Module 3

ANNUITY

Engr. Eduard Joseph M. Dela Cruz

APCAS CME
Annuity
 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. It is also referred as annuity-immediate.

[ ] [ ]
−𝐧 𝐧
0 1 2 3 n
𝟏−(𝟏+ 𝐢 ) (𝟏+ 𝐢 ) − 𝟏
𝐏=𝐀 𝐅=𝐀
𝐢 𝐢

A A A A Where:
F P = present worth
A = series of periodic equal payments
P n = number of interest period
i = interest rate per interest period
 P/A and A/P Factors:
Notation and Equations
Factor Factor Standard
Factor Excel
Find/Given Notation
Notation Name Formula Functions
Equation

Uniform-
series
(P/A,i,n) P/A P = A(P/A,i,n) PV(i%,n,A)
present
worth

Capital
(A/P,i,n) A/P A = P(A/P,i,n) PMT(i%,n,P)
recovery
 F/A and A/F Factors:
Notation and Equations
Factor Factor Standard
Factor Excel
Find/Given Notation
Notation Name Formula Functions
Equation

Uniform-
series
(F/A,i,n) F/A F = A(F/A,i,n) FV(i%,n,A)
compound
amount

(A/F,i,n) Sinking fund A/F A = F(A/F,i,n) PMT(i%,n,,F)

 Sample Problems on
Ordinary Annuity
1. What is the current value of a $50 payment to be
made at the end of each of the next three years if the
prevailing rate of interest is 7% compounded annually?
2. An obligation of Php20,000 is to be repaid in uniform
annual amounts each of which included repayment of
the debt and interest over a period of 5 years. If interest
is 10% per year, what is the annual payment?
3. Maintenance cost for a small bridge expected to last
for 60 years is estimated to be Php1,000 each for
the first 5 years, followed by a Php10,000 expenditure in
the 15th year and Php10,000 in the 30th year. If interest
is 10% per year, what is the equivalent uniform
annual cost over the 60 year period?
 Sample Problems on
Ordinary Annuity
4. What is the equivalent previous worth of Php500
annuity to be paid constantly in 60 years 72 years ago, if
annual interest is 1%?
5. Find the annual payment to extinguish a debt of
Php10,000 payable for 5 years at 12% interest.
6. A savings loan is made between a man and banker.
What should be the uniform monthly payment that the man
should make if he is to borrow Php50,000 and he is to
pay in 10 years? Interest is taken as 6% compounded
quarterly.
7. What annuity is required over 10 years to equate with
the future amount of Php15,000. Assume i = 5%.
 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
Where:
k k = number of deferred periods

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.

[ ]
−𝐧
𝟏−(𝟏+ 𝐢 )
𝐏 ′= 𝐀
𝐢
4. Obtain the final value.

−𝒌 Where:
𝐏 =𝐏 ′ (𝟏+𝒊) k = number of deferred periods
 Sample Problems on
Deferred Annuity
1. Find the value of x in the cash flow diagram, given
that would make the equivalent present worth of
the cash flow diagram to Php22,000 and interest rate
is at 13% per year.
1, 000 per 5x
year

0 2
1 3 4 5 6 7 8 9 10 11

22,000
 Sample Problems on
Deferred Annuity
2. Determine the uniform annual payments which
would be equivalent to the cash flow diagram
given. Interest rate of 12% per year.

0 1 2 3 4 5 6 7 8 9
years

1,200
2,000

3,000
 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.

[ ]
−𝐧
𝟏 − ( 𝟏+ 𝐢 )
0 1 2 3 n 𝐏=𝐀 (𝟏+ 𝐢 )
𝐢

A A A A A
𝐅=𝐀 [
( 𝟏+ 𝐢 )𝐧 −𝟏
𝐢
(𝟏+ 𝐢 ) ]
F Where:
P P = present worth
A = series of periodic equal payments
n = number of interest period
i = interest rate per interest period
 Sample Problems on
Annuity Due
1. What is the current value of a $50 payment to be
made at the beginning of each year, for three
years if the prevailing rate of interest is 7%
compounded annually?
2. What is the accumulated value of a $25 payment
to be made at the beginning of each of the next
three years if the prevailing rate of interest is 9%
compounded annually?
 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
0 1 2 3 ∞
1. Ordinary Perpetuity – first
payment is done one period
after the focal date.
A A A A
𝐀
𝐏= F
𝐢 P

0 1 2 3 8
2. Deferred Perpetuity – first
payment is done several k
periods after the focal date.
A A A
𝐀
𝐏 = (𝟏+ 𝒊)−𝒌 F
𝐢 P

Where: k = number of deferred periods

 Sample Problems on
Perpetuity
1. How much should Mr. Sy invest on a bank that
offers 10% interest so that he would earn Php1,000 each
year in perpetuity.
2. Don Jose deposited Php5,000,000 on a bank that
earns 10% compounded annually. Five years later
he died. His will states that his beneficiary is an
orphanage which will be receiving the money in
perpetuity a year after he died. How much is the yearly
fund the orphanage will be receiving?
3. If money is worth 8% compounded quarterly,
compute the present value of the perpetuity of
Php1,000 payable quarterly.