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    Module 4 ECON Annuity

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    MIKE ARTHUR DAVID
    1) Annuity is a series of equal payments made at regular intervals. There are several types of annuities including ordinary annuity, deferred annuity, annuity due, and perpetuity. 2) An ordinary annuity makes payments at the end of each period starting from the first period. A deferred annuity delays payments for a number of periods. An annuity due makes payments at the beginning of each period. A perpetuity makes payments indefinitely. 3) Examples show how to calculate the present worth of annuities using formulas, and how to determine the amount borrowed or required payment amount given interest rates, number of periods, and future values.

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    Module 4 ECON Annuity

    Uploaded by

    MIKE ARTHUR DAVID
    46 views11 pages
    1) Annuity is a series of equal payments made at regular intervals. There are several types of annuities including ordinary annuity, deferred annuity, annuity due, and perpetuity. 2) An ordinary annuity makes payments at the end of each period starting from the first period. A deferred annuity delays payments for a number of periods. An annuity due makes payments at the beginning of each period. A perpetuity makes payments indefinitely. 3) Examples show how to calculate the present worth of annuities using formulas, and how to determine the amount borrowed or required payment amount given interest rates, number of periods, and future values.

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    1) Annuity is a series of equal payments made at regular intervals. There are several types of annuities including ordinary annuity, deferred annuity, annuity due, and perpetuity. 2) An ordinary annuity makes payments at the end of each period starting from the first period. A deferred annuity delays payments for a number of periods. An annuity due makes payments at the beginning of each period. A perpetuity makes payments indefinitely. 3) Examples show how to calculate the present worth of annuities using formulas, and how to determine the amount borrowed or required payment amount given interest rates, number of periods, and future values.

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    46 views11 pages

    Module 4 ECON Annuity

    Uploaded by

    MIKE ARTHUR DAVID
    1) Annuity is a series of equal payments made at regular intervals. There are several types of annuities including ordinary annuity, deferred annuity, annuity due, and perpetuity. 2) An ordinary annuity makes payments at the end of each period starting from the first period. A deferred annuity delays payments for a number of periods. An annuity due makes payments at the beginning of each period. A perpetuity makes payments indefinitely. 3) Examples show how to calculate the present worth of annuities using formulas, and how to determine the amount borrowed or required payment amount given interest rates, number of periods, and future values.

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    M OD U L E 4

    ANNUITY
    ANNUITY?
    Annuity is defined as a series of equal payments occurring at equal interval of time.

    Annuities occur in the following instances:


    1. Payment of a debt by a series of equal payments at equal intervals of time. This occurs when goods are brought on the
    installment plan, the payments for which are usually of equal amounts paid periodically, usually monthly.

    2. Accumulation of a certain amount by setting equal amounts periodically. This occurs when a person saves equal
    amounts ad deposits these periodically in a bank; when equal amounts are set aside at equal intervals of time to take
    care of the depreciation of equipment and to provide for their replacement at a definite future time. Periodic deposits in a
    sinking fund, equal in amount, are also annuities.

    3. Substitution of a series of equal amounts periodically in lieu of a lump sum at retirement of an individual.
    TYPES OF ANNUITIES
     
    Annuities in an engineering economy are usually classified into four categories.

    These are: ordinary annuity, deferred annuity, annuity due, and perpetuity.
     

    1. An ordinary annuity is one where the equal payments are made at the end of
    each payment period starting from the first period.

    A A A A

    0 1 2 3 4
    P F

      Payments for a bank loan is an example of ordinary annuity.


    A. Sum of Ordinary Annuity: 0 1 2 3 n

    𝑛
    A A A A
      𝐴 [ ( 1+ 𝑖 ) − 1]
    𝐹=
    𝑖 F
    where: i=interest per period
    n=number of periods
    A=uniform payment
    𝑛
     [ ( 1+𝑖 ) − 1 ] =uniform series compound amount factor
    𝑖
    B. Present worth of ordinary annuity:

    A A A A CASH FLOW OF ORDINARY ANNUITY


    P F
    F
    Using compound interest formula: P 
    (1  i ) n
    But: A  1  i   1
    n

    F  
    i
    A  1  i   1
    n

    Substituting the value of F: P  


    i (1  i) n
    Where:  1  i   1 = uniform series present worth factor
    n

    i (1  i ) n
    2. A deferred annuity is one where the payment of the first amount is deferred a certain number of
    periods after the first. This type of annuity postpones or delays payments after certain periods.

    CASH FLOW OF DEFERRED ANNUITY


      A A A

    0 1 2 3 4 n
    P F

    EXAMPLE : THE PAYMENTS OF AN AGRICULTURAL LOAN.


    3. An annuity due is one where the payments are made at the start of each period or beginning from the
    first period. Meaning it is an annuity that makes equal payments at the beginning of every period.

    A A A A A

    0 1 2 3 4 n
    P F
    CASH FLOW OF ANNUITY DUE

    Purchasing an appliance through credit usually is made by equal payments @ the start of every period.
    4. A perpetuity is an annuity where the payments periods extend forever or in which the periodic
    payments continue indefinitely.
    0 1 2 3 4 ∞ 
    A
    P
    i A A A A A
    P
    where: CASH FLOW
    i = interest per period
    A = uniform payment
     
    PROBLEM NO. 1:
    What is the present worth of a P500 annuity starting at the end of the third year and
    continuing to the end of the fourth year, if the annual interest rate is 10%?

    Solution: cash flow


    F
    0 1 2 3 4
    P2 
    A  1  i   1
    n
    1 i
    n

    P1   
    i(1  i)n P1
    P1
    P2 P2 
    500  1  0.1  1 1 i
    2 n

    P1   
    0.1(1  0.1)2 P867.77
    P2 
     1  0.1
    2
    P1  P867.77
    P 2  P 717.17
    Problem No. 2:
    Today a businessman borrowed money to be paid in 10 equal paments for 10
    quarters. If the interest rate is 10% compounded quarterly and the quarterly payment
    is P2,000, how much did he borrows?
    Solution:
    A  1  i   1
     n

    P  
    i (1  i ) n
     0.10 10 
    2000 1    1
     4  
     cash flow
    10
    0.10  0.10 
    1  
    4  4 
    P  17,504.13
    Problem No. 3:
    What annuity is required over 12 years to equate with a future
    amount of P20,000? Assume i=6% annually.
    Solution: cash flow
    A  1  i   1
    n

    F  
    i 0 1 2 3 … 12

    A  1  0.06   1
     12
    A A A A A
    20,000    F=20,000

    0.06
    A  1,185.54

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