Module 3

ANNUITY
Annuity
➢ Annuity – it is a series of equal cash flows
occurring each period over a range of periods.

➢ Types of Annuity:
1. Ordinary Annuity
2. Deferred Annuity
3. Annuity Due
4. Perpetuity
 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.

0 1 2 3 n
𝟏 − (𝟏 + 𝐢)−𝐧 (𝟏 + 𝐢)𝐧 −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
When:
𝐏 = 𝑭(𝟏 + 𝐢)−𝐧 Present Value of the nth-year cost
 P/A and A/P Factors:
Notation and Equations
Factor Factor Standard
Factor Excel
Find/Given Notation
Notation Name Formula Functions
Equation

Uniform-
series 1 − (1 + 𝑖)−𝑛
(P/A,i,n) P/A P = A(P/A,i,n) PV(i%,n,A)
present 𝑖
worth

Capital 𝑖
(A/P,i,n) A/P A = P(A/P,i,n) PMT(i%,n,P)
recovery 1 − (1 + 𝑖)−𝑛
F/A and A/F Factors:
Notation and Equations
Factor Factor Standard
Factor Excel
Find/Given Notation
Notation Name Formula Functions
Equation

Uniform-
series (1 + 𝑖)𝑛 −1
(F/A,i,n) F/A F = A(F/A,i,n) FV(i%,n,A)
compound 𝑖
amount

𝑖
(A/F,i,n) Sinking fund A/F A = F(A/F,i,n) PMT(i%,n,,F)
(1 + 𝑖)𝑛 −1
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.

𝟏 − (𝟏 + 𝐢)−𝐧
𝐏′ = 𝐀
𝐢

4. Obtain the final value.

Where:
𝐏 = 𝐏′(𝟏 + 𝒊)−𝒌 k = number of deferred periods
When:
C𝐚𝐬𝐡𝐢𝐧 = 𝐂𝐚𝐬𝐡𝐨𝐮𝐭 Finding x
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.

𝟏− 𝟏+𝐢 −𝐧
0 1 2 3 n 𝐏=𝐀 (𝟏 + 𝐢)
𝐢

𝟏+𝐢 𝐧−𝟏
𝐅=𝐀 (𝟏 + 𝐢)
𝐢
A A A A A
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
1. Ordinary Perpetuity – first 0 1 2 3 ∞
payment is done one period
after the focal date.
A A A A
𝐀
𝐏= F
𝐢 P

1
2. Deferred Perpetuity – first 0 2 3 8

payment is done several

k
periods after the focal date.
A A A
𝐀 F
𝐏 = (𝟏 + 𝒊)−𝒌
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 paya
ble quarterly.