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Handout 8.1 Annuity Due Sample Problems

1. An annuity due is a series of equal payments made at equal time intervals, with payments made at the start of each period beginning from the first period. 2. A perpetuity is where payment periods extend forever or payments continue indefinitely. The present value of a perpetuity can be calculated as the annual payment amount divided by the interest rate. 3. Examples show how to calculate the present value of annuities due and perpetuities in different scenarios like loans, pensions, and savings plans using the relevant formulas.

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Eruel Cruz
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Download as PDF, TXT or read online on Scribd
1K views

Handout 8.1 Annuity Due Sample Problems

1. An annuity due is a series of equal payments made at equal time intervals, with payments made at the start of each period beginning from the first period. 2. A perpetuity is where payment periods extend forever or payments continue indefinitely. The present value of a perpetuity can be calculated as the annual payment amount divided by the interest rate. 3. Examples show how to calculate the present value of annuities due and perpetuities in different scenarios like loans, pensions, and savings plans using the relevant formulas.

Uploaded by

Eruel Cruz
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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1st Sem 2021-22 ANNUITY DUE & PERPETUITY

ANNUITIES – a series of equal payments made at equal intervals of time.

Annuity Due - it is one where payments are made at the start of each period, beginning from the first
period. Page |
1

Sample problem:

#297 ME Board Oct 1996


Engr Sison borrows P100,000.00 at 10% effective annual interest. He must pay back the loan
over 30 years with uniform monthly payments due on the first day of each month. What does
Engr pay each month?

Solution:
A [ ( 1 + i )n - 1 - 1 ]
P = -------------------------------- + A
( 1 + i )n - 1 i

0.10
i = --------- = 0.00833
12

n = 30 (12) = 360

A [ ( 1.00833 )360 - 1 - 1 ]
100,000 = -------------------------------------- + A
( 1.00833 )360 - 1 (.00833)

A = P870.03

College of Engineering, Architecture & Technology


1st Sem 2021-22 ANNUITY DUE & PERPETUITY

#301 On retirement, a workman finds that his company pension calls for payment of P300 to him or
to his estate, if he dies, at the beginning of each month for 20 years. Find the present value of
this pension at 5% compounded annually.

Solution: Page |
2
i = 0.05 / 12 = 0.00417

n = 20 (12) = 240

300 [ ( 1.00417 )239 - 1 ]


P = ---------------------------------- + 300
( 1.00427 )239 (0.00417)

P = P45,631.87

#302 Under a factory savings plan, a workman deposits P25.00 at the beginning of each month for 4
years, and the management guarantees accumulation at 6% compounded annually. How much
stands to the work man’s credit at the end of 4 years.

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

i = 0.06 / 12 = .005

n = 4 (12) = 48

n + 1 = 49

25 [ ( 1.005 )49 - 1 ]
F = -------------------------------- - 25
0.005

F = P 1,359.21

College of Engineering, Architecture & Technology


1st Sem 2021-22 ANNUITY DUE & PERPETUITY

Perpetuity - it is one where payment periods extend forever or in which the periodic payments continue
indefinitely.

A P – present value of perpetuity


P = --------- A – annuity or amount of perpetuity Page |
i i - rate of interest 3

Perpetuity payable annually beginning of each year


A
P = A + ------- ( present value of perpetuity due )
i

Perpetuity payable annually with the first payment due at the end of “nth“ year

A A [ ( 1 + i )n - 1
P = --------- - ------------------- P – present value of perpetuity
i ( 1 + i )n i

Sample problem:

#615 What present sum would be needed for annual end of year payments of P15,000.00 each,
forever if money is worthy 8%.

Solution:
A 15,000
P = ----- = ------------
i 0.08

P = P187,500.00

College of Engineering, Architecture & Technology


1st Sem 2021-22 ANNUITY DUE & PERPETUITY

#619 If money is worth 4%, find the present value of a perpetuity of P100 payable at the beginning of
each year.

Solution: Page |
A 4
P = A + -----
i

100
P = 100 + --------
0.04

P = P2,600.00

College of Engineering, Architecture & Technology

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