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Annuity Due

An annuity due is a type of annuity where payments are made at the beginning of each payment period, unlike an ordinary annuity where payments are made at the end of each period. To calculate the periodic payment amount for an annuity due, use the formula: Present Value of Annuity Due / [ (1 + Interest Rate) - (1 + Interest Rate)^(1-Number of Payments) ] Given a goal of receiving ₧400,000 in 4 years with quarterly deposits earning 14% interest, the periodic payment would be ₧23,849.58 using the annuity due formula.

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254 views24 pages

Annuity Due

An annuity due is a type of annuity where payments are made at the beginning of each payment period, unlike an ordinary annuity where payments are made at the end of each period. To calculate the periodic payment amount for an annuity due, use the formula: Present Value of Annuity Due / [ (1 + Interest Rate) - (1 + Interest Rate)^(1-Number of Payments) ] Given a goal of receiving ₧400,000 in 4 years with quarterly deposits earning 14% interest, the periodic payment would be ₧23,849.58 using the annuity due formula.

Uploaded by

Vincent Larrie Moldez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Simple Annuity Due

Annuity Due

Annuity due is a type of annuity where the payments are made at the
beginning of each payment interval, unlike the ordinary simple annuity
the payment interval starts at the end of each period.

Example:
Equipment or property is leased usually paid in advance.

Educational plan wherein you need to pay it advance in regular period


with fixed amount.
Annuity Due
The time of each payment of n annuity due is at the beginning
of its respective payment interval.

The present value of ordinary simple annuity and annuity due


is its equivalent value at the beginning of term.

The focal date for the present value computation coincides with
the first payment of an annuity due.

The focal date for the future value computation is at the end
of the last payment interval.
Terms

Sdue = Future value of an n-payment simple annuity due


Adue = Present value of an n-payment simple annuity due
j = Nominal interest rate
m = Number of conversion per year
t = Time period (term) of the loan or investment
n = Number of payments in the annuity
R = Size of each annuity payment
i = Interest rate per compounding period (which, for simple annuities,
equals the interest rate per payment interval)
Formula
 1  in1  1 
S due  R  1 (Formula 5-1)
 i 
1  1  i1n 
A due  R  1 (Formula 5-2)
 i 
S due i
R (Formula 5-3)
(1  i)n1  (1  i)

A due i
R (Formula 5-4)
(1  i)  (1  i)1n

 S  R  i 
log1  due 
 R (Formula 5-5)
n 1
log1  i
 A  R  i 
log1  due 
 R (Formula 5-6)
n  1
log1  i
Annuity Due: Example for Future Value
1. How much will Marisol Sirug accumulate in her insurance
policy by age 60 if the first semiannual contribution of
₧10,000 is made on her 28th birthday and the last is made
six months before her birthday? Assume that her insurance
policy earns 11% compounded semiannually.
Given: R = ₧10,000 j = 11% = 0.11 m=2 t=
32 years

 1  in1  1  (Formula 5-1)


S due  R  1
 i 
Solution
 1  in1  1 
S due  R  1 (Formula 5-1)
 i 
 1  0.055 64 1  1 
 10,000   1
 0.055 

 32.46458654  1 
 10,000   1
 0.055 
= 10,000(572.0833916 – 1)
= 5,710.916
= ₧5,710,833.92

Marisol will have ₧5,710,833.92 in her insurance policy at age 60.


Annuity Due: Example for Future Value
2. Jesreal Eismar Fernando made deposits of ₧900 at the
beginning of each month to WSS Cooperative, which pays
12% compounded monthly. After 4 years, Jesreal Eismar
makes no more deposits. What will be the balance in the
account 7 years after the last deposit?
First is to compute for the amount of money after the last
deposit.
Given: R = ₧900 j = 12% = 0.12 m = 12 t = 4 years

 1  in1  1 
S due  R  1 (Formula 5-1)
 i 
Solution
 1  in1  1 
S due  R  1 (Formula 5-1)
 i 
 1  0.0149 1  1 
 900   1
 0.01 
1.644631822  1 
 900   1
 0.01 
= 900(64.46318218 – 1)
= 57,116.86397
= ₧57,116.86
The money will amount to ₧53,454.83 after the last deposit.

Then we will compute for the future value of the money after the 7th
year, that is 3 years after the last deposit.
Solution
Given: Sdue = P = ₧57,116.86 t = 3 years m = 12 j = 12% = 0.12

F = P(1 + i)n (Formula 3-1)


= 57,116.86(1 + 0.01)36
= 57,116.86(1.01)36
= 57,116.86(1.430768784)
= 81,721.0203
= ₧81,721.02

For Jesreal Eismar, the stream payments will accumulate to ₧57,116.86.


Then this lump sum for 7 years grows to ₧81,721.02.
Annuity Due: Example for Present Value
1. Shiela’s Furniture is advertising a Lazy Boy Chair for ₧5,000 down monthly
payments of ₧5,000, including interest at 18% compounded monthly. What
is the cash price of the chair?

