Unit 4 – Annuity

Defination:

1) Annuity : A sequence of equal payment made/receive at equal interval of time is called

annuity.
2) Periodic payment : The amount regular payment of an annuity is called periodic
payment.
3) payment interval or payment period : The time interval between two successive
payment is called payment interval or payment period. Note that the payment period
may be annual, half yearly, quarterly, monthly or any fixed duration of time.
4) Term of annuity : The time for which the payment of an annuity is made is called term
of annuity i.e. it is the time interval between the first payment and the last payment.
5) future value of an annuity : The sum of all payment made and interest earned of them
at the end of the term of the annuity is called future value of an annuity i.e. it is the
total worth of all the payments at the end of the term of an annuity.
6) present or capital value of an annuity : the present or capital value of an annuity is the
sum of the present values of all the payments of the annuity at the beginning of the
annuity i.e. it is the amount of money that must be invested in the beginning of the
annuity to purchase the payments due in future.
7) perpetual annuity or perpetuity : An annuity payable for ever is called perpetual
annuity or perpetuity. In this annuity beginning date is know but the terminal date is
unknown i.e. an annuity whose payment continues forever is called perpetuity e.g. the
endowment funds of trust, here the interest earned is used for welfare activities only.
All the above types of annuity are based on the number of term period. It can also
be classified on the basis of mode of payment as under.
8) annuity due An annuity in which payments of installments are made in the beginning of
each period then it is called annuity due. In annuity due every payment is an investment
and earns interest of them. Next payment will earn interest for on period less and so on,
the last payment will earn interest for one period less and so on, the last payment will
earn interest of on period e.g. saving schemes, life insurance payments etc.
9) deferred annuity. An annuity which is payable after the lapse of a number of period is
called deferred annuity. In this annuity the term begins after certain financial
organizations gives loan amount immediately and then the regular installment may
starts after specified time period.

Formula
(1) Amount of immediate annuity or ordinary annuity
Let a be the ordinary and i% the rate of interest per period. The total annuity A for
period is given as
a
A= ¿
i
(2) Present value of immediate annuity (or ordinary annuity)
Let a denotes the annual payment of an ordinary annuity, n is the number of years
and i% is the interest on rupee per year and P be the present value of annuity. In the case of
immediate annuity the payment are made periodically at the end of specified period.
Then the present amount of annuity is
a
∴ P= ¿
i
(3) Amount of annuity due at the end of n period.
 As defined earlier, annuity due is an annuity in which the payments are made at the
beginning of each payment period. The first installment will earn interest for n periods at the
rate of i per period.
a
A = (1 + i) ¿
i
(4) Present value of annuity due
Since the first installment is paid at the beginnings of first period (year) hence its
present value will be the same as a where a is the annual payment of annuity due.
Thus if P denotes the present value of annuity due then
a
P = (1 + i) ¿
i
(5) Perpetual Annuity is an annuity whose payment continue forever. As such, the amount of
perpetuity is undefined as the amount increases without any limit as time passes on.
a
Then P =
i
It should be noted that when amount is paid/deposited more than once in a year
then in all above formula i is replaced by i/k and n is replaced by nk. Where k is the number
of time the amount is paid/deposited during a year.

3. Sinking Fund.
It is a fund created by company or person to meet predetermined debts or certain
liabilities out of their profit at the end of every accounting year at compound rate of
interest. This fund is also known as pay-back fund. If ‘a’ is the periodic deposits or payments,
at the rate of i per unit per year then after n years the sinking fund A is

