continuing forever. Compute the maximum amount of the equal withdrawal.
Given:
P = ₱500,000
i = 8% or 0.08
n=2
Required:
A = maximum amount of equal withdrawal

Solution:
ERsemi−annually =ERannually
¿
¿
i = 8.16% or 0.0816
A
P=
i
 A
500000=
0.0816
Answer: A = ₱40,800

Example 4: A fund is to provide an annual scholarship at ₱4,000 for the first 5 years, ₱6,000
for the next 5 years and ₱9,000 thereafter. The fund will be established 1 year before the first
scholarship is charged. If the fund earns 12% interest what sum must be deposited?

Given:
A1-5 = ₱4,000
A6-10 = ₱6,000
A10-12 = ₱9,000
i = 12% or 0.12
n1-5 = 5
n6-10 = 10
Required:
P = Present Value (to be deposited)

Solution:
P= A ¿
P@ 4000 =4000 ¿ = ₱14,419.10
P@ 6000=6000 ¿ = ₱12,272.68
9000
P@ 9000@ 10= = ₱75,000
0.12
75000 = ₱24,147.99
P@ 9000 =
¿¿
P = P@4OOO + P@6000 + P@9000@10 + P@9000
P = ₱14,419.10 + ₱12,272.68 + ₱75,000 + ₱24,147.99
Answer: P = ₱50,839.77

 GEOMETRIC GRADIENT
 Cash flow series that either increases/decreases by constant percentage each period.
FORMULA: CALCULATOR TECHNIQUE:

[ ]
n n
A 1−w W = 1+ g P= A n(if i=g)
P= P=∑ A ¿ ¿¿
1+i 1−w 1+i 1+ i X

where,
P = value or sum of money at present
A = a series of periodic equal amounts of money
n = number of interest periods
i = interest rate per interest period
g=
w=

Example 1: An engineer borrowed an amount at a certain bank that can be paid by four end
of year installments, of which the first payment falls after 3 years. If the first payment will be
₱100,000 and increases by 8% every year, how much did he borrow if the first interest rate is
also 8%?

Given:
A = ₱100,000
g = 8% or 0.08
i = 8% or 0.08
n=2
n=4
Required:
P = Present Value

Solution:
A
P= n
1+i

(4)
100000
P1−4 =
1+ 0.08
P1-4 = ₱370,370.37
P1−4
P=
¿¿
370370.37
P=
¿¿
Answer: P = ₱317,532.90
ALTERNATIVE SOLUTION:
n
P=∑ A ¿ ¿¿
X

4
P=∑ 100000¿ ¿ ¿
1

P1-4 = ₱370,370.37
P1−4
P=
¿¿
370370.37
P=
¿¿
Answer: P = ₱317,532.90

Example 2: Annual maintenance cost for a machine is ₱1,500 this year and
estimated increase by 10% each year every year. What is the present worth of the
maintenance costs for 4 years if i = 8%?
Given:
A = ₱1,500
g = 10% or 0.10
i = 8% or 0.08
n=4

₱1,500(1+.10)2

Required:
P = Present Worth

Solution:

[ ]
1+ g 55 4
W= 1−
1+i 1500 54
P=
1+0.08 55
1−
54

ALTERNATIVE SOLUTION:
n

W=
1+0.10 P=∑ A ¿ ¿¿
1+0.08 X

4
55
W= P=∑ 1500¿ ¿ ¿
54 1

[ ] Answer: P = ₱5,711.79
n
A 1−w
P=
1+i 1−w
Answer: P = ₱5,711.79