Ordinary Annuity

Sample Problem
1. At a 10% interest rate, how much should you invest today to be able to withdraw
P10,000 annually for 10 years?
Given: Cash Flow Diagram: Solution:
i = 10% = 0.10 From:
A = P10,000 (1+𝑖)𝑛 −1
P=A
𝑖(1+𝑖)𝑛
n = 10 years
1 2 8 9 10
P Then;
Find: P = ?
(1+0.1)10 −1
P = P10,000
0.1(1+0.1)10

P = P10,000(6.144567)

Therefore;
P = P61,445.67
2. Money borrowed today is to be paid in 6 equal payments at the end of six quarters. If
the interest is 12% compounded quarterly, how much was initially borrowed if quarterly
payment is P2,000?
Given: Cash Flow Diagram: Solution:
m=4 From:
n=6 P (1+𝑖)𝑛 −1
P=A
𝑖(1+𝑖)𝑛
i = 12% = 0.12
1 2 3 4 5 6 quarters
.12
i= = 0.03
4 Then;
A = P2,000 (1+0.03)6 −1
P = P2,000
0.03(1+0.03)6

Find: P = ? P = P2,000(5.417191)

Therefore;
P = P10,834.38
3. What is the accumulated amount of a five-year annuity paying P6,000 at the end
of each year, with interest at 15% compounded annually?
Given: Cash Flow Diagram: Solution:
i = 15% = 0.15 From:
A = P6,000 F (1+𝑖)𝑛 −1
F=A
𝑖
n=5
years
1 2 3 4 5
Then;
Find: F = ? (1+0.15)5 −1
F = P6,000
0.15
F = P6,000(6.742381)

Therefore;
F = P40,454.29
4. The president of a growing engineering firm wishes to give each of 50 employees a holiday
bonus. How much is needed to invest monthly for a year at a 12% nominal rate, compounded
monthly, so that each employee will receive a P1,000 bonus?
Given: Cash Flow Diagram: Solution:
F = P1,000 x 50 F From:
F = P50,000 A=F
𝑖
months (1+𝑖)𝑛 −1
n = 12 1 2 3 11 12
m = 12
Then;
i = 12% = 0.12
0.01
.12 A = P50,000
i= = 0.01 (1+0.01)12 −1
12
A = P50,000(0.078849)
Find: F = ?
Therefore;
A = P3,942.44
5. A man secured a P10,000 loan at 12% effective interest. Find the annual
amortization to extinguish it in six years.
Given: Cash Flow Diagram: Solution:
i = 12% = 0.12 From:
P = P10,000 P 𝑖(1+𝑖)𝑛
A=P
(1+𝑖)𝑛 −1
n=6 years
1 2 3 4 5 6
Then;
Find: A = ?
A A A A A A 0.12(1+0.12)6
A = P10,000
(1+0.12)6 −1

A = P10,000(0.243226)

Therefore;
A = P2,432.26
6. A P35,000 debt is to be paid off in eight equal yearly payments, each combining an
amortization installment and interest at 10% compounded quarterly. What should be the
amount of each payment?
Given: Cash Flow Diagram: Solution:
P = P35,000 From;
n=8 P 𝑖(1+𝑖)𝑛
A=P
(1+𝑖)𝑛 −1
m=4 years
1 2 3 8
i = 10% = 0.10
𝑖
Then;
ie = (1+ 𝑛 )m – 1 0.1038(1+0.1038)8
𝑚 A A A A A A = P35,000
.10 (1+0.1038)8 −1
ie = (1+ )4 – 1
4
A = P35,000(0.1900448)
ie = 10.38% = .1038

Therefore;
Find: A = ?
A = P6651.57