9 ANNUITY

CHAPTER

Definition:-_A sequence of payments, generally equal Pupetuity: A perpetuity is an annuity whose payments
in size, made at equal intervals of times is called an continue forever.
annuity. Note. In what is to follow, it is understood that the
Monthly Rent; premiums of UC; deposited into a payment interval coincides with the interest period
recurring account in a bank; equal monthly payments unless statement to the contrary is made.
got by a retired government servant as pension and loan
instalments to houses or automobiles etc. ORDINARY ANNUITY OR ANNUITY REGULAR
Some terms related with annuities Definition:- Payments of an annuity are made at the
end of payment interval.
Periodic Payment:- The size of each payment of an
annuity is called the periodic payment of the annuity.
TYPEI
Annual Rent:- The sum ofall payments ofan annuity
made in one year is called its annual rent. (TO Find Amount)

Payment Period/Interval :- The duration between

two successive payments of an annuity is called the
S= A[ (I+;:• -l ]xtOOm.
payment period (or payment interval) of the annuity
Where S = Amount of an Annuity
Term:- The total duration from the beginning time of
A = VaJue of each instalment
the first payment period to the end of the last payment
period is called the term of the annuity. r = rate of interest
m = No. of conversion periods in a year
Amount of an Annuity:- The total value of all the
payments at the maturity time ofan annuity is called the n = m.t = No. of insta.lments made in t yrs.
amount (or future value) of the annuity. r
i = OOm = Rate of interest of one conversion Period
Present Value of an Annuity:- Sum of the present 1
values of all the payments of an annuity is called the
present value or capital value of the annuity. Calculator Trick
Step I Find ( I + i)" by calculator i.e. Type r+ I 00 m
TYPES OF ANNUITIES + I Then push x button then push = button (n - I )
Ordinary Annuity: lfthe payments ofan annuity are times.
made at the end of payment interval is called An Step D Then - l
Ordinary annuity or ReguJar annuity.
Step m +- r X I OOm
Annuity Due: If the payments ofan annuity are made
at the beginning of payment interval is called An Step JV Thenx A push= button (We get the required
value of Amount)
Annuity Due or Annuity Immediate.
146
 ANNUITY 147

Example 1. Find the future value of an annuity of Note:- If( I + i)" value is given in the question then use
t 500 is made annually for 7 years at interest rate of given value in the question otherwise answer may vary.
14% compounded annually. [Given that (l. 14)7 =
2.5023] TYPE 11
(a) f 5365.25 (b) f 5265.25
To find the Value of EACH INSTALMENT
(c) ~ 5465.25 (d) none
Example. If a bank pays 6% interest compounded
Solution :- Option (a) is correct quarterly what equal deposit have to be made at the end
ofthe each quarter for 3 years ifyou wantto have~! 500
Calculator Trick at the end of 3 years?

S = A[ (l + ,~n -l ]x 100m. =~ 5365.25 (a)f lt7.86

(c) f 150.50
(b)fl15 .0J
(d) None of these
Solution :- (b) is correct

Stepl Find (
14 '·i7
+I}AsTypel4+l00 + lxPush FV = S= A[ (l+i;" -l]xlOOm
100
= button 6 times.
( I+
6
400)
!'2 -I x400
Step II Type - I + 14 then x I 00 (Because it is annu- 1500= - -
ally) 6
Step m Thenx 500 = (we get the result)
Example 2. ~ 200 is invested at the end ofeach month A=~ 115.01
in an account paying interest 6% per year compound
monthly. What is the future value of this annuity after Calculator Trick
10th payment? Given that (l.005)10 =1.05 1 l Step I 1ype 6 + 400 + 1Then push x button then push
(a) f 2544 (b) f 2144 = button I I times
t 2544
(c) (d) None Step JI Then push - I + 6x 400 buttons
Solution :- (a) is correct. Step m Then push M+ button to save the
Here A = 200 ; r = 6% compounded monthly typed value.
n = IO = No. of payments. Step IV Then type I 500 then+ button then push
"MRC" button 2 times then push = button. [we get the

FV = S = A[ + (l ir-1] required result]

r
TYPEII

=2
r1+ - 6
1200
-1
x1200=f2045.60
(To find Present Value for Ordinary Annuity)

6
PV = Present value = 1Jt-(l+ir"]
i

Calculator Trick
Calculator Trick Step I Type ( I + i) value then push+ button
Step I Type 6 + 1200 + I Then push x button then Step D Then push = buttons "n" times
push = buttton 9 times.
Step m Push GT button
Step D Type- I Then+ 6x 1200
Step IV Then typex A (value) then push
Step m Then Type x 200 = buttons we get the required
= button
amount.
we get the required result.
148 ANNUITY

Example. Find the present value of an annuity which Annuity Immediate/Due

pays t 200 at the end of each 3 months for IO years Definition:- An annuity due is an annuity the first
assuming money to be worth 5% converted quarterly? payment of which is made at the beginning of the first
(a) f 3473.86 (b) f 3 108.60 payment interval
(c) f 6265.38 (d') None of these
Solution :- Option (c) is correct TYPEV - - - - - - -
Here A= 200 ; m = 4; r = 5% 1/4 yearly. (To find Amount)
l = IO years => n = mt = 4 x I O = 40 year
PV=? FV = Amounts= A[{O+i);+i -l}x1oom-1]
Calculator Trick
Calculator Trick (work as ordinary annuity)
Step I Type 5 + 400 + I then push + button
Step I Type r + I 00 m + I then push x button
Step D Then push = buttons 40 times
Step D Push = buttons n + I - I = n times then push -
Step ill Then Push GT button I button then push + button then push r value then
Step IV Then typex 200 = buttons pushx IOOm value buttons.
[We get the resulting value] Step m Push - I button then x button and then type A
value & then push= button (we get the required result)
TYPEIV Example 1 Invests f I 0,000 every year starting from
today for next IOyears. Suppose interest rate is 8% per
(To find instalment value If PV is given).
annum compounded annually calculate future value of
Example Mr. A borrows t 5,00,000 to buy a house. the annuity Given that ( I +0.08) 10 = 2. 15892500
If he pays equal instalments for 20 years and 10% (a) t 156454.875 (b) t 156484.875
interest on outstanding balance what will be the equal
(c) t 156494.875 (d') None of these
annual ins talment?
Solution :- (a) is correct
(a) f 58239.84 (b) f 58729.84
(c) f 68729.84 (d) None of these Calculator Trick
Solution :- (b) is correct
Here PV = f 5,00,000 ; r = 10% yearly
t = 20 years:. n = 20; A = ?

