Annuities – series of equal payments occurring at equal periods of time

Elements
P = value or sum of money at present
F = value or sum of money at some future time
A = a series of periodic, equal amounts of money
n = number of interest period
i = interest rate per interest period

Types of Annuity

Ordinary Annuity – payments are made at the end of each period

Finding P when A is given

The quantity in brackets is called the “uniform series present worth factor”
Finding F when A is given

The quantity in brackets is called “uniform series compound amount factor”

Finding A when P is given

The quantity in brackets is called the “capital recovery factor”

Finding A when F is given

The quantity in brackets is called “sinking fund factor”

Problems:

1. What are the present amount worth and the accumulated amount of a 10 year annuity paying 10,000 at the end
of each year, with interest at 15% compounded annually?

2. What is the present worth of 500 deposited at the end of every three months for 6 years if the interest rate is
12% compounded semi-annually?

3. A businessman needs 50, 000 for his operations. One financial institution is willing to lend him the money for
one year at 12.5% interest per annum (discounted). Another lender is charging 14%, with the principal and
interest payable at the end of one year. A third financier is willing to lend him 50,000 payable in 12 equal
monthly installments of 4,600. Which offer is best for him?

ES 412 Engineering Economy Engr. James A. Hinayon