Annuities

by Group 2
Reporter:

Katherine Ramos
 Present Value

The Present Value is the cash value of future returns or income

once a discount rate has been applied to it.

PRESENT VALUE USING THE TABLE

ILLUSTRATION:
Cassandra wants P500,000 in 8 years. Find how much
Cassandra must invest now at 6% interest compounded
semiannually in order to have P500,000, 8 years from
now.
 Determine the Interest rate
per period and the numbers of
compounding periods

Interest rate per period = Nominal rate

Periods per year

Interest rate per period = 6% ÷ 2= 3%

Compounding Periods = Years × Periods per year

Compounding Periods = 8 × 2 = 16

Present Value = Compound amount × Table factor Scan across the top
row of the present
Present Value = 500,000 × .623167 = P311, 583.50
value table to 3%
down to 16 periods.
 Present Value

Table Factors for Periods Beyond the Table

When this occur, you can create a new table factor by multiplying the
table factors for any two periods that add up to the number of periods
required.
ILLUSTRATION:
Determine the new table factor and find the present
value of P200,000, if the interest rate is 13%
compounded semiannually, for 28 years.
Interest rate per period = 13% ÷ 2= 6 ½ %

Compounding Periods = 28 × 2 = 56

Table factor for 25 at 6 ½% = .207138

Table factor for 31 at 6 ½% = .141959

.207138 × .141959 = .029405

Present Value= 200,000 × .029405= P5,881

 Present Value Using the Formula

PV= A Illustrition: Use the present value formula to find

(1+i)n the present value of P30,000, if the interest rate
is 16% compounded quarterly, for 6 years

PV= 30,000
(1+.04) 24

PV= 30,000 PV= 30,000 PV= P 11,703.64

(1.04) 24 2.5633041
Fractional Part of Compounding Periods

Illustration: Find the present value

of a non-interest- bearing note of
P10,000 for three years and two
months at 6% compounded
semiannually.
 ADDITIONAL PROBLEM

Equivalent Values
A single obligation or a set of obligations may be
replaced by another single obligation or set of
obligation due on dates other than the original
obligations ' due dates. For the mutual benefit of the
creditors and debtors, the value of the new obligations
should be equivalent to the values of the original ones.
An equation of value makes the original obligations and
the new obligations to be of equal value on a
comparison date.
 Illustration: A debt of P20,000 is due at the end of four years. If money is worth
6% compounded quarterly, what is the value of the debt when it is paid (a) at the
end of one year? (b) at the end of six years????

A. 6% ÷ 4= 1 ½% B. 4× 2= 8
4× 3= 12 compounding periods
Table 2 PV= A× Table Factor Table 1 PV= A× Table Factor

Present Value = Compound amount=

20,000× 1.836387 20,000× 1.126493
= P16,727.74 = P22,529.86
 Illustration: Jude owes P30,000 due in three years and P40,000 due in eight years. He and his creditor
have agreed to settle the debts by two equal payments in five and six years, respectively. Find the
size of each payment if money is worth 6% compounded semiannually. Designate the debt of P30,000 as
debts (a) and the debt of P40,000 as debt (b) for reference purposes.

1. PV= P30,000 2. A= P40,000

i= 3% ( 6%÷2) i= 3% ( 6%÷2)
n= 6 ( 3 years- from due date n= 4 ( 2 years- from comparison date
to comparison date × 2) to due date × 2)
Table 1 is used Table 2 is used
Compound amount= 30,000 ×
1.194052= P35,821.56 Present Value= 40,000 ×
0.888487= P35,539.48
 Illustration: Jude owes P30,000 due in three years and P40,000 due in eight years. He and his creditor
have agreed to settle the debts by two equal payments in five and six years, respectively. Find the
size of each payment if money is worth 6% compounded semiannually. Designate the debt of P30,000 as
debts (a) and the debt of P40,000 as debt (b) for reference purposes.