1-(1+10 )-20 =t 156454.875

5, 00<XX> = A IOO = ,58729.84 Step I Type 8 + I 00 + I then push x button then push
' 0.10 = buttons 11 - I = 10 times
Step ll Type l Then + 8 x I 00 - I buttons.
Calculator Trick Step m Then x 10000 = button.
Step I Type IO + 100 + J then push + button (We get the result)
Step II Push = buttons 20 times
Step m Then Push GT button
TYPEVI
Step IV Then M+ buttons to save the result. (To Flud Present Value of Annuity Due or Annuity
immediate)
Step V Type 5,00,000 then pus h + button
then MRC button 2 times and then
I -(I +i)·<•-
PV = P =A [{- - - - + l
1
>} ]
= button. i
(We get the required result)
 ANNUITY 149

Calculator Trick Step 11 Push M+ button

Step m Then type S (Amount value) Then
Step I Find (l+if<..-n by calculator as above
push+ button then push MRC button two times then
Step n Then push GT button push = button
Step m Then push + I (we get the required result of "A")
Step IV Then type x A value then push Example The amount of an annuity due consisting of
15 annual payments invested at 8% effecti ve is
= button.
f I0,000. Find the size of each payment.
(We get the required result)
(a) f 873.86 (b) t 108.60
Example Suppose your mom decides to gift you
~ 10,000 every year starting from today for next 5 (c) ~ 341.01 (d) None
years. You deposit this amount in a bank as and when Solution :- (c) is correct
you receive and get I0% per annum interest rate
compounded annually what is the present value ofthis Calculator Trick
annuity?
(a) ~40,000 (b) ~41 ,698.70
(c) ~ 42695.70 (d) None
Solution :- (h) is correct
=t 341.01.
Calculator Trick
Step I Type 8 + I 00 + I then push x button then push
= buttons I 5 + I - I = I 5 times

1- ( l +IO- rs-n Step D Push - I button then+ 8 x I00 and then push -
PV =10, 100 +1 I button.
O.IO
Step m Push M+ button.
Step IV Type 10000 then + button then push MRC
= ~ 41,698.70 button two times then = button.
(we get the required value of A)
Step I Type IO + 100 + I then push + button and
then push = button 4 times
Step n Then push GT button then type+ I.
TYPEVII
Step m Then push x I0,000 = buttons (To find Instalment Value if Present Value is given)
(We get the req uired result)

TYPEVII
PV=
1 1-(l+i)-(n-l)
- - - - +l
;
]

(To Find Instalment Value if Amount is given) calculator Trick

l - (l+,)-cn-1> ]
Step I We work on calculator for [ i +1
j ust like type VI
Calculator Trick Step II Push M+ button
Step I We work on calculator for Step m Type PV value then push + button then push

{
(l +i)"+'
r
-1} xtOOm-1
MRC button 2 times; then = button; we get the re-
quired value of "A"
Example A debt off 5000 with interest at the rate of
!See TYPE VI 8% compounded quarterly is to be discharged by 8
150 ANNUITY

equal quarterly payments the first being due today. Calculator Trick
Find the sire of each payment.
(a) t 573.86 (b) t 669.17
(c) t 399.26 (cl) None of these
Solution :- (b) is correct

Calculator Trick
300000=A
' '
r
( I + - 10
JOO
0.10
-l

1-(1 + i )- ( ir- 1) ]
PV=A - - - - + I
[ i
A= t 18,823.62
8 )-(8-II
I- l+ - Step I Type IO + I 00 + l then push x button then
(
5000 = A 400 +I push =button 9 times then -1 then + IO x I 00
0.02
Step D Then Push M+ button
Step ill Then type 300,000 + MRC button 2 times then
=t 669.17. push = button.
(we get the required value)
Step I Type 8 + 400 + I then push + button then Example 2. Raja aged 40 wished his wife Rani to have
push = buttons 7 times f 40,00,000 at his death. If his expectation of life is
another 30 years and he starts making equal annual
Step II Then Push GT button then + l invesbnents commencing now at 3% compound inter-
button. est annually?
Step m Then push M+ button. (a) ~ 81628.19 (b) t 84450
Step IV Then Type 5000 + button then push MRC (c) t 84449 (d) None of these
button 2 times then push = button. (we get the required Solution :- (a) is correct
value of A)
Calculator Trick
TYPED(
--------
SINKJNG FUND 40 00 000 =Al{<•+ 0.03)30+l - •}-1]
' ' 0.03
A sinking fund is a type of fund that is created and set :. A= t 8162 .19
purposely for repaying debt. The owner of the account
sets aside a certain amount regularly and uses it only for
a specific purpose. Interest is compounded at the end or TYPEX
beginning of every period.
AMORTIZATION OF LOANS
(l+i)"- 1] A loan is said to be Amortized ifit can be discharged
We use formula, FV = A [ i by a sequence of equal payments made over equal
periods of time. Each payment can be considered as
Example. How much amount is required to be in- consisting of two parts:
vested every year so as to accumulate t 3,00,000 at the (,) Interest on the outstanding loan, and
end of IO years if interest is compounded annually at
10%? (it) Repayment of part of the loan. Thus, a loan is
amortized when part ofeach periodic payment is
(a) t 18823.62 (b) f I 8850.24 used to pay interest and the remaining part is used
(c) t 19823.62 (d) None to reduce the principal.
Solution :- (a) is Correct
 ANNUITY 151

Formula
I- ( l+ - 3 TM
I0OOO=A
'
JOO
0.03

Example 1. A loan of f30,000 at the interest rate of Use Calculator Trick and find the value of
6% compounded annually is to be amortized by equal
A = f 672.16
payments at the end of each year for 5 years, find the
annual payment Example 3. A man purchased a house valued at
(a) f 7121.89 (b) f 7200
t 3,00,000. He paid ~ .00,000 at the time of purchase
and agreed to pay the balance with interest at 12% per
(c) f 6921.89 (d) None annum compounded half yearly in 20 equal halfyearly
Solution :- (a) is correct instalments. If the first instalment is paid after six
Here A = ?; PV = t 30,000 months from the date of purchase then the amount of
each instalment is [Given log I 0.6 = 1.0253 and log
r = % yearly; t = 5 years~ n = 5xt =5. 31.19 = 1.494)
(a) f 87 19.66 (b) f 8769.2 1
PV =P =A[l-(l;;r•] (c) f 7893.1 3 (d) None
Solution :- (a) is correct
Here present value for amortization
1-( 1+t& T5 = t 3,00,000 - t 2,00,000
30,000=
0.06 , A= ~7121.89 PV = ~ 1,00,000
r = 12% compounded half yearly
n = 20 instalment
Calculator Trick A =?
Step I Type 6 + I 00 + I push + button Then push =
button 5 times
Step U Then Push GT button then push M + button
Step m Then type 30,000 then push + button then
push MRC button 2 times then = button;
l 00 000 = A
I- ( l+ - 12
zoq
T
~
We get the required result. ' ' 0.06
Example 2. A loan of t I0,000 is to be repaid by equal
annual instalments of20 years. The rate o f interest is
3% per annum effective. Find the annual instalment. Use calculator trick and find
A = , 8718.46 =~ 8719.66
(a) t 600 (b) t 672.16
(c) t718.25 (d) None (It is calculator value)

Solution:- (b) is correct (lfwe use given log value we can get the same result)

TYPEXI
Leasing
A financial arrangement under which the owner of the
asset allows the user to use the asset for a defined
period of time for a cons ideration (lease rental) payable
over a given period of time is called
152 ANNUITY

