Scribd
Upload
27 views34 pages

03 Module 02 - Annuity Series

Uploaded by

Katrine Siean Batoon
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
27 views34 pages

03 Module 02 - Annuity Series

Uploaded by

Katrine Siean Batoon
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/ 34

Annuity

■ An annuity is a series of payments made at equal


intervals. Examples of annuities are regular deposits to
a savings account, monthly home mortgage payments,
monthly insurance payments and pension payments.
Annuities can be classified by the frequency of payment
dates
■ a fixed sum of money paid to someone each year,
typically for the rest of their life.
■ a form of insurance or investment entitling the investor
to a series of annual sums.
Different types of Annuity
1. Ordinary Annuity
2. Deferred Annuity
3. Annuity Due
4. Perpetuity
5. Capitalized Cost
Ordinary annuity
■ Is a series of constant cash flows that occur at the end of each period for some fixed
number of periods.
■ Examples : Consumer Loans, Home Mortgages
Ordinary Annuity

F = A(1+i)n-1 + A(1+i)n-2 + . . A (1+i) + A


Or
F = A + A(1+i) + A(1+i)2 + . . . A(1+i)n-1 (Eq 2.5)
Multiplying Eq 2.5 by (1 + i) would result to,
(1+i)F = A(1+i) + A(1+i)2 + . . . + A(1+i)n
Subtract Eq 2.5 from Eq 2.6 to eliminate common terms gives us
F (1+i) – F = -A + A(1+i)n .
F = A [{(1+i)n – 1} / i] or F = A/i * [(1+i)n – 1]
Ordinary Annuity

𝒏
𝟏+𝒊 −𝟏
F =𝑨[ ]
𝒊
= A (F/A, i, N)
Ordinary Annuity

𝟏+𝒊 𝒏−𝟏
F =𝑨[ ]
𝒊

The bracketed term is called the equal-payment-series


compound-amount factor (also known as uniform-series
compound-amount factor. It’s factor notation is (F/A, i, N).
The interest factor has been also calculated for various
combinations of I and N.
Sinking Fund Factor (Find A given F, i & n)

𝒊
■ A =𝑭[ ]
𝟏+𝒊 𝒏−𝟏
■ The term within the brackets is called the equal-payment-
series sinking fund-factor, or just sinking fund factor and is
referred to with the notation (A/F,i,n).
■ A sinking fund method is an interest-bearing account into
which a fixed sum is deposited each interest period it is
commonly established for the purpose of replacing fixed
assets.
Capital Recovery Factor (Annuity Factor)

■ Find A given P, i & n.


𝒊 𝟏+𝒊 𝒏
■ A =𝑷[ ]
𝟏+𝒊 𝒏−𝟏
■ = P(A/P, i, n)
■ The portion in the bracket is called the capital-
recovery factor also referred to as the annuity
factor.
Example
■ Suppose you make an annual
contribution of $5000 to your F
savings account yearly.
Accounts earns an interest rate
of 6% annually. How much can
be withdrawn at the end of 5
years?
YEARS

0 1 2 3 4 5

$5000 $5000 $5000 $5000 $5000


Annuity due
■ An annuity for which the
cash flow occurs at the
beginning of each period.

F
First payment
Annuity Due

𝒏
𝟏+𝒊 −𝟏
F =𝑨[ ] * (1+i)
𝒊
Example
■ Suppose you make an annual
contribution of $5000 to your F
savings account yearly.
Accounts earns an interest rate
of 6% annually. How much can
be withdrawn at the end of 5
years, First installment is on
period 0?
YEARS

0 1 2 3 4 5

$5000 $5000 $5000 $5000 $5000


Deferred annuity
■ An annuity where in the first payment interval does not coincide with the first interest period. The
first payment is put-off to some later date.
Deferred Payments

_
𝒏
𝟏 − 𝟏+𝒊
■P =𝑨 = Ordinary Annuity
𝒊 𝟏+𝒊 𝒎

_
𝒏
𝟏 − 𝟏+𝒊
■P =𝑨 𝒎𝟏
_ = Annuity Due
𝒊 𝟏+𝒊
n = number of annuity
payments
m = number of deferred
payments
Example
■ Suppose you make an annual contribution
of $5000 to your savings account yearly at
F
start of 2nd year. Accounts earns an interest
rate of 6% annually. How much can be
withdrawn at the end of 5 years?
■ If your target Lumpsum at the end of 5th
year is $29,876.59 what should be your
Annual contribution starting at the end of
2nd year?
YEARS

0 1 2 3 4 5

$5000 $5000 $5000 $5000


Perpetuity
■ Is an annuity in which the cash flows continue forever.
What’s the difference between
Perpetuity and Annuity?
Perpetuity

■Is an annuity whose term is INFINITE


(i.e. an annuity whose payments
continue forever)

■Present Value (Perpetuity) = A / i


Example

■What is the present value


of $2,000 perpetuity
discounted back to present
at 10% interest rate?
Capitalized cost
■ (CC) is the present worth on an investment what will last forever.
■ Examples : Government Projects (Roads, Dams, Bridges, project that possess
perpetual life.
■ It has an infinite analysis period.
Example

■ Determine the capitalized cost of an


expenditure of $200,000 at time 0,
$25,000 in years 2 through 5, and
$40,000 per year from year 6 on.
■ Interest Rate = 12% per year
Activity

■What is the capitalized cost of a


public works project that will cost
$25,000,000 now and will require
$2,000,000 in maintenance
annually. I = 12%
Activity

i = 18%
Formulas

■ Discussion on Gradient Annuity next meeting.

You might also like