3. PV=x 2. New debts = Old debts

i= 3% ( 6%÷2) x+1.0609x 35,821.56+35,539.48
n= 2
Table 1 is used
Solve for x
Compound amount= × x + 1.0609× = 71,361.04
(1.0609)= 1.0609x 2.0609x = 71,361.04
x = P34,626.15
Reporter:

Krystle Cabahug
 Annuity
An annuity is a series of equal cash flows, or
payments, made at regular intervals.
Examples:
Periodic savings
Life insurance premium
Interest payments on bonds
Purchases of cars, houses, or home
Appliances on installment payment plans
Payment Interval Term
The period of time The time between the
between two successive beginning of the first
payment dates. payment interval and
(Annually, Semi-Annually, the end of the last
Quarterly, Monthly) payment interval.
Classification of Annuities

1. Annuities Classified by Term

2. Annuities Classified by Dates of
Payment
3. Annuities Classified by Length of
Payment Interval and Interest
Compounding Period
 1.
Annuities
Classified by
Term
 1. Annuities Classified by Term

a. Annuity Certain
The term of annuity certain begins and ends on definite dates.
b. Perpetuity
The term of a perpetuity begins on a definite date but never
ends.
c. Contingent Annuity
The term of contingent annuity begins on a definite date, but
the ending date is not fixed in advance. Instead, the ending
date depends on some condition happening in the future.
 2.
Annuities
Classified by
Dates of
Payment
2. Annuities Classified by Dates of Payment

a. Ordinary Annuity
Periodic payments are made at the end of each
payment interval.
Example: If the term of an annuity is one year, which
begins on January 1, and the payment interval is one
quarter, the first payment should be made on April 1,
three months later or at the end of the first quarter,
the second payment should be made on July 1, the end of
the second quarter, and so on.
2. Annuities Classified by Dates of Payment

b. Annuity Due

Periodic payments are made at the beginning of

each payment interval
Example: In the above example the first payment
would be made on January 1, the beginning of the
first quarter, the second payment would be made on
April 1, the beginning of the second quarter, and so on.
2. Annuities Classified by Dates of Payment

c. Deferred Annuity
Periodic payments are made at the end of each payment
interval. However, the term of the annuity does not begin
until after a designated period of time.
Example: A man borrows P100,000 on April 15, 2018, and
agrees to repay the loan by making a series of three
equal annual payments, the first payment to be made
two years from the date of the loan.
 3.
Annuities Classified
by Length of
Payment Interval
and Interest
Compounding Period
3. Annuities Classified by Length of Payment
Interval and Interest Compounding Period

a. Simple Annuity
The payment interval coincides with the interest
compounding period. In other words, the interest is
computed on payment date.
Example: When the payment interval is one month, the
interest is compounded monthly. When each of the
payments of an annuity is made at the end of each
month the interest is also computed and compounded at
the end of each month.
3. Annuities Classified by Length of Payment
Interval and Interest Compounding Period

b. Complex Annuity/General Annuity

The payment interval does not coincide with the
interest compounding period.
Example: Payment interval is one month, and the
interest is compounded quarterly, or the payment
interval is one quarter, and the interest is
compounded monthly.
Ordinary
Annuity
 Future Value of an
Ordinary Annuity by:

a. Manual Calculation
b. Using the Table
c. Using the Formula
 a. Manual Calculation
Illustration: What is the
future value of an ordinary
annuity of P10,000 per year,
for 4 years, at 6% interest
compounded annually?
Solution: Each interest
calculation uses the formula:
I = PRT R = 0.06 T = 1 year.
 b. Using the Table
Illustration: Audrey Alonzo
deposited P30,000 at the end of
each year for 8 years in her
savings account. If her bank paid n 5%
5% interest compounded annually,
find the future value of Audrey's
account. 8 9.549109
Solution:
Future Value = Payment x Table Factor
Future Value = 30,000 x 9.549109
Future Value = P 286,473.27
 c. Using the Formula
Formula:
FV(OA) = Future value of an
ordinary annuity
Pmt = Annuity payment
i = Interest rate per period
(nominal rate ÷ periods per year)
n = Number of periods
(years x periods per year)
 c. Using the Formula
Illustration: What is the future value of an ordinary
annuity of P1,000 per month, for 3 years, at 12% interest
compounded monthly?
Given:
Pmt = 1,000
i = 1% or 0.01(12% ÷ 12)
n = 36 periods (3 years x 12 periods per year).
c. Using the Formula

