ANNUITY • P and F EXAMPLES:

ANNUITY 𝐅 1. A contractor bought a concrete mixer at

- Series of uniform payments mad at equal
intervals of time.
Purposes of Annuity:
1. As a payment of a debt by a series of
equal payment at equal time intervals,
also known as amortization.
2. To accumulate a certain amount in the
future by depositing equal amounts at
equal time intervals. The amounts are
called sinking fund.
3. As a substitute to periodic payment for a
future lump sum payment.
Examples of Annuities:
- Regular deposit on a savings account
- Monthly home mortgage payments
- Monthly insurance payments
- Monthly payment on a brand new car
Elements of Annuity:
A = Periodic Payment
P = Present worth of all periodic payment
F or S = Future worth or Sum of all the periodic
payments after the last payment is made.
i = interest rate per payment
n = number of payments
n’ = number of periods from time zero up to the
last payment
Relationships:
• A and F
𝐀[(𝟏+𝐢)𝐧 −𝟏]
F=
𝐢 ** considering time 0 to time 6 or vice versa for
• A and P
𝐀[(𝟏+𝐢)𝐧 −𝟏]
P= ′ annually if money is worth 8%
(𝟏+𝐢)𝐧 (𝐢)
P= ′ P120,000.00 if paid in cash. The mixer may
(𝟏+𝐢)𝐧
TYPES OF ANNUITY
A. Ordinary Annuity
- Payment is made at the end of each
period starting from the first period.
** considering time 0 to time 6 or vice versa for
this instance, n = 6 and n’ = 6
B. Deferred Annuity
- First Payment is deferred a certain number
of periods after the first.
** considering time 0 to time 6 or vice versa for
this instance, n = 4 and n’ = 6
C. Annuity Due
- Payment is made at the beginning of
each period starting from the first period.
this instance, n = 7 and n’ = 6
also be purchased by installment to be
paid within 5 years. If money is worth 8%,
how much must be paid at the beginning
of each year? (ans: P27,829.00)
2. A contract calls for semiannual payments
of P40,000.00 for the next ten years and in
an additional payment of P250,000.00 at
the end of that time. Find the equivalent
cash value of the contract at 7%
compounded semiannually. (ans:
P694,138)
3. In five years, P18,000.00 will be needed to
pay for a building renovation. In order to
generate this sum, a sinking fund consisting
of the three annual payments is
established. For tax purposes, no further
payments will be made after three years.
What payment is necessary of the money
is worth 15% per annum?
PERPETUITY
- Annuity where the payment periods
extend to forever or the periodic
payments continue indefinitely
𝐀
P=
𝐢
EXAMPLE:
1. If money is worth 8%, determine the
present value of a perpetuity of P1,000.00
payable annually, with the first payment
due at the end of 5 years.
2. Find the present value in pesos of a
perpetuity of P15,000.00 payable semi-
compounded quarterly.