LEASING. Owner of the asset is called LESSOR user = t 3642.14 [Use Calculator Trick]
of the asset is called LESSEE and defined period of
clearly leasing cost= f 3642.14 is less that purchase
time for leasing is called LEASE PERIOD. Decision
ma.king is required for Lessor or Lessee. It can be cost so leasing is preferable.
followed with examples.
Leasing. A company may have to decide whether to
TYPEXII
obtain a machine either by leasing it for n years (the Capital Expenditure
useful life) at an annual rent of, say~ A or by purchas- (Investment Decision):-
ing the machine for~ P It company can borrow money
at r% per annum, the question is, 'which alternative is Example 1. Machine A costs t I 0,000 and bas useful
preferable ?' Life of 8 years. Machine B costs ~ 8,000 and has
In such situation, we find the present value of an useful life of6 years. Suppose machine A generates an
ordinary annuity oft A for n years at the interest rate annual labour savings of ~ 2,000 while machine
r% per annum. We compare this value with the purchase B generates an annual labour saving of ~ 1800.
price and then decide accordingly. Assuming the time value of money is I 0% per annum,
find which machine is preferable?
Example 1. ABC LTD. wants to lease out an asset
costing t 3,60,000 for a five year period. It has fixed a (a) Machine A (b) Machine B
rental of t 1,05,000 per annum payable annually (c) Both are equivalent (d) None of these
starting from the end of first year. Suppose rate of Solution :- (a) is correct
interest is I 4% per annum compounded annually on
For Machine A.
which money can be invested by the company in this
agreement which action is favourable to the com- PV of a sequence of annual savings of t 2000 for
pany?
(a) yes
(c) Data inadequate
(b) No.
(d) None
8 years @ I 0% p.a. = 2000[ 1-(1. IO)"s
0.10
l
Solution :- (a) is correct [Use Calculator Trick]
= t 10669.85 = t 10670
PV =A[l-(l;t)-n] = I 05 CXX>[l-(1.14rs]
' ' 0.14 Net saving = t I 0,670 - t I 0000 = t 670
= ~ 3,60,473.50. For Machine B
Which ls greater than cost Rs.3,60,000 PV of a sequence of annual savings of~ 1800 for 6
:. Leasing is favourable. years @ I 0% p.a.
Example 2. A company is considering proposal of
purchasing a machine full payment of~ 4000 or by
leasing it for 4 years at an annual rate of~ 1250. Which
=1snrf 1-(1.10)~
"1 0.10
l
course of action is preferable if the company can [Use calculator Trick]
borrow money at 14% compounded annually?
= ~ 7839.46
(a) Purchasing (b) Leasing
Net saving= f 7839.46 - f 8000 = - ~ 160.53
(c) Both are same (d) None of these
Solution:- (b) Leasing is correct Thus, machine B costs f 160.53 more.

We will find PV of annuity f 1250 Decision:- Machine A is preferable.

PV =125
1-( 1+ I~
0.14
r Example2.Amachinecan be purchased forf50,000.
Machine will contribute f 12000 per year for the next
five years. Assume borrowing cost is I 0% per annum
compounded annually. Determine whether machine
should be purchased or not.
 ANNUITY 153
(a) Purchased payments, called coupon payments, and at maturity,
(b) Not Purchased they receive the face value of the bond along with the
last coupon payment. Each payment received from the
(c) lnfonnation insufficient
bonds, be it coupon payment or payment at maturity, is
(d) None of these termed as cash tlow for investors.
Solution :- (b) is correct. The rate at which a bond yields interest is called the
PV for sequence of payments off 12000. dividend rate or the nominal Interest rate.
This is always computed on the face value ofthe bond.

=12000
r
1- t+ -10
IOO
0.10
r The face value of a bond is the sum mentioned in the
bond. This sum is also called the par value or
denomination of the bond.
The redemption price of a bond is the amount the
bond pays at maturity. The redemption price is usua.lly
equal to the face value, in which case the bond is said
[Use calculator Trick] = f 45489.44 to be redeemed at par. Sometimes, the bond may be
This is less than cost f 50,000 So, Machine should not redeemed at a price higher than the face value; in this
be purchased. case, the bond is said to be redeemed above par. The
redemption price is stated on the bond. The statement
Example 3. A machine with useful life of7 years costs " a bond is to be redeemed at I07'' means that the
f 10,000 while another machine with useful life of 5 redemption price of the bond is I07% ofits face value.
years costs ~ 8000. The first machine saves labour
Yleld Rate and Purchase Price. Bonds are bought in
expenses offl 900 annually and the second one saves the open market at a price usually different from the
labour expenses off 2200 annually. redemption price or par value. This is due to the fact
Determine the preferred course ofaction. Assume cost that the purchaser expects to realize an income from
of borrowiing as I0% compounded per annum. his investment at a rate, called the yield rate or
effective rate, which is usually either higher or lower
(a) I st Machine should be purchased
than the dividend rate.
(b) 2nd Machine should be purchased
The owner of a bond is entitled to the fo llowing
(c) Infonnation is not sufficient benefits from the bond :
(d) None of these I . All future dividends as they occur.
Solution :- (b) is correct 2. The redemption price of the bond at maturity.
1st Machine The purchase price of a bond is therefore equal to the
present value of the annuity formed by all its future
PV =PV =1900[l- (1.l0)-'
0.10
]=f 9250 dividends plus the present value of its redemption
price.
Net saving f 9250 - I 0,000 = - f 750 Formula for computing the purchase Price

PV=220Jl-(I.JOr' ] - To derive the formula for the purchase price of a bond

1
0.10 - f 8340. the following notations will be used:
F = the face value
Net saving=~ (8340 - 8000) = ~ 340.
C = the redemption price
So 2nd machine is preferable.
i = the yield rate per period
TYPE XIII- - - - - - - ~ n = the number of periods before redemption.

Bond Valuation R = the periodic dividend payment

Bonds are long-term debt securities issued by compa- V = Purchase price= present value ofthe bond.
nies or government entities to raise debt finance. Inves-
tors who invest in bonds receive periodic interest V =C(l+i)..,, +{ l-(l;i)-"]
154 ANNUITY

Note:- If a bond is redeemed at par then Solution :- (b) is correct

C = F then
8 )-10
V=PV=l l+- +(1000x8.5%)
V =F(l +;r" + R[ l-(1 ;o-n] 10 ]
1000
l-(l.08r
[ 0.08
Calculator Trick
Step I Fill"St work on calculator for by using Trick of
type ID
=, 1033.SS.
[Use calculator as me.ntloned In the above Ques-
Step D Save it by pushing ''M±" button tion]
Step m Find c( I + it' Example 3. Find the purchase price oft 1000 bond
Step IV Then push+ MRC button 2 times then push = having redemption price 10% above face value at the
button end of IO years; paying annual dividends at 4% if the
yield rate is to be 5% effective.
(Y,'e get the required answer)
(a) f 884.16 (b) f 984.17
Example 1. Arun intends to purchase a three year
(c) f 1084.16 (d) None of these
f I000 par value bond having nominal interest rate
of I 0%. At what price the bond may be purchased now Solution :- (b) is correct
if it matures at par and the investor requires a rate of :. The bond is redeemed at , 11 O; it means the
return of 14%? redemption price of the bond is 110% of its face value.
(a) , 907. 135 (b) , 920.25 Thus
(c) , 813.75 (d) None of these C = ll 0% of ' J000 = t 1100
Solution :- (a) is correct R = 4% of face value = 0.04x 1000 = ? 40
Given n = IO ; i = 5% = 0.05
C = The redemption price =, I000.
... Pv =v = 11 ooc1.osr10 + AJ i-c1.osr 10 ]
R = Periodic dividend payment 7_ 0.05
= I 0% of I 000 = t I00. =f984.17.
i = yield rate per period= 14% [Find answer by using CALCULATOR Trick]
n = No. of periods before redemption = 3.
EXERCISE
V = Present value of bond = Purchase price= PV of
resumed price + PV of all periodic dividend