Given:
Pmt = 1,000
i = 1% or 0.01
(12% ÷ 12)
n = 36 periods
(3 years x 12
periods per year).
Reporter:

Katherine Ramos
 PRESENT VALUE OF AN ORDINARY ANNUITY

This business situation requires that a lump sum amount to

be deposited at compound interest at the beginning is
known as the present value of an annuity.
 Present Value using the Table
Illustration: How much must be deposited now, at 9%
compounded annually, to yield an annuity payment of
P50,000 at the end of each year, for 10 years?
Present Value= Annuity payment × Table Factor
Present Value= 50,000× 6.417658
Present Value= P320,882.90
 Present Value Using the Formula

PV OA = Pmt × 1- (1+i) -n

i
PV = Present Value of an ordinary annuity
Pmt = Annuity payment
i = Interest Rate period ( nominal rate ÷ periods per year
n = Numbers of periods ( years× periods per year)
 Present Value Using the Formula
Illustration: What is the
present value of an ordinary
annuity of P10,000 per
month, for 4 years, at 12%
interest compounded
monthly? For this present
value of an ordinary annuity
problem we shall use i= 1%
and n= 48
 Interest Rate per Period not Given in the Table
Illustration: Find (a) the
future and ( b) the present
value of an annuity of
P2,000 payable at the end
of each year for 20 years,
if money is worth 5.2%
compounded annually.
 Interest Rate per Period not Given in the Table
Illustration: Find (a) the
future and ( b) the present
value of an annuity of
P2,000 payable at the end
of each year for 20 years,
if money is worth 5.2%
compounded annually.
Reporter:

Tiffany Villamor
Finding the Interest Rate per Period
and the Nominal Interest Rate
Future Value is known

To find the interest Table factor = Future

rate when the value
future value is Annuity
known, use the payment
formula:
 Illustration and Solution
Illustration: At what nominal rate compounded quarterly
will an annuity of P1,500 payable at the end of each
quarter amount to P66,000 in eight years?
Here, FV = P66,000, Pmt = P1,500, n = 32 (8 x 4).
Substituting the values in the above formula,
Solution: 66,000
Factor =
Future value Factor =
Annuity 1,5000
payment Factor = 44
 When a more accurate value of i is needed, the
interpolation method may be employed as follows:
[(1+i) n -1]
Interest Rate per Period Table factor or i
2% 44.227030
x 44.000000
1 7/8% 43.307936

x - 1 7/8% .692064
=
1/8% .919094
 Solve for x :
(.692064)
x - 1 7/8% = 1/8%
(.919094)

x - .01875 = .00125 x .752985

x - .01875 = .000941
x = .000941 + .01875
x = .019691
i = .010691 or 1.97%
nominal interest rate = .019691 x 4
= .078764 or 7.88%
Finding the Interest Rate per and
the Nominal Interest Rate
Present Value is known

To find the interest Table factor = Present

rate when the value
present value is Annuity
known, use the payment
formula:
 Illustration and Solution
Illustration: The present value of an annuity of P2,000 payable
at the end of every six months for 10 years is P30,00. What is
the nominal rate compounded semi-annually?
Here, PV = P30,000, Pmt = P2,000, n = 20 (10 x 2). Substituting
the values in the above formula,
Solution: 30,000
Factor =
Present value Factor =
Annuity 2,000
payment Factor = 15
 When a more accurate value of i is needed, the
interpolation method may be employed as follows:
[(1+i) n -1]
Interest Rate per Period Table factor or i
2 3/4% 15.227252
x 15.000000
3% 14.877475

x - 3% .122525
=
-1/4% .349777
 Solve for x :
(.122525)
x - 3% = -1/4%
(.349777)

x - .03 = -.0025 x .350295

x - .03 = -.000876
x = -.000876 + .03
x = .029124
i = .029124 or 2.91%
nominal interest rate = .029124 x 2
= .058248 or 5.82%
 Finding the Term
Future Value is known

