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 owes ₱10,000 with interest at 6% payable semi-annually. What equal
payments at the beginning of each 6 months for 8 years will discharge his debt.
Given:
P = ₱10,000
i = 6% or 0.06 semi-annually
m=2
n= 8
Required:
A = Annual Payment

Solution:
P= A ¿

10000=A ¿

Answer: A = ₱772.92

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: Determine the present worth of a deferred annuity consisting of 10 semi-annual

payments each ₱1,000 the first at the end of the third-year money is worth 14% compounded semi-
annually.
Given:
A = ₱1,000
i = 14% or 0.14 compounded semi-annually
m=2
n = 10
k=6
Required:
P = Present Worth

Solution:
A
P= ¿
i

A
P= ¿
0.14
Answer: P = ₱5,007.72

Example 2: A man loans ₱187,400 from a bank with interest at 5% compounded annually. He
agrees to pay his obligations by paying 8 equal annual payments, the first being due at the end
of 10 years. Find the annual payments.
Given:
P = ₱187,400
n=8
i = 5% or 0.05
k = 10
Required:
A = Annual Payment

Solution:
A
P= ¿
i

A
187,400= ¿
0.05

Answer: A = ₱44,980.56

ANNUITY DUE
 is a type of annuity where the payments are made at the beginning of each period.
FORMULA:
P= A ¿ P = value or sum of money at
F= A ¿ present
A = a series of periodic equal
amounts of money
n = number of interest periods
i = interest rate per interest period
where,
F = value or sum of money at some
future time
Example 1: A man bought an equipment costing ₱60,000 payable quarterly for 3 years, each
installment payable at the beginning of each period. The rate of interest is 24% compounded quarterly,
what is the amount of each payment?
Given:
P = ₱60,000
i = 24% or 0.24 compounded quarterly
n=3
m=4
Required:
A = Annual Payment

Solution:
P= A ¿
60,000=A ¿
Answer: A = ₱6,751.53

Example 2: What is the present worth of ₱1,000 monthly deposit at 2% per month for one
year of the payments are made at the beginning of each month.
Given:
A = ₱1,000
i = 2% or 0.02
m = 12
n=1
Required:
P = Present Worth

Solution:
P= A ¿
P=1000 ¿
Answer: P = ₱11,890.79

PERPETUITY
 A perpetuity is an annuity in which the payments continue indefinitely
FORMULA:
A
P= A ¿ P=
i

where,
P = Perpetuity
A = a series of periodic equal amounts of money
n = number of interest periods
i = interest rate per interest period

Example 1: What amount of money invested today at 15% interest can provide the following
scholarships: ₱30,000 at the end of each year for 6 years: ₱40,000 for the next 6 years and
₱50,000 thereafter?
Given:
A = ₱30,000 for the first 6 years
A = ₱40,000 for the next 6 years
A = ₱50,000
i = 15%
n=6
Required:
P = Present Value
Solution:
P= A ¿
The present value of the first six years is:
P1−6=30000 ¿ = ₱113,354.48

The present value up to the next 6 years:

P7−12=40000 ¿ = ₱65,445.45

We can calculate the present value for perpetuity using formula:

A
P=
i
50000
P perpetuity =
0.15
P perpetuity = ₱333,333.33

The amount of money, which should be invested now, is the present value of all ordinary annuity
and perpetuity.
P= P1-6 + P7-12 + Pperpetuity
P = ₱113,354.48 + ₱65,445.45 + ₱333,333.33
Answer: P = ₱512,133.26

Example 2: What present sum would be needed for annual end of year payment of ₱250,000
each, forever if money is worth 15%?
Given:
P = ₱250,000
i = 15% or 0.15

Required:
P = Perpetuity
Solution:
A
P=
i
 250000
P=
0.15
Answer: P = ₱1,666,666.67

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

 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

Required:
P = Present Worth

Solution:

[ ]
1+ g 55
4
W= 1−
1+i 1500 54
P=
1+0.10 1+0.08 55
W= 1−
1+0.08 54
55 ALTERNATIVE SOLUTION:
W=
54 n
P=∑ A ¿ ¿¿
[ ]
n
A 1−w
P= X
1+i 1−w 4
P=∑ 1500¿ ¿ ¿
1

Answer: P = ₱5,711.79
Answer: P = ₱5,711.79