a
A = (1 + i) ¿
i

EXCERSICE
1) Mr. X pays Rs. 64000 per annum for 12 year at the rate of 10% per year. Find annuity.
2) A person deposit Rs. 5,000 in the beginning of every month in recurring account at the rate
of 11% p.a. what amount he would get after 15 years?
3) What amount should be deposited in the beginning of January, April, July and October of
every year at 15% rate of compound interest to receive Rs. 4000000 on maturity at the end
of 10 years?
4) A person has taken of Rs. 7,00,000 at 16% rate of interest from finance company. If the
repayment period is of 15 years then find what amount that he has to pay in the beginning
of each months.
5) Find the amount of an ordinary annuity of Rs. 6,400 p.a. for 12 years at the rate of interest of
A manufacturer plans to purchase a machine costing Rs. 3,00,000. Its estimated life is of 10
years and the machine will add net income of Rs. 60,000 every year, with the prevailing rate
of compound interest at 12%. Whether it is advisable to purchase a machine? Why?
10% per year. [Given (1.1)12 = 3,1384
6) If the payment of Rs. 2,000is made at the end of every quarter for 10 years at the rate of 5%
per year then find the amount of annuity. [Given (1.02) 40 = 2.2080]
7) Find the amount of an ordinary annuity of 12 monthly payments of Rs. 1,500 that earns
interest at 12% p.a. compounded monthly. [Given (1.01) 12 = 1.1262
8) A bank pays 8% p.a. interest compounded quarterly. What equal deposit have to be made at
the end of each quarter for 10 years to have Rs. 30,200. [Given (1.02) 40 = 2,2080
 9) Find the least number of years for which an ordinary annuity of Rs. 800 p.a. must
accumulate Rs. 20,000 at 16% interest compounded annually. [Given log 5 = 0.699, log 1.16
= 00645]