To find the term of Table factor = Future

an annuity when the value
future value is Annuity
known, use the payment
formula:
 Illustration and Solution
Illustration: If P3,000 is deposited at the end of each month,
how many moths will be required for the deposits to P122,000,
if the interest rate is 6% compounded monthly?
Here, FV = P122,000, Pmt = P3,000, i = 1/2% (6% / 12).
Substituting the values in the above formula,
Solution: 122,000
Factor =
Future value Factor =
Annuity 3,000
payment Factor = 40.666667
 The findings are as follows:

When n = 37, the entry = 40.532785

When n = 38, the entry = 41.735449

When n = 37, FV = 3,000 x 40.532785 = P121,598.36

When n = 38, FV = 3,000 x 41.735449 = P125,206.35
Answer:
= 38 deposits or 38 months (3 years and 2 months)
 Finding the Term
Present Value is known

To find the term of Table factor = Present

an annuity when the value
present value is Annuity
known, use the payment
formula:
 Illustration and Solution
Illustration: Alvin Anson borrows P40,000 and agrees to repay it by
paying P2,000 at the end of each quarter. If the interest charged
is 8% compounded quarterly, how long will he have to pay?
Here, PV = P40,000, Pmt = P2,000, i = 2% (8% / 4). Substituting the
values in the above formula,
Solution: 40,000
Factor =
Present value Factor =
Annuity 2,000
payment Factor = 20
 The findings are as follows:

When n = 25, the entry = 19.523456

When n = 26, the entry = 20.121036

When n = 25, PV = 2,000 x 19.523456 = P39,046.91

When n = 26, PV = 2,000 x 20.121036 = P40,242.07
Answer:
= 26 payments or 26 quarters (6 years and six
months)
Reporter:

Mariam Icot
 ANNUITY DUE

an annuity for which the Illustration:

periodic payment are What is the future
made at the beginning of value of an annuity due
each payment interval.
The term of annuity due
of P10,000 per year, for
begins on the date of the 4 years of 6% interest
first payment and ends compounded annually?
one payment interval
after the last payment is
made.
 Manual Calculation Solution
P= 10,000. I= 6% T= 1
Time Balance Beginning of Period 3 21,836
Beginning of Period 1 10,000 +10,000
+600 +1,910.16
End of Period 1
10,600 End 33,746.16

Beginning of Period 2 10,600 Beginning of Period 4 33,746.16

+10,000 +10,000
+1,236 +2624.76
21,836 End 46,370.92
End
 Future Value Using the Table
Illustration:
To solve, we need to determine the interest
Aubrey Albin deposited rate per period and number of compounding
P6,000 at the beginning of each periods first. Then we need to ADD ONE
month, for 2 years. If the interest PERIOD to the total number of compounding
rate was 12% compounded monthly, periods. In the illustration, the interest rate
use the table to calculate the per period is 1% (12%/12) and the number of
compounding period is 24 (2 yrs x 12period per
future value of Aubrey’s account
year) plus 1 = 25 periods

Future Value = Annuity Payment x Table Factor From the table factor found DEDUCT 1 to
= 6,000 x 27.243200 get the annuity due table factor. The
annuity table factor will be 27.243200
= P163,459.20 (28.243200- 1)
 Future Value Using the Formula

Annuity Payment ( Pmt )= 60000

n
Interest Rate per period ( i )= 1% (12%/12)
(1 + i) - 1 Number of periods ( n )= 24
FVAD = Pmt x x (1 + i)
i 24
= 6,000 x (1 + 0.01) - 1 x (1 + 0.01)
0.01
= 6,000 x 26.97346485 x 1.01 Note that the annuity due formula is
= 163,,459.197 similar to the ordinary annuity formula
except that it is multiplied by (1+i) to
= P163,459.20 account for the fact that annuity due
earns interest for one additional period
because payments are made at the
beginning of each period
 Present Value Using the Table

Illustration: To solve, we need to determine the interest

How much must be deposited now, at 10% rate per period and number of compounding
periods first. Then we need to SUBTRACT ONE
compounded semiannually, to yield an
PERIOD to the total number of compounding
annuity payment of P20,000 at the
periods. In the illustration, the interest rate per
beginning of each 6-month period, for 7
period is 5% (10%/2) and the number of
years? compounding period is 14 (7 yrs x 2 period per
year) less 1 = 13 periods
Present Value = Annuity Payment x Table Factor
= 20,000 x 10.393573 From the table factor found ADD 1 to get the
= P207,871.46 annuity due table factor. The annuity table
factor will be 10.393573 (9.393573 + 1)
 Present Value Using the Formula

