Module 4 Annuity

Prepared by:
Ezrha C. Godilano
BSIE, CIE
Annuity
these are a series if uniform or equal receipts or payments
occurring at the end of each period for n periods with i% per
period.

Conventions
P is the present equivalent value that occurs one interest
period before the first A (uniform amount)
F is the future equivalent value that occurs at the same time
as the last A, and n periods after P
A is the uniform amount that occurs at the end of each period

Source: Sullivan, William G., Elin M. Wicks and

Uniform Series (Annuity) James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Ordinary Annuity
payment is made at the end of each payment
interval

Annuity Due
payment is made at the beginning of each payment
interval

Deferred Annuity
a situation where payments do not begin until
some later date.

Source: Sullivan, William G., Elin M. Wicks and

Types of Annuity James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Finding F when given A Finding A when given F

(1 i ) 1
n i
F A A F
(1 i ) 1
n
i
Finding P when given A Finding A when given P

(1 i) 1
n i (1 i) n
P A n
A P
i (1 i) (1 i) 1
n

Source: Sullivan, William G., Elin M. Wicks and

Annuity Formula James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Finding F when given A Finding A when given F

(1 i ) 1
n i
A F
Uniform Series
F A Compound amount

(1 i ) 1
n
i
factor

Finding P when given A Finding A when given P

(1 i) 1
n i (1 i) n
P A n
A P
i (1 i) (1 i) 1
n

Source: Sullivan, William G., Elin M. Wicks and

Annuity Formula James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Finding F when given A Finding A when given F

(1 i ) 1
n i
F A A
Sinking fund F
factor

(1 i ) 1
n
i
Finding P when given A Finding A when given P

(1 i) 1
n i (1 i) n
P A n
A P
i (1 i) (1 i) 1
n

Source: Sullivan, William G., Elin M. Wicks and

Annuity Formula James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Finding F when given A Finding A when given F

(1 i ) 1
n i
F A A F
(1 i ) 1
n
i
Finding P when given A Finding A when given P

(1 i) 1
n i (1 i) n
Uniform series
P A n
A P
present worth

i (1 i) (1 i) 1
factor n

Source: Sullivan, William G., Elin M. Wicks and

Annuity Formula James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Finding F when given A Finding A when given F

(1 i ) 1
n i
F A A F
(1 i ) 1
n
i
Finding P when given A Finding A when given P

(1 i) 1Capital
n
recovery i (1 i)
n

P A n
A P

factor

n
i (1 i ) (1 i ) 1
Source: Sullivan, William G., Elin M. Wicks and
Annuity Formula James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
You borrowed $15,000 from your
credit union to purchase a used
car. The interest rate on your loan
is 0.25% per month and you will
make a total of 36 monthly
payments. What is your monthly
payment?
Source: Sullivan, William G., Elin M. Wicks and
Example 4.1 James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Ms. Paige has acquired a new
printing press machine. Due to
insufficient funds, she agreed to pay
the seller equal $150 every month
for 13 months. The company charges
an annual interest rate of 3.4%
compounded quarterly. How much
does the machine cost?
Source: Sullivan, William G., Elin M. Wicks and
Example 4.2 James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Martin wanted to have
Php100,000 on his bank account
at the end of five years. The bank
charges 0.23% compounding
monthly. Martin plans on placing
the deposits every end of month.
How much should he deposit?
Source: Sullivan, William G., Elin M. Wicks and
Example 4.3 James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Finding F when given A Finding A when given F

(1 i ) n 1 i
F Note:
A Same formula A F
(1 i ) 1
will be used, n
i
only the concept and usage will
Finding Pvary
whenon each
given A case. Finding A when given P

(1 i) n 1 i (1 i) n
P A n
A P
i (1 i) (1 i) 1
n

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p104-130

Annuity Formula
Eight annual deposits of $1,500 were
made at the beginning of each year
in an account that pays 10%
compound interest.
a. What will be the accumulated
amount at the end of eight years?
b. What is the present worth of the
deposits?
Source: Sullivan, William G., Elin M. Wicks and
Example 4.4 James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Sarah wants to have $10,000 on her
account at the end of 5 years. If she
plans to place it on a bank having an
interest rate of 5% compounded
annually and make deposits at the
beginning of each year, what should
be her annual deposits?

Source: Sullivan, William G., Elin M. Wicks and

Example 4.5 James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
A man, on the day that his son was
born, wishes to determine what
lump amount would have to be paid
into an account bearing interest of
12% per year to provide withdrawals
of $2,000 on each of the sons 18th,
19th, 20th, and 21st birthdays.

Source: Sullivan, William G., Elin M. Wicks and

Example 4.6 James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
During your first job, you opened an
account having an interest rate of 8%
per year wherein you made annual
deposits of $5,000. Five years later,
you moved into a new job and
opened another bank account. How
much can you withdraw from the
first account 35 years later?
Source: Sullivan, William G., Elin M. Wicks and
Example 4.7 James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
p104-130
Perpetuity
It is a term for unlimited amounts of cash
flow.
Where:
A
P P = present worth of perpetuity
A = amount of cash flow
i i = interest rate for a given period

Source:
Perpetuity http://www.moneyinstructor.com/doc/fi
nanceannuities.asp
You won a prize that entitles you to
receive Php 10,000 every month for
the rest of your life. If the interest
rate is 12% compounded monthly,
what is the present worth of
perpetuity? If the interest is
compounding every three months?