~ 14
= l w\l+ lOO
)-J+I r 100
t - t+ 14

0.14
r TYPEI
Q.1. The amount ofan annuity off 2000 payable at the
end of each year for 5 years if money is worth 8%
effective is ......
(a) , 11733.86 (b) , 13108.60
=' 907.135. (c) , 21002.75 (d) none of these
Note:- Use calculator Q.l. The Future Value of an annuity of, 500 payable
Example 2. A? I000 bond paying annual dividends at at the end of each year for 14 years if money is worth
8.5% will be redeemed at par at the end of 10 years. 5% effective is ...
Find the purchase price of this bond if the investor (a) , 9 173.86 (b) , 9799.32
wishes a yield rate of 8%. (c) t 28953.75 (d) none of these
(a) t907.l3S (b) t 1033.S4 Q.3. The amount of an annuity of f 200 payable at the
(c) f 945.67 (d) None of these end ofeach 6 months for 4 years if money is worth 6%
compounded semi-annually is...
 ANNUITY 155

(a) ~ 1173.86 (b) ~ 3108.60 Q.2. The present value ofan annuity of~ 2000 payable
(c) ~ 1778.47 (d) none of these at the end of each year for IO years, if money is worth
4% effective is ....
Q.4. The amount of an annuity of~ 800 payable at the
end ofeach 3 months for 6 years ifmoney is worth 6% (a) f 1622 1.79 (b) f 33508.60
compounded quarterly is ... (c) f 15272.75 (d) none ofthese
(a) ~ 22906.82 (b) ~ 23 I08.60 Q.3. The Capital value ofan annuity of~ 800 payable
(c) ~ 23002.75 (d) none of these at the end of each 6 months for 5 years, if money is
worth 6% converted semi-annually ..... .
Q.S. Arun decides to put aside~ I00 at the end ofevery
month in a money market fund that pays 8% (a) ~ 7573.86 (b) f 6824.16
compounded monthly. After making 12 deposits, how (c) f 8302.75 (d) none of these
much money does he have? Q.4. The present value of an annuity which pays f 200
(a) ~ 1173.86 (b) ~ 1244.99 at the end of each 3 months for 10 years, assuming
(c) ~ 2002.75 (d) none of these money to be worth 5% converted quarterly ...... .
Q.6. An annuity consisting of payments of~ 500 made (a) f 3473.86 (b) f 3 108.60
at the end ofevery 3 months for 4 years at the rate of6% (c) f 6265.38 (d) none of these
compounded quarterly. Its Future value is... Q.5. Arjun buys a house for which he agrees to pay
(a) ~ 8966.18 (b) ~ 8 I 08.60 ~ 5000 at the end of each month for 8 years. If money
(c) ~ 9602.75 (d) none of these is worth 12% converted monthly, what is the capital
value of the house ?
Q.7. HDFC bank pays 6% interest, compounded
quarterly, what equal deposits have to be made at the (a) f 307638.50 (b) f 310825.60
end of the each quaner for 3 years ifyou want to have (c) f 25902.75 (d) none of these
f 1500 at the end of3 years? Q.6. Amit buys a house paying~ 50,000 in cash and the
(a)~ll7.86 (b) fl1 5.0I balance in 20 instalments of~ 8000 each at the end of
(c) ~ 150.50 (d) none of these each year. Ifinterest be reckoned at 16%, how much he
should have paid if had purchased it cash down.
Q.8. An annuity consisting of equal payments at the
end of each month for 2 years is to be purchased for (a) ~ 85250 (b) ~ 97430
t 2000. If the interest rate is 6% compounded (c) ~ 72002.75 (d) none of these
monthly, how much is each payment ? Q.7. Munna purchased LED TV paying f 5,000 down
(a) ~73 .86 (b) ~ 3 1.60 and promising to pay t 200 every quarter for next 10
(c) ~ 78.64 (d) none of these years. The seller charges interest at the rate of 12% per
annum compounded quarterly. If Munna missed the
Q.9. What sum must be invested at the end ofeach year
first IO payments, what must he pay when the 11th
to provide for the replacement at the end of IO years of payment is due to discharge his entire loan ?
a machine costing ~ I0000 if money is worth 5%
effe•ctive ? (a) f5 873.86 (b) f7108.60

(a) ~ 773.86 (b) f 795.05 (c) f 6399.26 (d) none of these

(c) ~ 1102.75 (d) none of these

TYPEI
TYPED Q.t. The value of the amount at the end of 12 years of
an annuity of ~ 1200 payable at the beginning of the
Q. I. The present value ofannuity of~ 5000 payable at each year unti I 12 payments have been made if money
the end ofeach year for 6 years, if money is worth 7% is worth 8% effective.
effective is ....
(a) f 25873.86 (b) t 24594.35
(a) ~ 23832.70 (b) f 23108.60
(c) f 32399.26 (d) none of these
(c) ~ 22502.75 (d) none of these
156 ANNUITY

Q.2. At the beginning of each quarter, Mr. X deposits (a) ~ 873.86 (b) ~ 108.60
~ 600 into a savings account that pays 6% compounded (c) ~ 341.01 (d) none of these
quarterly. Find the balance in the account at the end of
Q.10. A debts oft 5000 with interest at the rate of8%
5 years.
compounded quarterly is to be discharged by 8 equal
(a) ~ 14082.31 (b) ~ 15028.35 quarterly payments, the first being due today. Find the
(c) t 16399.26 (d) none of these size of each payment.
Q.3. Find the amount of an annuity oft 2000 payable (a) f 573.86 (b) f 669.17
at the beginning of each month for 3 years at the rate of (c) f 399.26 (d) none of these
15% compounded monthly.
(a) f 85873.86 (b) f 91358.90 ANSWERS
(c) ~ 96399.26 (d) none of these
Type I
Q.4. An annuity consisting of equal payments at the
beginning ofeach quarter for 3 years is to be purchased 1• (a) 2. (b) 3. (c) 4. (a) 5. (b)
for ~ 7000. If the interest rate is 8% compounded 6• (a) 7. (b) 8. (c) 9. (b)
quarterly, how much is each payment?
Type II
(a) t 587.86 (b) ~ 108.60
I. (a) 2. (a) 3. (b) 4. (c) 5. (a)
(c) ~ 511.68 (d) none of these 6. (b) 7. (c)
Q.5. The value ofthe present value, at 8% compounded
quarterly, of an annui ty due of ~ I 000 payable Type Ill
quarterly for 5 years ? I. (b) 2. (a) 3. (b) 4. (c) 5. (c)
(a) f 15873.86 (b) t 17108.60 6. (a) 7. (a) 8. (b) 9. (c) JO. (b)
(c) ~ 16678.46 (d) none of these
PERPETUAL ANNUITY (OR PERPETUITY)
Q.6. Ram purchased a house for which he agreed to pay
t 5000 at the beginning of each 3 months until he has The sequence of payments continuing forever (i.e., the
made IO payments. Ifmoney is worth 6% compounded payments continue for infinite number of periods) is
quarterly, what is the equivalent cash price of the called Perpetuity (or perpetually annuity). Here
house? beginning date is known but its terminal date i.e. end
(a) t 46802.58 (b) t 47108.60 date is not known ; So, we cannot find amount of a
perpetuity, but its present value can be determined.
(c) ~ 46399.26 (d) none of these
There are three types of perpetual annuities.
Q.7. The premiums ofa HDFC Life policy aref700 a
quarter, payable at the beginning ofeach quarter. If the Type I. Present Value of Immediate perpetuity
policyholderwishestopay 1 year's premiuminadvance, Present value ( P) of immediate ( or ordinary) annuity
how much should be paid provided that the interest rate consisting n payments off (R) each, paid at the end of
is I 0% compounded quarterly ? each period at the rate i per period is given by
(a) f 2699.22 (b) f 2 108.60 R
=> P= PV= -
(c) f 2399.26 (d) none of these i
Q.8. The value of each equal instalment made at the Type 11. Present Value of Perpetuity Due
beginning of each year for IO years will pay for a piece Here, each payment of~ R is payable at the be-ginning
of property priced at ~ 80,000, if money is worth 7% of each period, the first payment is due now.
effective?
:. The present value of perpetuity due
(a) t 15873.86 (b) ~ 10645.05
R
(c) ~ 16399.26 (d) none of these PV =P=R+ -
i
Q.9. The Future value of an annuity due consisting of
15 annual payments invested at 8% effective is
~ I 0,000. Find the size of each payment.
 ANNUITY 157