Annuity Payment ( Pmt )= 20000

Interest Rate per period ( i )= 5% (10%/2)
1 - (1 + i)-n
PV AD = Pmt x x (1 + i) Number of periods ( n )= 14
i
1 - (1 + 0.05)-14
= 20,000 x x (1 + 0.05)
0.05 Note that the annuity due formula is similar to
= 20,000 x 9.89864094 x 1.05 the ordinary annuity formula except that it is
= 207,871.4597 multiplied by (1+i) to account for the fact that
annuity due earns interest for one additional
= 207,871.46 period because payments are made at the
beginning of each period
 ADDITIONAL PROBLEMS INVOLVING ANNUITY DUE

Finding the Annuity Illustration:

Angelo Armstrong wishes to
Payment when receive P20,000 five years
Future Value is from now. How much must
Known he invest at the beginning
Annuity Payment=
Future value of each year if the first
Table factor payment starts now and
the interest is 10%
compounded annually?
 Solution
Fv= 20,000. I= 10% n= 6 (5+1)
n
(1+i) -1
FVAD = ×(1+i)
Future value i
Annuity Payment = 5
Table factor (1+0.10) -1
FVAD = ×(1+0.10)
0.10
20,000
Annuity Payment = FVAD = 6.715610
6.715610

Annuity Payment = P 2,978.14

 ADDITIONAL PROBLEMS INVOLVING ANNUITY DUE

Finding the Annuity Illustration:

Payment when washing machine that sells
for P6,000 can be bought
Present Value is under terms of 20 equal
Known monthly payments, starting
Present value now. If money is worth 21%
Annuity Payment=
Table factor compounded monthly,
what is the size of each
payment?
 Solution
Fv= 6,000 I= 1.75% n= 19 (20-1)

[i-
1
(1+i) n
[
×(1+i)
Future value PVAD = i
Annuity Payment =

[
Table factor 1-
1 [
PVAD = (1+0.0175) 20 ×(1+0.0175)
0.0175
6,000
Annuity Payment = FVAD = 17.046057
17.046057

Annuity Payment = P 351.99

 Finding the Interest The steps in finding the table
Rate and Period when factor for the annuity due is
Future Value is Known modified in the second formula,
FV = Pmt × Table Factor
Instead of deducting 1 from the
FV = Pmt × Table Factor − Pmt table factor found in the
ordinary annuity table
FV + Pmt = Pmt × Factor
(using n + 1), no deduction is
FV+ Pmt made. This is why payment for
Factor =
Pmt one period is deducted as
shown in the second formula.
 Finding the Interest Rate per Period when
Future Value is Known
Illustration: FV = 50,000 PMT = 10,00 n=5 (4+5)
At what nominal rate
compounded annually FV+ Pmt
Factor =
Pmt
will an annuity due of 50,000 + 10,000
P10,000, payable at the Factor =
10,0000
beginning of each year Factor = 6
for four years, amount I= 9% < x < 9.5%
to P50,000?
Finding the Number of Periods when Future
Value is Known
If P5,000 is deposited at FV = 50,000 PMT = 5,000 i= 8%
the beginning of each
FV+ Pmt
month at an interest rate Factor =
Pmt
of 8% compounded 50,000 + 5,000
Factor =
annually, how many 5,0000
months will be required Factor = 11
for the deposits to n+1 = 22 - 1 = 21 months
amount to at least or 1 year and 9 months
P50,000?
 Finding the Interest The steps in finding the table
Rate and Period when factor for the annuity due is
Present Value is Known modified in the second
PV = Pmt × Table Factor
formula. Instead of adding I to
PV = Pmt × Table Factor + Pmt the table factor found in the
ordinary annuity table (using
PV - Pmt = Pmt × Factor
n- 1). no addition is made. This is
FV- Pmt why payment for one period is
Factor =
Pmt added as shown in the
Second formula.
 Finding the Interest Rate per Period when
Present Value is Known
Illuastration: FV = 58,000 PMT = 3,000 n=23 (4×6-1)
What is the nominal rate FV- Pmt
compounded quarterly if Factor =
Pmt
the present value of an 58,000 - 3,000
annuity of P3,000 payable Factor =
3,0000
at the beginning of each
Factor = 18.33
quarter for six years is
P58,000 i = 7.5%< x <8%
 Finding the Number of Periods when
Present Value is Known
Illustration: Arold Aric bought a FV = 42,500 PMT = 5,000 i = 6% (12÷2)
P42,500 flat television and FV- Pmt
Factor =
agreed to pay for it in Pmt
installment of P5,000 at the 42,500 - 5,000
beginning of every six months, Factor =
5,000
starting on the date of Factor = 7.5
purchase. If the interest n-1= 11
charged is 12% compounded 11+1 = 12 semianually
semiannually, how long will it periods or six years
take him to pay for the flat
television?
Reporter:

Hannah Angelica
Antopina
DEFERRED ANNUITY
-it is a type of annuity where the payments don't
start right away—they begin at a future date.
PERIOD OF DEFERRAL
-the time between the purchase of an annuity and
the start of the payments for the deferred
annuity
 HOW TO DETERMINE PERIOD OF DEFERRAL

EXAMPLE:

1) Annual payments of Php 2,500 for 24 years

that will start 12 years from now.

2) Monthly payments of Php 2,000 for 5 years

that will start 7 months from now.
 HOW TO DETERMINE PERIOD OF DEFERRAL

EXAMPLE:

3) Quarterly payments of Php 5,000 for 8 years

that will start two years from now.

4) Semi-annual payments of Php 60,000 for 10

years that will start 5 years from now.
 FUTURE VALUE USING THE TABLE

The future value of a deferred annuity is the total

amount you will have at the end of the payment period.
This includes all the payments you made and the interest
earned.
Even though the payments start later, you calculate
the future value the same way as a regular (ordinary)
annuity. You don’t count the waiting time before the
payments begin. To find the future value, you use the
same table used for ordinary annuities, called Table 3.
 EXAMPLE
Find the future value of an FORMULA:
annuity of P1,000 payable at FV= Pmt x Table factor
the end of each quarter for
six payments. The interest Pmt = P1,000; i = 1 1/2%
rate is 6% compounded (6%/4); n = 6
quarterly. The first payment
is due at the end of nine FV = 1,000 × 6.229551 =
months. ₱6,229.55
 PRESENT VALUE USING THE TABLE

The present value of a deferred annuity is the value

of the annuity at the start of the waiting period, not
when the actual payments begin.
In other words, you are finding out how much the
annuity is worth today, before any payments start.

The letter d stands for the number of periods (like

months or quarters) you have to wait before the
payments begin.
 EXAMPLE
Find the present value of an
annuity of P1,000 payable at FORMULA:
the end of each quarter for PV= Pmt x Table factor
six payments. The interest
rate is 6% compounded Pmt = P1,000; i = 1 1/2%
quarterly. The first payment (6%/4); n = 6, d=2
is due at the end of nine
(2 quarters or 6 months)
months.
 STEPS:
1. Find a present value assuming FORMULA:
that payments were made
PV= Pmt x Table
even during the period of
deferment, d. Hence, total factor
number of compounding periods
is d+ n. The period to be used PV= 1,000 x 7.485925
in locating the table factor
=Php 7,485.92
in Table 4 is 8 (2+6).
 STEPS:
FORMULA:
2. Find a present value
assuming only d or 2-the PV= Pmt x Table
period of deferment as the factor
total number of compounding
periods.
PV= 1,000 x 1.955883
=Php 1,955.88
 STEPS:
FORMULA:
3. Subtract the present value
in step 2 from the present PV= Pmt x Table
value in step 1. The factor
difference is the present
value of the deferred
PV=7,485.92-1,955.88
annuity.
=Php 5,530.04
 PRESENT VALUE USING THE TABLE

Alternatively, the final present value may be

solved directly.

