College of Engineering

Engineering Economics (Activity No. 2)

RESEARCH THE DEFINITION OF THE FOLLOWING

1. What is Annuity? - Annuities are insurance contracts that provide a fixed income stream
for a person's lifetime or a specified period of time. An annuity can be purchased with a
lump sum or a series of payments and begin paying out almost immediately or at some
point in the future. Annuities are often used as a way to fund retirement.

2. What is Ordinary Annuity? - An ordinary annuity is a series of regular payments made

at the end of each period, such as monthly or quarterly. In an annuity due, by contrast,
payments are made at the beginning of each period. Consistent quarterly stock
dividends are one example of an ordinary annuity; monthly rent is an example of an
annuity due.

3. What is Annuity Due? - An annuity-due is an annuity for which the payments are made
at the beginning of the payment periods. The time diagram in Figure 2.2 illustrates the
payments of an annuity-due of 1 unit in each period for n periods.

4. What is Deferred Annuity? - A deferred annuity is an insurance contract that generates

income for retirement. In exchange for one-time or recurring deposits held for at least a
year, an annuity company provides incremental repayments of your investment plus
some amount of returns

5. What is Perpetuity? - A perpetuity is a type of annuity that receives an infinite amount

of periodic payments. An annuity is a financial instrument that pays consistent periodic
payments. As with any annuity, the perpetuity value formula sums the present value of
future cash flows.

6. What is Continuous Compounding? - Single payment formulas for continuous

compounding are determined by taking the limit of compound interest formulas as m
approaches infinity, where m is the number of compounding periods per year. Here “e”
is the exponential constant (sometimes called Euler's number).

7. Derive the Formulas for Annuity.

8. What is Gradient? - The gradient of a line is determined by the ratio of vertical change
to horizontal change. Gradient (m) describes the slope or steepness of the line joining
two points.

9. What is Uniform Gradient? - In a uniform gradient cash flow the cash flow changes by
the same amount in each payment period.

10. What is Arithmetic Gradient? An arithmetic gradient series is a cash flow series that
either increases or decreases by a constant amount each period. The amount of change
is called the gradient. Formulas previously developed for an A series have year-end
amounts of equal value.

11. Difference between Uniform Gradient and Arithmetic Gradient. – In uniform gradient
cash flow the cash flow changes by the same amount in each payment period while in
arithmetic gradient a cash flow series either increases or decreases by a constant
amount each period.

12. Derive the formulas for Gradient.