Where R = Value of one instalmen~ Solution : It is a perpetuity due & R = f 4,500 ; i =

i = rate of interest per period. 4% yearly = 0.04

Example 1.1 f money is worth 6 % per annum, find the R

present value of a perpetuity of~ 3300 payable annu- (i) Requjred amount = PV = P = R + -;-- =
l
ally.
Solution : It is an immediate perpetuity. 4,500+ 4500
0.04
6
Here R = 3300 i = - = 006 = 4,500 + I, 12,500 = ~ 1,17,000
' ' 100 .
(i1) Effective rate of interest corresponding to 12%
:. The present value of the perpetuity is given by compounded quarterly,
R 3300 4

P- = i = 0.06 = ~ 55,000. 0.12 )

i = ( 1+4 -1 = (103)4-1
Example 2. At 8% converted quarterly, find the
present value of a perpetuity of~ I 000 payable at the = 1.126 - l [By calculator ( 1.03)'= 1.126)
end of each quarter. = 0. 126 (or 12.6 % annually)
Solution : This is immediate perpetuity, as payments
R
are made at the end of each quarter. :. The required amount = PV = P = R +-;--
0.08 '
Here, R = 1oo·, i = -4- = o.02 =4500+ 4500
' 0.126
R 100 1000 = 4S00 + 3S,714.29 = f 40,2 14.29
... P - = i = 0.02 = 0.02 = ~ 50•000·
TYPEIV
Example 3. lf the cash equivalent of a perpetuity of
~ 1750 per month is~ 1,40,000; find the rate of interest Q.1. The value of tbe present value of a sequence of
converted monthly. payments of~ 80 made at the end ofeach 6 months and
Solution: Let r % p.a. be the rate ofinterest converted continuity for ever, if money is worth 4% compounded
monthly. Then semi-annually is ....
(a) ~ 4,000 (b) ~ 5,000
r
i = Rate of Interest per period (i.e., per month) = (c) ~ 3,000 (d) None of these
12 Q.2. How much money is needed to endure a series of
Here. R = 1750, P .. = 1,40.000. lectures costing~ 2,500 at the beginning of each year
indefinitely, if money is worth 3% compounded
R annually ?
Since, P .. =-:-- ,
I
(a) ~ 80,454.67 (b) ~ 85,833.33
_ 1750 . . 1750 (c) ~ 90,350.45 (d) None of these
Or, 140000
, , - . ,' =0.0125
I 1,40,000 Q.3. At what rate converted semi-annually will the
=> r = 12i = 12 x0.0125 = 0.l5 = 15% presentvalueofa perpetuity of~ 450 payable at the end
of each 6 months be ~ 20,000 ?
Example 4. How much money is required to endure a
series of lectures costing ~ 4,500 at the beginning of (a) 3.5% (b) 4%
each year indefinitely, if money is worth: (c) 4.5% (d) None of these
(i) 4 % compounded annually; (ii) 12% compounded
quarterly. ANSWERS
I. (a) 2. (b) 3. (c)
158 ANNUITY

Growing Perpetuity such as taxes, investment fees and inflation. For

Definition :- A growing perpetuity is one in which the example, detailed data on a mutual fund might show
periodic payments increase at a constant growth rate the fund's nominal rate of return as I 0% but also show
and are received for an infinite amount of time. its return after truces on distributions and sales offund
Fonnula; shares as only 7 per cent. Investors must look beyond
an investment's nominal rate ofretum to get a true idea
The present value of a growing perpetuity
of an investment's potential earnings.
R
=PVA=-- REAL RATE OF RETURN
i-g
A real rate of return is the annual percentage return
Where R = Value of each payment receipt for each
realized on an investment, which is adjusted for changes
period.
in prices due to inflation or other external effects. This
i = Rate of interest per payment= discount rate method expresses the nominal rate of return in real
g = Growth rate. tenns, which keeps the purchasing power of a given
Example:- If the perpetuity entitles to a payment of level ofcapital constant overtime.Adjusting the nominal
amount t I00 at the end of first year that will grow at return to compensate for factors such as inflation
a rate of 5% annually. Find the present value of this allows you to detennine how much of your nominal
growing perpetuity discounted at a rate of 15% ? return is real return.
Solution Present value = PVA • Nominal Rate of Return - lnflation = Real Rate of
Return
R 100 100
= i - g = 0.15 - 0.05 0.10 = '1000 •• Nominal Interest Rate= Real Interest Rate+ Inflation
Example :-Assuming that the discount rate is I0% per COMPOUND ANNUAL GROWTH RATE
annum, how much would you pay to receive f 800, (CAGR)
growing at 8%, annually, forever? The compound annual growth rate (CAGR) is the rate
Solution of return that would be required for an investment to
8 grow from its beginning balance to its ending balance
PVA = ..!!._ = 00 = 800 = f 40,000 assuming the profits were reinvested at the end ofeach
i- g 0.10-0.08 0.02
year of the investment's lifespan.
NET PRESENT VALUE
To calculate the compound annual growth rate, divide
The difference between the present value of the future
the value of an investment at the end of the period by
cash flows from an investment and the amount of
investment. Present value of the expected cash flows is its value at the beginning of that period, raise the result
computed by discounting them at the required rate of to an exponent of one divided by the number of years,
return. and subtract one from the subsequent result.
1
Net Present Value (NPV) = Present value of net cash
inflow - Total net initial investment. CAGR ( t t ) = (V(t,,
•' o V(to)
))•.-to -1
Net Present Value (NPV) = Present value of cash
inflow - Present value of cash outflow. Where V( t.) = End period value & V ( t O) = Beginning
Decision Rule : period va.lue.
l. If NPV ~ 0 ~ Accept the Proposal Example:- Suppose Revenue of ABC LTD. for four
2. If NPV < 0 ~ Reject the Proposal years are given below.
A positive net present value means a better return, and
Year 20 14 20 15 2016 2017 20 18
a negative net present value means a worse return, than
the return from zero net present value. It is one of the Revenue 250 300 350 420 480
two discounted cash flow techniques (the other is Calculate Compound annual Growth rate ( CAGR ).
internal rate of return) used in comparative appraisal of
investment proposals where the flow of income varies Solution : t • - t O= 2018 - 2014 = 4
over time. _ 1_ I
4
NOMINALRATEOFRETURN CAGR(O 4 )= (V(t•))••-"' - I = (480) - I
The nominal rate of return is the amount of money • V(to) 250
generated by an investment before factoring in expenses = l.177132 - 1 = 0.177132 = 17.71 %
 ANNUITY 159