10) A firm anticipates a capital expenditure of Rs. 5,00,000 for a new machine in 5 years. How
much should be deposited quarterly in sinking fund carrying 12% p.a. compounded quarterly
to provide for the purchase. [(1.03)20 = 1.806
11) A person deposit Rs. 2,000 from his salary towards his PF account. The same amount is
credited by his employs also. If 8% rate of compound interest is paid then find balance
amount after his service of 20 years. [Given (1.0067) -14 = 0.2632
12) Find the present value of an annuity of Rs. 2,000 p.a. for 14 years at 10% p.a. rate of interest.
[Given (1.1)-14 = 0.2632
13) Find the present value of an annuity of Rs. 900 payable at the end of 6 months for 6 years.
The money compounded at 8% p.a. [Given (1.04) 12 = 0.6252
14) A firm buys machine on installment and pays Rs. 50,000 cash and the balance payment in 5
equal installment of Rs.40,000 payable at the end of year. If the rate of interest is 10%
compounded annually. Find the cash price of machine. [Given (1.1) 5 = 1.6106
15) A loan of Rs. 50000 is to be repaid at 8% p.a. compound interest in 24 equal annual
installments beginning at the end of first year. Find the amount of each installments [Given
(1.06)224 = 4,0486
16) A person borrow Rs. 80,000 at 10% p.a. interest rate compounded half yearly and agree to
pay in 12 installments at the end of each six moths. Find the installments. Given log
1.05=0.0212 and log 5.56
17) A man retires at the age of 60 years. He gets pension of Rs. 72000p.a. for rest of the life.
Reckning his expected life to be upto 74 years. Find single sum equivalent to his pension of
interest at 16% p.a. [Given log 1.16 = 0.0645, Antilog 1́.0970=0.1250
18) Find the amount at the end of 12 years of an annuity of Rs. 5,000 payable at the beginning of
each year, if the money worth 10% p.a.
19) A person purchased an item paying Rs. 5,000 down payment and agree to pay Rs.200 every
three months for next 4 years. The seller charges 8% per annum compounded quarterly. Find the
cash price of the item. Also if the person missed the first three payments, what must he pay at
the time the fourth is due to bring him upto date
20) what should be the monthly sales volume of a company if it desires to earn a 12% annual
convertible monthly on its in vestment of Rs. 2,00,000 ? Monthly costs are Rs.3,000. The
investment will have eight year life and no scrap value.
21) what equal payments made at the beginning of each year for 10 years will pay for 10 years
will pay for a piece of property priced at Rs. 6,00,000 if the money worth 5% effective.
[Given (1.05)-10 = 0.6139]
22) Find the amount of annuity of Rs. 250 payable at the beginning of each month for 5 years at
15% p.a. compounded monthly. [Given (1.0125) 60 = 2.1072
23) What is the present value of an annuity due of Rs. 1,500 for 16 years at 8% p.a. [Given
(1.08)15 = 3.1696
24) Find the present value of an annuity due of Rs. 4,500 payable half yearly for 13 years at 9%
p.a. compounded half yearly
25) What equal installment are made at the beginning of each month for 5 years will pay for a
machine priced as 1,50,000. If the money worth 15% p.a. compounded monthly. [Given
(1.0125)60 = 0.4742
26) Find the present value of sequence of annual payment of Rs. 1,500 each the first being made
at the end of 3 years and the last at the end of 10 years. The money worth value is 8%.
27) An annuity consists of 4 annual payments of Rs. 2,500 each, the first being made at the end
of 5th year. Find the amount of annuity, if the money is worth 10% effective.
 28) An annuity consists of 15 semi-annual payments of Rs. 500 each first being payable after 2.5
years. Find the amount of annuity of the money is worth 80% p.a. [Given (1.04) 15 = 2.550
29) A men paid his advance taken for house constructed in equal installments of Rs. 25000 half
yearly for 10 years. If the money worth 8% p.a. compounded half yearly and payment
started after initial gap of 5 years. Find the sum of advance taken. [Given (1.04) 9 = 1.4223 &
(1.04)10 = 1.0880]
30) What is the amount of perpetual annuity of Rs. 50 at 5% compound interest per year?
31) A cash prize of Rs. 1,500 is given to the student standing first in examination of business
mathematics by the person every year. Find out the sum that the person has to deposit to
meet this expense. Rate of interest is 12% p.a.
32) A company propose to create a fund to assist the children of their employee in education,
illness etc. The estimated expenses are Rs. 3,000 per month. If the rate of interest is 12.5%,
then find what amount should the company should invest to meet this expenses.
33) A limited company has purchased a machine for Rs. 90,000 expected life of machine is 7
years. After 7 years, the scrap value of machine is Rs. 2,500. A new machine would cost 25%
more. Under this assumption it has decided to create sinking fund and a sum of Rs. 11,000
every year. This amount should be invested at 12% rate of compound interest. Do you think
that this is wise decision?
34) A company establishes a sinking fund for payment of Rs. 16,000,000 debt manufacturing in 7
years. How much should be deposited quarterly into sinking fund carrying 12% per annum
compounded quarterly to provide the purpose? [Given (1.03) 28 = 2.2879]
35) A company creates a sinking fund for the redemption of debentures of Rs. 1,60,000 at the
end of 16 years. If the company put Rs. 6,000 at the end of each year in sinking fund and the
fund accumulates 8% p.a. then find the extra money in the fund after paying off the
debenture. [Given (1.08)16 = 3.423]
36) Chiku deposited Rs. 520 in a bank. The pays interest 8% per annum.Find the interest and
amount to be received by Chiku after two years.
38) A person borrows Rs. 5,000 for 2 years at 4% p.a. simple interest. He immediately leads it to
1
another person at 6 % p.a. for 2 years. Find his gain in the transaction per year.
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39) What is an aggregate amount for Rs. 4,000 at 12% rate of compound interest for 3 years if the
interest is compounded every six months?
40) In what time a sum of Rs. 20,000 becomes Rs. 22,000 compound rate of 5% p.a.?
[log 1.1 = 0.0414
log 1.05 = 0.0210
log 1.1575 = 0.0633]
41)If a sum of Rs. 5,000 is deposited with Shroff at the end of every years for 10 years at 15%
compound rate if interest find out the total amount of annuity at the end of 10 years.
42)What equal installment are made at the beginning of each month for 5 years, will pay for a
machine priced as 14,00,000. If the money worth 15% p.a. compounded monthly. [Given
(1.0125)60 = 2.1072]
(43)Rs. 4,000 are invested for one year at 8% compound rate of interest and the interest is
calculated quarterly, what is the effective rate of interest.
44) Initial cost of appliance is Rs. 64,000. The rate of depreciation for the first two years is 5%,
then it comes to 8% for the next two years and it becomes 10% for the fifth year. Find the
depreciation value of appliance after five years.
45)Dhairya has opened a recurring account for a period of 10 years. He deposits Rs. 2,500 in this
account in the beginning of every year. If the rate of interest is 11% find out the total amount in his
account at the end of 10 years. [1.11] 10 = 2.8394]
 46) Soniya has attained a loan to start an ISP unit. This loan is to be repaid in 10 installments of Rs.
1,75,000 each at the end of year. If the rate of compound interest is 12% find the amount of the
loan. [1.12]10 = 3.1058
47) Nandini borrows Rs. 32,000 at rate 16% of simple interest and invests it on the same day at
the rate 14% of compound interest. At the end of 4 years how much profit or loss will she have?