Scribd
Upload
168 views19 pages

Module 7-8-Annuity

The document discusses different types of annuities including ordinary annuity, annuity due, deferred annuity, and perpetuity. It provides examples and formulas for calculating future and present values of each type. For ordinary annuities, payments are made at the end of each period. For annuity due, payments are made at the beginning of each period. Deferred annuities have payments that start several periods after inception. Perpetuities involve uniform payments made infinitely into the future. Worked examples are provided to illustrate calculations for each annuity type.

Uploaded by

I am Angelll
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
168 views19 pages

Module 7-8-Annuity

The document discusses different types of annuities including ordinary annuity, annuity due, deferred annuity, and perpetuity. It provides examples and formulas for calculating future and present values of each type. For ordinary annuities, payments are made at the end of each period. For annuity due, payments are made at the beginning of each period. Deferred annuities have payments that start several periods after inception. Perpetuities involve uniform payments made infinitely into the future. Worked examples are provided to illustrate calculations for each annuity type.

Uploaded by

I am Angelll
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 19

Engineering Economics

Annuities
by: Engr. Mary Jane C. Lusung
Simple Interest Compound Interest Continuously
Compounded Interest
I = Prt  r
nt

A  p1  
A=I+P  n

A—Total amount / Future Value


 Annually – 1
p —principle (Initial Value)  Semi-annually – 2
r —interest rate  Quarterly Compounded – 4
 Monthly – 12
n —number of compounding periods
 Daily (bank days)– 360
t —time in years  Bi-monthly- 6
Annuity
It is a series of equal payments occurring at equal
periods of time.

Examples:
 Saving for retirement
 Getting paid from a pension plan
(after retirement)
 Paying of a home mortgage or other
loans
Types of Annuity

 Ordinary Annuity
 Annuity Due
 Deffered Annuity
 Perpetuity
Ordinary Annuity
It is a series of equal payments or receipts occurring over a
specified number of periods where the payments are made at
the end of each period. Frequency of payments is same as
frequency of compounding the interest.

Where:
P = present worth
F = future worth of all periodic payments after the
last payment is made
A = amount of periodic equal payments
n = number of interest period
i = interest rate per interest period
Example 1
Suppose 1,500php is deposited at the end of each year for
the next 6 years in an account paying 8% interest
compounded annually. Find the future value of this annuity
or in others word, how much will be in the account at the
end of 6 years?
Example 2
Suppose that at the end of each year for the next 10 years,
$500 is deposited in a savings account paying 7%
compounded annually.
a.) How much is the account at the end of the 10 years?
b.) How much money would have to be deposited in one
lump sum today (at the same compound interest rate) in
order to produce exactly the same balance at the end of 10
years? (This is called the present value of the annuity.)
Example 3
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.
Annuity Due
It is a series of equal payments or receipts occurring
over a specified number of periods where the payments
are made at the beginning of each period.

Where:
P = present worth
F = future worth of all periodic payments after the
last payment is made
A = amount of periodic equal payments
n = number of interest period
i = interest rate per interest period
Example 1
What is the accumulated 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?
Example 2
What is the current 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?
Deferred Annuity
These are annuities that are computed on different present year
and/or future year. It is an annuity where the first payment is
made several periods after the beginning of the annuity.

Where:
k = number of deferred periods
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 obtain the required value.
3. Project all values to temporary focal date.

4. Obtain the final value.


Where:
k = number of deferred periods
Example 1
A man agrees to pay 15 yearly installments, first being paid
after 3 years. How much money he can borrow today if
interest rate is 10% compounded annually? Annual
installments is 20,000php.
Example 2
A certain fund is to be established today in order to pay for
the Php5,000 worth of monthly rent for a commercial space.
If the payments for rent will start next year and the fund
must be sufficient to pay for the monthly rental fee for 2
years, how much must be deposited at 2.5% interest
compounded monthly?
Perpetuity

These are uniform payments which are done


infinitely. It is also called as perpetual annuity.
Types of Perpetuity

 Ordinary Perpetuity – first


payment is done one period
after the focal date.

 Deferred Perpetuity – first


payment is done several
periods after the focal date.

Where:
k = number of deferred periods
Example 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.
Example 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?

You might also like