PREVIOUS YEARS IIEIIORY BASED QUESTIONS

Q.1. Mr. X Invests f I 0,000 every year starting from today But it costs f 50,000
for next IO years suppose: interest rate is 8% per annum :. It should not be purchased
compounded annually. Calculate future value ofthe annuity:
(Given that ( l + 0.08) ' 0 = 2. 15892500) :. (b) is correct
(a) ~ 156454.88 (b) ~ 144865.625 Q.4. How much amount is required to be invested every year
so as to accumulate ~ 3,00,000 at the end of 10 years, if
(c) t 156554.88 (d) None of these interest is compounded annually at IO % ? [Give ( 1.1 ) 10 =
Nov. 2006 2.5937)
Solution : (a) It is Annuity Due Question (a) ~ 18,823.65 (b) ~ 18,828.65
(c) ~ 18,832.65 (d) ~ 18,882.65
A=FV =R[{(l+i):+• -t}xtOOm - 1] Feb. 2007

(l+i)" -I ]
=10,~(l+0.08/o+' - lx100-I] Solution: (a) FV = R [ r xJOOm

=~ 1,56,454.88.
j
(See Type-V]

l
(a) is correct (I +~ )'° - 1
JOO xlOO
Q.2. The present value of an annuity of~ 3,000 for 15 years 3,00,000 = R IO
at 4.5% p.a. C.I. is:
[Given that ( 1.045r = 1.935282)
(a) ~ 23,809.67 (b) ~ 32,218.67 3,00,000
(c) t 32,908.67 (d) None of these 10
R= [(I.I) - 1 xtoo = ~ 18,823.65.
Nov. 2006 10

Solution : PV = R [
l- (l +
;
l)-n ] (a) is correct
Q.5. A company is considering proposal of purchasing a
machine either by making full payment of t 4,000 or by
)- (1.045)-U] leasing it for four years at an annual rate of ~ 1,250. Which
= 3000 [ 0.045 course of action is preferable, if the c.ompany can borrow
money at 14% compounded annually? [Given: ( 1.14) =
'Irick! = ~ 32,2 18.67 1.68896)
[See Calculator Tricks in Type IU] (a) Leasing is preferabl e (b) Should be purchased
Q.3. A machlne can be purchased for f 50,000. Machine (c) No difference (d) None of these
will contribute~ 12,000 per year for the next five years.
May 2007
Assume borrowing cost is I0% per annum. Determine
whether machine should be purchased or not: Solution: (a) f 4000 = Present value
(a) Should be purchased
PV = R[l-(l;r)_,, xlOOm]
(b) Should not be purchased
(c) Can't say about purchase
j=
l
4
(d) None of the above Feb. 2007 l -(l+Ji.)"
)00 X)00
= 1250 14 ~ 3642.14
1-(l+i) - "]
Solution : (b) PV = R [ ;
It is less than real cost price.
:. Leasing is better
-l2 J 1-(1.10)-S ]
PV- 7 0.10
: . (a) is correct

=t 45,489.44
160 ANNUITY

Q.6. Vipul purchases a car for f 5,50,000. Re gets a loan of (a) t 84,077 (b) t 81 ,628
f 5,00,000 at 15% p.a. from a Bank and balancef 50,000 he (c) f 84,449 (d) None
pays at the time ofpurchase. He has to pay the whole amount
ofloan in 12 equal monthly instalments with interest starting Nov. 2007
from the end of the first month. The money he has to pay at Solution :- (b) is correct.
thecndofevery month is: [Given(l.0125)12= 1.160754521 Calculator Tricks :- [See Type IX]
(a) t 45, 130.43 (b) t 45,230.43 Q9. Acompany may obtain a machine either by leasing it for
(c) t 45,330.43 (d) None of these 5 years (useful life) at an annual rent off 2,000 or by
May 2007 purchasing the machine for f 8,100. lf the company can
borrow money at 18% per annum, which alternative is
Solution : Loan Value= t 5,00,000 = PV preferable ?
R = Instalment value = ? (a) Leasing (b) Purchasing
(c) Can" t say (d) None of these
Feb.2008
2 Solution : (a) PV = f 8100
1- ( 1+ ~ 1-•
15 ft is an ordinary Annuity

5,00,000 = R ;

PV=2
( 8
1-l+IOO
rs xlOO

R = 45, 130.43. 18

Q.7. A company establishes a sinking fund to provide for

the payment of f 2,00,000 debt maturing in 20 years. = f 6254.34
Contributions to the fund are to be made at the end of every
It is less than ~ 8100.
year. Find theamountofeachannualdepositifinterestis5%
per annum: : . (a) is correct
(a) ~ 6, 142 (b) ~ 6,049 Q.10. A sinking fund is created for redeeming debentures
worth t 5 lakbs at the end of25 years. How much provision
(c) t 6,052 (d) t 6,159
needs to be made out of profits each year provided sinking
Aug. 2007 fund investments can earn interest al 4% p.a.?
Solution : A= f 2,00,000

l
(a) 12,006 (b) 12,040
(c) 12,039 (d) 12,035
~+rioor -l June 2008
200000=
' ' { ---'--'--'----XIOO
5 Solution : (a) is correct
Tricks :
or
20
2,00,000 = R [ (1.05) - I x I 00]
f 5,00,000 = R [
(1.04) -
0 _04
25
I] :- R = 12006.00 approx.
R= 2,00,000x5
or
[(1 .05) 20 - l))xlOO Q.11. Future value of an ordinary annuity :
= f 6049 (Approx.)
1
Q.8. Raja aged 40 years wishes his wife Rani to have t 40 (a) A(n,i) =~(I+;:- - ]
lakhs at his death. If his expectation of life is another 30
years and he starts making equal annual investm ents
commenc ing now at 3% compound interest p.a. How much
should he invest annually?
(b) A(n,i) = A[ (I +i:- +I ]
 ANNUITY 161

PV = IJI - (1.06)-JO ]
(c) A(n,i)=A[l-(li+i)"]
7 0.06
=t 7360
(a) is correct.
(d) A(n, i) = A[().+ i)". - I]
1(1+1)" Q. 14. The future value of an annuity oft 5,000 is made
annually for 8 years at interest rate of 9% compounded
Dec. 2008 annually
Solution : (a) is correct.
[Given that(l.()1))8 = 1.99256 _ _~
It is Formula.
Q.12. Paul borrows t 20,000 on condition to repay it with (a) t 55, 142.22 (b) t 65, 142.22
compound interest at 5% p.a. in annual instalment of (c) t 65,532.22 (d') t 57,425.22
t 2,000 each. Find the number of years in which the debt Dec. 2010
would be paid off.
Solution : (a) is correct
(a) 10 years (b) 12 years
(c) 14 years (d') 15 years June2009
FV =57
J (1.()1))8 - 1]
O.()I) = t 55,142.22
Solution : (c) is correct