PV= Pmt x Difference in table factors

PV= 1,000 (7.485925-1.955883)
PV= 1,000 (5.530042)
PV= Php 5,530.04
 PRESENT VALUE USING THE FORMULA

R- regular payment
i- interest rate per period
n- number of payments
k- number of conversion periods in the
deferral
 PRESENT VALUE USING THE FORMULA

On his 40th birthday, Mr. Ramos decided to buy

a pension plan for himself. This plan will allow
him to claim P10, 000 quarterly for 5 years
starting 3 months after his 60th birthday.
What one - time payment should he make on his
40th birthday to pay off this pension plan, if
the interest rate is 8% compounded quarterly.
 STEPS:
On his 40th birthday, Mr. Ramos GIVEN:
decided to buy a pension plan for R= 10,000
himself. This plan will allow him
M=4
to claim P10, 000 quarterly for
5 years starting 3 months after R=8%=0.08
his 60th birthday. What one - t=5
time payment should he make on
i= 0.08/4=0.02
his 40th birthday to pay off this
pension plan, if the interest rate n=(4)(5)=20
is 8% compounded quarterly. k=80
 STEPS

P= Php 33,538.38
Reporter:

Frances Jo Maata
 PERPETUITY
- an annuity with a term that begins on a definite date
but never ends
- its final value is impossible to determine, but its
present value can be determined
 Simple Ordinary
Perpetuity
- when the payments of perpetuity are made
at the end of each interest period
 Simple Ordinary Perpetuity

Formula
PV∞ = I ÷ R
∞ = infinity
I = periodic payment
R = interest rate per period
 EXAMPLE
Find the present value of
PV∞ = I ÷ R
a simple perpetuity of a
PHP5,000 payable at the
PV∞ = 5000 ÷ 0.02
end of each quarter if
the interest rate is 2%
PV∞ = PHP250,000
per quarter (or 8% if
compounded quarterly).
 EXAMPLE
If PHP250,000 is invested now
PV∞ = I ÷ R at 2% per quarter, the
investor can draw PHP5,000
PV∞ = 5000 ÷ 0.02 qt the end of each quarter
forever; that is if the
principal remains in tqct and
PV∞ = PHP250,000
the interest rate does not
change.
 EXAMPLE

Ms. Alex Consani, a rich and generous alumni,

wants to create a scholarship fund for her
alma mater. She plans to donate money that
earns interest to fund a PHP300,000
scholarship each year. If the fund can
consistently earn a 5% annual return, how
large should the initial donation be?
 SOLUTION

PV∞ = I ÷ R
PV∞ = 300,000 ÷ 0.05
PV∞ = PHP6,000,000
Ms. Alex needs to donate PHP6,000,000 to make the scholarship
happen. This amount, invested at 5% annual return, will generate
PHP300,000 pesos in interest that funds the scholarship each year.
 Simple Perpetuity Due
- when the payments of perpetuity are made
at the beginning of each interest period
 Simple Perpetuity Due

Formula
PV∞ = (I ÷ R) + I
OR

PV∞ = I (1 + (1/R)
∞ = infinity R = rate per period
I = periodic payment
 EXAMPLE
Find the present value
of a simple perpetuity 1. Compute the
of PHP4,000 payable simple
at the beginning of perpetuity at
each month if the the end of
interest rate is 12%
each month.
compounded monthly.
 STEPS:

1. Compute the PV∞ = (I ÷ R) + I

simple PV∞ = 4000 ÷ 0.01*
perpetuity at
PV∞ = PHP400,000
the end of
each month.
*R = 12% ÷ 12
 STEPS:

PV∞ = (I ÷ R) + I
2. Add the first
PV∞ = 400,000 + 4000
payment.
PV∞ = PHP404,000
 EXAMPLE

You were born into generational wealth. Your rich

grandfather died and left you a mansion in Maria
Luisa Estate Park. That property generates a
consistent monthly rental income of PHP120,000 per
month, with the first payment received immediately.
You want to determine the fair market value of the
property, assuming a discount rate of 6%.
 SOLUTION

PV∞ = (I ÷ R) + I
= 120,000 ÷ 0.005*
= 24,000,000 + 120,000

PV∞ = PHP24,120,000
*R = 6% ÷ 12
Does Anyone Have
A Question?
Thank
You!