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Annuity

- An annuity is a series of uniform payments made at equal time intervals. Annuities can be used to pay off a debt through equal periodic payments, accumulate a future sum, or substitute periodic payments for a lump sum. - The key elements of an annuity are the periodic payment (A), present worth (P), future worth (F), interest rate (i), and number of payments (n). There are different types of annuities including ordinary, deferred, and annuity due. - Formulas can be used to calculate the present worth, future worth, and periodic payments of annuities based on the interest rate and number of periods. Several examples are provided to demonstrate solving ann

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156 views

Annuity

- An annuity is a series of uniform payments made at equal time intervals. Annuities can be used to pay off a debt through equal periodic payments, accumulate a future sum, or substitute periodic payments for a lump sum. - The key elements of an annuity are the periodic payment (A), present worth (P), future worth (F), interest rate (i), and number of payments (n). There are different types of annuities including ordinary, deferred, and annuity due. - Formulas can be used to calculate the present worth, future worth, and periodic payments of annuities based on the interest rate and number of periods. Several examples are provided to demonstrate solving ann

Uploaded by

rommel satajo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Annuity

- is a series of uniform payments made at equal intervals of time. When an annuity has

a fixed time span it is known as annuity certain.

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.

Elements of Annuity

A = periodic payment

P = present worth of all periodic payments

F or S = future worth or lump sum of all the periodic payments after the last payment is

made

i = interest rate per payment

n = number of payments

Types of Annuity

1. Ordinary Annuity – the payment is made at the end of each period starting from the first

period as in the diagram shown.


P F

A A A A A A

Annuity is based on the principles of compound interest. Hence, computation of

the sum of Annuity may be done using the formulas for geometric progression.

The future worth

F = A { [(1+i)n-1)] / i };

(1+i)n-1) / i is called uniform series compound amount factor denoted by (F/A, i, n)

The present worth

P = {A [(1 – (1+i)-n] / i };

[1-(1+i)-n]/i] is known as uniform series present-worth factor and is denoted by

(P/A, i, n).

The value of A with known F is: A = F{i/[(1+i)n -1]};

i/[(1+i)n -1] is called the sinking fund factor denoted by (A/F, i%, n) read as “A

given F at i% in n interest periods”

The value of A with known P is: A = Pi [1- (1+i)-n ]

2. Deferred Annuity – the first payment is deferred a certain number of periods after the first.

P P1 F

A A A A

F = A [(1+i)n-1) / i ]
3. Annuity Due – the payment is made at the beginning of each period starting from the first

period.

P F

A A A A A A A

F = [A(1+i)n-1)] / i

P = {A[(1- ( 1+i)-n] / i } + A

4. Perpetuity – is an Annuity where the payment periods extend forever or the periodic

payments continue indefinitely.

If the payment is made at the end of each period starting from the first period, the

present worth of a perpetuity of A is

P = A/i

Examples:

1. What are the present worth and the accumulated amount of 10- yr annuity paying P10 000

at the end of each year, with interest at 15% compounded annually. (P = 50 188, F= 203

037).

P F

A A A A A A A A A A

P = A[1-(1+i)n]/i ; 10 000 [1-(1+.15)-10]/.15 ; = 50 187.68

F = A[(1+i)n-1]/i ; 10 000 [(1+.15)10-1]/.15 ; = 203 037.18

2. What is the present worth of P500 deposited at the end of every three months for 6 years if

the interest rate is 12% compounded semiannually. (P = 8 504)


Solution:

Solving for i ; (1+ i)4 -1 = (1+ 0.12/2)2 – 1 ; i = 2.96%

P = A (P/A, 2.96%, 24) ; n= 4 * 6 years =24 periods

= 500 [1-(1+.0296)-24]/.0296 = 8 504.37

3. If 10000 is deposited each year for 9 years, how much annuity can a person get annually

from the bank every year for 8 years starting 1 year after the 9 th deposit is made. Cost of

money is 14%. (A= P34675)

F1= 1000[(1 + i)n-1]/i = 160 853.47

P = A [1- (1+i)-n]/i ;

A = 160 853.47/[1-(1.14)-8]/0.14

= 34 675.19

Problems for Practice:

1. A chemical engineer wishes to set up a special fund by making uniform semiannual

end-of-period deposits for 20 years. The fund is to provide P 100 000 at the end of

each of the last 5 years of the 20-year period. If interest is 8% compounded

semiannually, what is the semiannual deposit to be made? (A= P6193.39)

2. A debt of P40 000, whose interest rate is 15% compounded semiannually, is to be

discharged by a series of 10 semiannual payments, the first payment to be made 6

months after consummation of the loan. The first 6 payments will be P6000 each, while
the remaining 4 payments will be equal and of such amount that the final payment will

liquidate the debt. What is the amount of the last 4 payments? (A= P5454)

3. A house and lot can be acquired by a down payment of P500 000 and a yearly payment

of P100 000 at the end of each year for a period of 10 years starting at the end of 5

years from the date of purchase. If money is worth 14% compounded annually, what

is the cash price of the property? (cash price = 808 835.92)

4. Find the present value in pesos of perpetuity of P15 000 payable semiannually if money

is worth 8% compounded quarterly. (P = 371 287.13)

5. Find the annual payment to extinguish a debt of P10 000 payable for 6 years at 12%

interest annually. (A= 2432.26)

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