Down payment equals the other 11 payments, the 12 payments form an


annuity due.

The arrangement may be seen as a loan to the customer of the full


purchased price, which constitutes an annuity due.

Like any loan,


Original principal = Present value of all of the payments

The rate of interest charged on the loan is used as the discount rate.
Solution
Given: R = ₧5,000 j = 18% = 0.18 m = 12 t = 1 year

1  1  i1n 
A due  R  1 (Formula 5-2)
 i 
1  1  0.015 112 
 5,000   1
 0.015 
= 5,000(10.07111779 + 1)
= 5,000(11.07111779)
= 55,355.58893
= ₧55,355.59

The cash price of the chair is ₧55,355.59.


Annuity Due: Example for Present Value
2. MS Services acquired computers under a capital lease agreement. MS
Services pays the lessor ₧300,000 per year at the beginning of each year
for six years. If MS can obtain six-year financing at 10% compounded
annually, what is the long-term lease liability will MS report in its financial
statements?

Given: R = ₧300,000 j = 10% = 0.10 m=1 t = 6 years

1  1  i1n 
A due  R  1 (Formula 5-2)
 i 
Solution
1  1  i1n 
A due  R  1 (Formula 5-2)
 i 

1  1  0.10 16 
 300,000   1
 0.10 

= 300,000(3.790786769 + 1)
= 300,000(4.790786769)
= 1,437,236.031
= ₧1,437,236.03

The initial lease liability is ₧1,437,236.03.


Annuity Due: Periodic Payment
1. If you would like to accumulate ₧3,500,000 in 15 years,
what amount must you contribute each year if the
investment earns 13% compounded annually and the
contributions are made at the beginning of each year?

Given: Sdue = ₧3,500,000 t = 15 years m=1

S due i
R n1 (Formula 5-3)
(1  i)  (1  i)
Solution
S due i
R (Formula 5-3)
(1  i)n1  (1  i)
3,500,00(0.13)

(1  0.13)15 1  (1  0.13)
455,000

(1.13)16  (1.13)
455,000

7.067325527  1.13
= 76,633.83083
= ₧76,633.83

It is needed to make annual contributions of ₧76,633.83 to


accumulate to ₧3,500,000 in 15 years.
Annuity Due: Example for Periodic Payment
2. Mr. Wilfredo Secundo has already accumulated ₧2.3 million in his retirement
plan. His goal is to build it to ₧6 million with equal contribution of six-month
period for the next eight years. If his retirement plan earns 10% compounded
semiannually, what must be the size of further contributions?

The ₧6 million target will be the combined future value of the ₧2.3 million
already in the retirement plan and the annuity due formed by the next 16
payments.

Given: P = ₧2,300,000 t = 8 years m=2

Total amount of retirement plan = Future value of ₧2.3 million + Sdue


Solution

6,000,000  P(1  i)  R 
n 1  i n1
1 
 1
 i 

6,000,000  2,300,000(1  0.05)  R 
16 1  0. 05 16 1
1 
 1
 0.05 

6,000,000 = 2,300,000(2.182874588) + R(25.84036636 – 1)


6,000,000 = 5,020,611.55 + R(24.84036636)
R(24.84036636) = 6,000,000 – 5,020,611.55
R(24.84036636) = 979,388.45
979,388.45 Mr. Erfelo must make semiannual
R payments of ₧39,427.29.
24.84036636
R = ₧39,427.29
Annuity Due: Example for Periodic Payment
3. A lease that was 4 years to run is recorded on a company’s book as a liability
of ₧1 million. If the company’s cost of borrowing was 15% compounded
monthly when the lease was signed, what is the amount of the lease
payment made at the beginning of each month?

Given: Adue = ₧1 million t = 4 years m = 12 j = 15% = 0.15

A due i
R (Formula 5-4)
(1  i)  (1  i)1n
Solution
A due i
R (Formula 5-4)
(1  i)  (1  i)1n
1,000,000(0.0125 )

(1  0.0125 )  (1  0.0125 )148
12,500

1.0125  0.5577421948

= 27,487.15878
= ₧27,487.16

The monthly lease payment is ₧27,487.16.


Annuity Due: Example for Periodic Payment
4. JM Balajadia wishes to receive ₧400,000 four years from now. How much
must he invest at the beginning of each quarter if the first payment starts now
and the interest is 14% compounded quarterly?

Given: Adue = ₧400,000 t = 4 years m=4 j = 14% = 0.14

A due i
R (Formula 5-4)
(1  i)  (1  i)1n
Solution
A due i
R (Formula 5-4)
(1  i)  (1  i)1n

400,000(0.035)

(1  0.035)  (1  0.035)116
14,000

1.035  0.5968906186
= 31,955.4901
= ₧31,955.49

The quarterly payment is ₧31,955.49.


Debt is saving in reverse.
– Peter Lynch
End of Presentation

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