Source:
Example 4.8 http://www.moneyinstructor.com/doc/fi
nanceannuities.asp
You want to avail a life insurance that
will entitle your beneficiaries Php
100,000 every end of three months.
The company gives 15% interest
compounded semi-annually. How
much should you pay for the
insurance now?

Source:
Example 4.9 http://www.moneyinstructor.com/doc/fi
nanceannuities.asp
Gradient of Cash Flows
a gradient is a series or sequence of cash flows increasing by
a constant amount. (N-1)G
(N-2)G

(N-3)G
3G
2G
G

0 1 2 3 4 N-2 N-1 N

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p139-143

Uniform (Arithmetic) Gradient of Cash Flow

 Finding P when given G

1 (1 i) N 1 N
P G N
i i (1 i ) N
(1 i )
Finding A when given G
1 N
A G
i (1 i ) 1
N

Source: Sullivan, William G., Elin M. Wicks and

Gradient Formula James T. Luxhoj. (2006). ENGINEERING ECONOMY,
13TH ED. Pearson-Prentice Hall. p104-130
 Finding F when given G

1 (1 i) N 1
F G N
i i

Source: Sullivan, William G., Elin M. Wicks and

Gradient Formula James T. Luxhoj. (2006). ENGINEERING ECONOMY,
13TH ED. Pearson-Prentice Hall. p104-130
INCREASING GRADIENT CASH FLOW

An EOY cash flows are expected to be $1,000

for the second year, $2,000 for the third year,
and $3,000 for the fourth year. If the interest is
15% per year, it is desired to find
a. Present equivalent value at the beginning of
the first year
b. Uniform annual equivalent value at the end
of each of the four years.
Source: Sullivan, William G., Elin M. Wicks and
Example 4.10 James T. Luxhoj. (2006). ENGINEERING ECONOMY,
13TH ED. Pearson-Prentice Hall. p104-130
A series of end-of-year cash flows are given on
the table below.
At an interest rate of 15% year, determine the
present and future worth of the cash flow.
End of year Cash Flow
1 $5,000
2 $6,000
3 $7,000
4 $8,000

Source: Sullivan, William G., Elin M. Wicks and

Example 4.11 James T. Luxhoj. (2006). ENGINEERING ECONOMY,
13TH ED. Pearson-Prentice Hall. p104-130
DECREASING GRADIENT CASH FLOW

A series of end-of-year cash flows are given on the

table below.
At an interest rate of 15% year, determine the present
and future worth of the cash flow.
End of year Cash Flow
1 $8,000
2 $7,000
3 $6,000
4 $5,000

Source: Sullivan, William G., Elin M. Wicks and

Example 4.12 James T. Luxhoj. (2006). ENGINEERING ECONOMY,
13TH ED. Pearson-Prentice Hall. p104-130
Geometric Sequences of Cash Flows
cash flow patterns are changing at an average rate f , each
period.

for f i
Increasing f :

P
A1
i f

1 (1 i ) N (1 f ) N
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p139-143

Geometric Sequence
for f i
Decreasing f :

P
A1
i f

1 (1 i ) N (1 f ) N
For f i
P A1 N [(1 i ) N ]

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p139-143

Geometric Sequence
A series of cash flows starting at year 1 with $1,000 having a rate
of increase of 20% per year after the first year, and interest per
year is 25%. Determine P, A, and F in 5 years.

If the cash flow is decreasing at the same rate, find P, A and F.

Compare the values.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p104-130

Geometric Sequence Example

 SEATWORK
1. Prepare a one whole yellow paper.
2. You may open your notes.
3. Work individually and quietly and independently.
4. Write legibly and neatly. Avoid too much erasures.
5. No sharing of notes.
6. Each slide will expire at a given time frame.

GOOD LUCK! =)
Problem 1: Tess wanted to have
$100,000 on her bank account at
the end of 10 years. She plans to
deposit an amount at the beginning
of each month at an interest rate of
3.5% compounded quarterly.
a. What is her monthly deposits?
b. What is the present worth of
these deposits?
Problem 2: You were entitled to
receive $5,000 at the end of six
months for the rest of your life. If
the interest rate is 10%
compounded monthly, what is
the present value of perpetuity?
Problem 3: Kate deposits Php 10,000 to her
bank account every year when she was in high
school for four years to prepare for her college
degree. She took an engineering course and
since then, she stopped depositing to her bank
account. Right after graduation (she graduated
on time), she got a job that pays Php 240,000 a
year. If she continues to deposit to the same
bank account Php 40,000 every year for 10
years, calculate the future worth after 30 years
if the deposits are made at the end of each
year if the bank pays 2% interest per year
Problem 4: What end-of-month
deposits for five months should
Joshua have if he is planning to
withdraw equal amounts of Php
2,000 for the tenth, eleventh, and
twelfth month if the bank is paying
an interest rate of 2.2%
compounded monthly?