( 5 )_, :. (a) is correct

1-ll + 100 x lOO Q.15. How much amount is requ ired to be invested every
20,000 = 200 - -
5 year as to accumulate t 6,00,000 at the end of I 0th year, if
interest is compounded annually at I 0% rate of interest?
(a) t 37,467 (b) f 37,476
(c) t 37,647 (d) t 37,674
OT
June 2014
Solution : ( c) is correct
or 10x5 = l- (1.0S}- r Let amount invested annually = R
100

or 0.5 -1 = (1.05)-r R= 6, 00,CXX)

1 )10
or 0.5 -1 =-(1.05)- f ( 1+ 100 - 1
IO xlOO
, I
or (1.05) = - =2
0.5

log2 = t 37,647 (approx.)

or 1
= log(l .OS) = 14 yrs approx. Q.16. The future value of an annuity of t 1,000 made
annually for 5 years at the rate of interest 14% compound
Tricks :- Go by choices annually is
Q.13. Find the present value ofan annuity oft 1,000 payable (a) t 5610 (b) t 6610
at the end o f each year for IO years. If rate ofinterest is 6%
(c) t 6160 (d') t 5 160
compounding per annum. [given (1 .06['0 =0.5584):
Dec. 2014
(a) t 7,360 (h) t 8,360
(c) t 12,000 (d') None of these.
June 2010
Solution : (a) is correct
162 ANNUITY

Solution : FV = Solution : CaJculator 'Iiicks:

1000
( 1+-14 - 1
100
14
J
x tOO
- [(
R-
796870

I+ __!_Q_) 'o - I
100
10
l
xlOO

=t 6610.104 = t 6610.
Q. 17. Suppose your mom decides to gift yout I 0,000 every =f 50,000
year starting from today for the next sixteen years. You option (d) is correct.
deposit this amount in a bank as and when you receive and Q.20. A person invests , 2,000 at the end or each month @
get 8.5% per annum interest rate compounded annually. of interest 6% compounding monthly, find the amount of
Whal is the present value of this money: Given that P ( 15, annuity after the I 0th payment is :
0.085) = 8.304236
(a) t 20,456 (b) t 20, 156
(a) 83042 (b) 90 100
(c) f 20,256 (d) f 20,356
(c) 93042 (d) 10100
[1 Mark, 2018 June]
Dec. 2015
Solution : (a)
Solution : (c) is correct
6 )JO -1
1- ( 1+ -8.5 ) (-l6-I) 1 FV = 2000
( l+ - -
1200
6
x1200
lOO x lOO+I
PV = I0,000 8.5
[
= {' 20,456
Type 6 + UOO + l then pressx button them= button 9
= I 0,000 (8.304236+ I ) times - I+ 6x 1200x 2000 = button; we will get the
=t 93,042 required result.
Q.18.The future value ofan annuity off 1500 made annually Q.2 I. Determine the present value of perpetuity off 50,000
for 5 years at an interest rate of I0% compounded annually per month @ Rate of interest 12% p.a. is _ _ _ __
is (a) t 45,00,000 (b) t 50,00,000
[Given that ( I.I }'= 1.6105 1] (c) t 55,00,000 (d) t 60,00,000
(a) 95 17.56 (b) 9 157.65 II Mark, June 2019)
(c) 9715.56 (d) 9 175.65 Solution : (b)
[1 Mark, 2017 June!
i= _g_ = 0 .01
10 )s -1 1200
( 1+ - Formula
Solution : FV = 1500 l()() X 100
10
PV = R = 50,000
i 0.01
Use Calculator tricks =, 50,00,000
(b) is correct.
= f 9157.65
Q.22. A person wants to lease out a machi ne costing
Q.19. What sum should be invested at the end of every year f 5,00,000 for a IO year period. It has fixed a rental of
so as to accumulate an amount or, 796870 at the end of I 0 , 5 1,272 per ann um payable annually starting from the end
years at the rate of interest I 0% compounded annually,
of first year. Suppose rate of interest is I0% per annum,
[given thatA(IO; 0.1) = 15.9374) compounded annually on which money can be invested. To
(a) 40,000 (h) 4,50,000 whom this agreement is favourable?
(c) 4,80,000 (d) 50.000
[I Mark, 2017 June[
 ANNUITY 163

(a) Favour for lessee (b) Favour for lessor then = button.
(c) Not for both (d) Can't be detennined We get f 4337.
(l Mark, June 2019) Q.24. Find the future value of annuity of ~ 500 is made
Solution : (a) annuaUy for 7 years interest rate of 14% compound at
annually. Given that ( 1.14)7 = 2.5023
Cost = f 5,00,000.
(a) f 15635.35 (b) f 10,730.71
So; GST = PV of lnstal.ments made
(c) f 16535.35 (d) f 16355.35
(1 Mark, Dec. 2019]
1- ( l+ - 10 )-10]
= PV = 51,272 ;oo Solution: (b)

[ 7

l+ - -1
[( 114 ) ]
FY =500 ~ x lOO
Calculator Tricks
Type 10+100+ 1 +=button IOtimes thenpress GT
button then x5 l,272 =button= f 3,15,04425.
2 50 1
Which is less than f 5,00,000. = soox[ · : - x100]
So, Leasing is preferable.
= t 10,730.71
(a) is correct.
Q.25. Determine the present value of perpetuity f IO per
Q.23. Let a person invest a f1Xed sum at the end of each
month for infinite period at an effective rate of interest of
month in an account p aying interest 12% per year
14% p.a.?
compounded monthly. It the future value of this annuity
after the 12th payment is f 55,000 then the amount invested (a) f 657 (b) f 757
every month is? (c) f 857 (d) f 957
(a) f 4,837 (b) f 4,637 (J Mark, Dec. 2020]
(c) f 4,337 (d) f 3,337

Solution : (c)
(1 Mark, June 2019] Solution : i = [ 1 !~]
Calculator Tricks
Value of each instalments
· PV
··
= i[R] = ____!_Q._
14
= IO x 1200
14
1200
=R= FV
FVforf 1 = f 857. 14 =f 857.
(c) is correct.

l( ,/s).~
Q.26. Which ofth.e following statement is true?

= I+ --
12
-1 l (a) F.V ofordinary annuity< F.V of annuity due
(b) F.V ofordinary annuity> F.V of annuity due
~ x1200
(c) P.V ofordinary annuity> P.V of annuity due
(d) None of these [I Mark, Dec. 2020]
= f 4337 Solution : (a) is correct.
Q.27. Suppose you deposit f 900 per month into an account
• Type 12+1200+1 X=ll times
that pays 14.8% interest compounded monthly. How much
- I + 12 x 1200 = button. money will you get a.fter 9 months?

