Module 3
ANNUITY
ANNUITY
Annuity – it is a series of equal cash flows
occurring each period over a range of periods or
a series of uniform payments made at equal
intervals of time.
Types of Annuity:
1. Ordinary Annuity
2. Deferred Annuity
3. Annuity Due
4. Perpetuity
Annuities are established for the
following purposes:
1. As payment of a debt by a series of equal
payment at equal time intervals, also known
as amortization.
2. To accumulate a certain amount in the
future by depositing equal amounts at equal
time intervals. These amounts are called
sinking fund.
3. As a substitute periodic payment for a future
lump sum payment.
Ordinary Annuity
Ordinary Annuity – is a series of equal payments or receipts occurring over a
specified number of periods with the payments or receipts occurring at the end
of each period, starting from the first period. It is also referred as annuity-
[ ]
immediate.
𝐧
(𝟏+ 𝐢 ) − 𝟏
𝐅=𝐀
𝐢
0 1 2 3 n
A A A A Where:
F F= Future worth
P = present worth
P A = series of periodic equal payments
n = number of interest period
i = interest rate per interest period
Value of A with known P (capital recovery)
A=
Value of A with known F (sinking fund)
A=
P/A and A/P Factors:
Notation and Equations
FACTOR FACTOR NAME FIND/ GIVEN FACTOR FORMULA STANDARD
NOTATION NOTATION
UNIFORM SERIES
(P/A,i%,n) PRESENT WORTH P= A(P/A,i%,n)
FACTOR or EQUAL-
PAYMENT- SERIES P/A
PRESENT- WORTH
FACTOR
(A/P,i%,n) EQUAL- PAYMENT- A/P A= P(A/P,i%,n)
SERIES-CAPITAL-
RECOVERY
F/A and A/F Factors:
Notation and Equations
FACTOR FACTOR NAME FIND/ GIVEN FACTOR FORMULA STANDARD
NOTATION NOTATION
UNIFORM SERIES
(F/A,i%,n) COMPOUND AMOUNT F= A(F/A,i%,n)
FACTOR or EQUAL-
PAYMENT- SERIES F/A
COMPOUND AMOUNT
FACTOR
(A/F,i%,n) EQUAL- PAYMENT-
SINKING FUND A/F A= F(A/F,i%,n)
FACTOR
Deferred Annuity
Deferred Annuity – are annuities that are computed on different present year
and/or future year. It is annuity where the first payment is made several
periods after the beginning of the annuity.
0 1 2 3 n
k
Where:
k = number of deferred periods
A A A A
F
P
DEFERRED ANNUITY
0 1 2 3 n
k
Present Worth, P:
P= [ A A A A
F
P
Methods of Solving
Deferred Annuity Problems
1. Draw the cash flow diagram.
2. Select any convenient focal date.
Temporary focal date is used to convert deferred annuity to
ordinary annuity
Final focal date is used to obtained the required value.
3. Project all values to temporary focal date.
𝐏 ′= 𝐀 [
𝟏−(𝟏+ 𝐢 )− 𝐧
𝐢 ]
4. Obtain the final value.−𝒌
𝐏 =𝐏 ′ (𝟏+𝒊)
ANNUITY DUE
Annuity Due – is a series of equal payments or receipts occurring over a specified
number of periods with the payments or receipts occurring at the beginning of each
period.
0 1 2 3 n 𝐅=𝐀 [
( 𝟏+ 𝐢 )𝐧 −𝟏
𝐢 ]
(𝟏+ 𝐢 )
[ ]
−𝐧
𝟏 − ( 𝟏+ 𝐢 )
𝐏=𝐀 (𝟏+ 𝐢 )
𝐢
A A A A A
Where:
F
P = present worth
P
A = series of periodic equal payments
n = number of interest period
i = interest rate per interest period
Sample Problems on
Annuity
A contractor bought a concrete mixer at P120,000.00 if paid in cash. The mixer may also
be purchased by installment to be paid within 5 years. If money is worth 8%,the amount of
each annual payment if all payments are made at the beginning of each year, is:
a. P27,829.00 b. P31,005.00
c. P29,568.00 d. P32,555.00
Mr. Rankine bought a piece of property for P100,000.00 down payment at 10 deferred semi
annual payments of P8,000 starting 3 years from now. If the interest rate is 12%
compounded semiannually, what is the present worth of the property?
a. P143,999.08 b. P152,444.05
c. P148,555.02 d. P166,888.01
PERPETUITY
Perpetuity – are uniform payments which are done infinitely. It is
also called as perpetual annuity.
0 1 2 3 ∞
A A A A
F
P
TYPES OF PERPETUITY
1. Ordinary Perpetuity – first payment is done one period after the focal date.
0 1 2 3 ∞
−𝒏
𝟏 − (𝟏+ 𝒊 ) 𝟏 − (𝟏+ 𝒊 )
−
𝐏= 𝑨 [ ] 𝐏= 𝑨 [ ]
𝐢 𝐢
𝐀 A A A A
𝐏=
𝐢 P
F
2. Deferred Perpetuity – first payment is done several periods after the focal
date. 0 1 2 3 8
𝐀 −𝒌
𝐏= (𝟏+ 𝒊)
𝐢 k
Where: k = number of deferred periods A A A
F
P
Sample Problems on
Perpetuity
1. What amount of money invested today at 15% interest can provide the
following scholarships: P30,000 at the end of each year for 6 years;
P40,000 for the next 6 years and P50,000 thereafter?