Then press (m+) button. (a) f 8,511 (b) f 9,000

• Type 55000 + button (c) f 9,200 (d) f 1,000

then press MRC button f.l Mark, Dec. 2020)

164 ANNUITY

Solution :

FV =R [
(1 + ifr - I xlOOm l
=900=
1+ 14.8 ) -1
[( 1200
14.8
9

xl200
l =?8511.31=?85 II
= t 8182
[Calculator Tricks 6 + 1200 + I x = 9 times-I+ 6 x 1200 x
800 = button; we get? 8182]
Q.30. The present value ofan Annuity immediate is the same
as
(a) Annuity regular for(n - I) year plus the initial receipt
Calculator Trick in the beginning of the period
14.8 + 1200 + I x = button 8 times -1 (b) Annuity regular for (n - I) years
+ 14.8 x 1200 x 900 = button. We get FY? 8511. (c) Annuity regular for (n + I) years

(a) is correct. (d) Annuity regular for(n + I ) years plus the initial rece ipt
in the beginning of the period
Q.28. Assuming that the discount ral.e is 7% p.a. how much
[l Mark Jan. 2021]
would pay to receive f 200 growing at 5% annually for ever?
Solution : (a) is correct

l
(a) ? 2,500 (h) ? 5,000
(,·) ? 7,500 (d) t 10,000
1-(t+ir<"-''
11 Mark, Jan. 20211 ·: PY = R [ i +t
Solution : (d) is correct

Discount rate= i = 7% =
1
~ = 0.07
= R[
1-(l+ir<•-I)
.
1
l+R
Growing rate= g = 5% = 0.05
R = Value of each payment received= t 200 = PY of Annuity Regular + Value of I st instalment
(a) is correct
R 200
Q.31. Find the future value of annuity of , 1,000 made
:. PVA = i-g = 0.07-0.05
annually for 7 year at interest rate of 14% compounded
= t 10,000 annually (Given that 1.147 = 2.5023)

Q.29.? 800is investedattheendofeachmonth in an account (a) ? 10,730.7 (b) ? 5,365.35

paying interest 6% per year compounded monthly. What is (c) t 8,756 (d) t 9892.34
the future value of this annually after I 0th payment? (1 Mark, Jan. 2021J
(a) t 4,444 (b) ? 8,756 Solution : (a) is correct
(c) ? 3,491

Solution: (d) is correct.

(d) t 8,182
I I Mark, Jan. 2021 I
FV=A
[
{I + l)"- 1
r xlOOm
l
Monthly Instalment = A =, 800
Where m = No. of conversion periods in I year = I
rate of interest = r = 6% p.a. compounded monthly
n = No. of payments made= mt
n =No.of Payments= I 0

l
= n = t x7 = 7
r = 14% yearly
(l+rr- 1
:. FV = A,.. o = A [ r x lOOm A= Value of each instalment = ~ 1000
 ANNUITY 165

1+-
FY = A1._ 1, = l000 [( l~
14 )'
-1
x lOO
l Q.33.1 fthe nominal rate ofgrowth is 17% and inflation is 9%
for the five years. Let P be the Gross Domestic Product
(GDP) amount at the present year then the projected real
GDP after 6 years is
(a) 1.587 P (b) 1.92 1 P
(c) 1.403 P (d) 2.5 1 P
11 Mark, July 20211
Calculator Tricks
Solution: Rea l rate of return = Nominal rateof retum -
Type 14 + 100 x = button 6 times - I + 14 x 100 x l000 =
lnflation = 17 - 9 = 8%
button
Expected Real GDP after 6 years
We get 10,730.5 which is nearest to option (a) f
10,730.70
:. (a) is correct
Q.32. A loan on' 1,02,000 is to be paid back in two equal
annual instalments. If the rate of interest is 4% p.a., c-0m- = 1·587 P
pounded annuall y, then the total interest c harged Where P = Gross Domestic Product (GDP) Amount
(in~ under this instalment plan is (a) is correct
(a) 6 160 (b) 8120
Q.34. lfaperson bought a house by paying, 45,00,000down
(c) 5980 (d) 7560 payment and t 80,000 at the end of each year till the
II Mark, July 20211 perpetuity, assuming the rate of interest as 16%, the present
Solution : (a) is correct value of house (in~ is given as
(a) 47,00,000 (b) 45,00,000
PV (c) 57,80,000 (d) 50,00,000
Value of one lnstaJment
= ['+(t+i)"<D-1) ] 11 Ma.rk, July 2021]
i +I
Solution : (d) is correct
1,02,000 Present value of House

· ['-<\o•r' .,] = 45,00,000 + -:-

R
1
Calculator Tricb
Type 1·04 + = I time press GT button+ I = button then press 80000
M + button = 45,00,000 + 0 -16

Then type 1,02,000 + MRC button then = button.

We get

R =, 52,000
Ist year, C.I. =,1,02,000 x 4% =,4080 = 45,00,000 + 5,00,000
2nd year, C.I. =, 52000 x 4% =, 2080 = 50,00,000
Total compound Interest =, 6160
:. (a) is correct
Q.35. Let the operating profit of a manufacturer for fi ve years is given as:

Year I 2 3 4 5 6
Operating profit (in lakh ~ 90 100 106.4 107.14 120.24 157.35
Then the operating profit of Compound Annual Growth Rate (CAGR) for year 6 with respect to year 2 is given at
(a) 9% (b) 12% (c) 11 % (d) 13%
(I Mark, July 2021]
166 ANNUITY

Solution : (b) is correct Q.36. If discount rate is 14% per anm.un, then how much a
Compound Annual Growth company has to pay to receive, 280 growing at 9% annually
forever.
Rate (CAGR) for year 6 with respect to year 2
(a) , 5,600 (b) ' 2,800
(c) f 1,400 (d) f 4,200
II Mark, July 2021 J
Solution : (a) is correct

= [(151::5/-•] x JOO% R 280

PVA = - =----
i-g 0- 14-0-03
= ~1.5735 - I x I00%
=f 5600
= 11 ·999% = 12%
Calculator Tricks

Type 1·5735 press J button two times - I x 100 = button

We get 12%

Q.37. lfthe cost of capital be 12% per annum, then the net present value (in nearest f) from the given cash flow is given as
Year 0 I 2 3
Operating profit (in thousands') (100) 60 40 50

(a) 31048 (b) 34185 (c) 51048 (d) 24 187

Solution : (d) is correct
Year Operating profit 1 PVlF @ 12o/o 2 Discounted
Cash Flows
=1, 2

0 (100,000) ( 1+100
12r = I (1,00,000)

I 60,000 ( 1+ 100
12r = 0·893 53,580

2 40,000 ( 1+ 100
12rl =0·797 3 1,880

3 50,000 0·7 12 35,600

Net present Value (NPA) f 21 ,060
Its nearest value in option is (d)
So (d) is correct
Fonnula
PVIF = A ( I + i)-• = ( I + ij"
. When A = I
I
 ANNUITY 167

Q.38. The future value of annuity of ~ 2,000 for 5 years at

5% compounded annually is given (in nearest~ as
= 2000 [
(1+ ~)5 -I X 100] = ~ 11051 ·26
(a ) 5 105 1 (b) 2 102 1
(c) 15624 (d) 6 1254 Calculator Tricks
11 Mark, July 20211 Type 5 + I 00 + I x =4 times - I
Solution : (c) is correct + 5 x 100 x 2000 = button
We get~ 11 ,05 1.26
(l+i)" -I IOOm]
FV = R [ X Which is nearest lo smallest value in option (c)
r