ANNUITIES AND THEIR

FUTURE VALUE
JAMSHED AFZAL
FAST UNIVERSITY LAHORE

ANNUITY

ANNUITY
A SERIES OF PERIODIC
PAYMENTS

EXAMPLE:
REGULAR DEPOSITS TO A
SAVING ACCOUNTS
MONTHLY CARS
INSURANCE PAYMENTS
PERIODIC PAYMENTS TO A
PERSON FROM A
RETIREMENT FUNDS.

Q. A person plans to deposit

$1000 in a tax-exempt saving

plan at the end of this year
AND

Q1. A person plans to deposit

$1000 in a tax-exempt saving

plan at the end of this year
AND an equal sum at the end
of each following year.

Q1. A person plans to deposit

$1000 in a tax-exempt saving

plan at the end of this year
AND an equal sum at the end
of each following year.
If the interest is expected to be
earned at the rate of 6% per
year compounded annually.

Q1. A person plans to deposit

$1000 in a tax-exempt saving

plan at the end of this year AND
an equal sum at the end of each
following year.
If the interest is expected to be
earned at the rate of 6% per year
compounded annually.
To what sum will the investment
grow at the time of the fourth

1000

1000

1000

1000

1000
1000(1.06) 1160.0
1

1000(1.06) 1123.60
2

1000(1.06) 1191.02
3

So Future value of Annuity

S4 = 1191.02 + 1123.60 +
1060
+1000
S4 = 4374.62

Method using Formula

R[(1 i ) 1]
Sn
i
4
1000[(1 0.06) 1]
S4
0.06
S 4 4374.62
n

S n R R (1 i ) R (1 i ) .... R(1 i )
2

n 1

S n R R (1 i ) R (1 i ) .... R(1 i )
2

S n R[1 (1 i ) (1 i ) .... (1 i )
2

n 1

n 1

S n R R (1 i ) R (1 i ) .... R(1 i )
2

S n R[1 (1 i ) (1 i ) .... (1 i )
2

n 1

n 1

(1 i ) S n (1 i ) R[1 (1 i ) (1 i ) .... (1 i)
2

n 1

S n R R (1 i ) R (1 i ) .... R(1 i )
2

S n R[1 (1 i ) (1 i ) .... (1 i )
2

n 1

n 1

(1 i ) S n (1 i ) R[1 (1 i ) (1 i ) .... (1 i)
2

n 1

S n iS n R[(1 i ) (1 i ) .... (1 i ) ]
2

S n R R (1 i ) R (1 i ) .... R(1 i )
2

S n R[1 (1 i ) (1 i ) .... (1 i )
2

n 1

n 1

(1 i ) S n (1 i ) R[1 (1 i ) (1 i ) .... (1 i)
2

n 1

S n iS n R[(1 i ) (1 i ) .... (1 i ) ]
2

iS n R[(1 i ) (1 i ) .... (1 i ) ] S n
2

S n R R (1 i ) R (1 i ) .... R(1 i )
2

S n R[1 (1 i ) (1 i ) .... (1 i )
2

n 1

n 1

(1 i ) S n (1 i ) R[1 (1 i ) (1 i ) .... (1 i)
2

n 1

S n iS n R[(1 i ) (1 i ) .... (1 i ) ]
2

iS n R[(1 i ) (1 i ) .... (1 i ) ] S n
2

iS n R[(1 i ) 1]
n

S n R R (1 i ) R (1 i ) .... R(1 i )
2

S n R[1 (1 i ) (1 i ) .... (1 i )
2

n 1

n 1

(1 i ) S n (1 i ) R[1 (1 i ) (1 i ) .... (1 i)
2

n 1

S n iS n R[(1 i ) (1 i ) .... (1 i ) ]
2

iS n R[(1 i ) (1 i ) .... (1 i ) ] S n
2

iS n R[(1 i ) 1]
n
R[(1 i ) 1]
Sn
i
n

Q2. A teenager plans to

deposit $50 in a saving
account at the end of each
quarter for the next 6
years. Interest is earned at
a rate of 8 % per year
compounded quarterly.
(i) What should her
account

Sol:

R = $50
i = 0.08/4 = 0.02
(8 % per year compounded
quarterly)
n = 24 compounded periods
(6 years) (4 quarter per year)

(i) What should her account

balance
n
be 6 years
from
R[(1 i ) 1]now?
Sn
i
24
50[(1 0.02) 1]
Sn
0.02
S n $1,521.09

(ii) How much interest will

she earn?
Sol: ????????

(ii) How much interest will

she earn?
Sol: Over the 6 years period
she will make 24 deposits
of $50 for a total of $1200.
Interest for the period will
be $1521.09 $1200 =
$321.09

Q3. An investment earns

interest of 7% per year,
compounded annually. If
$5,000 is invested at the
end of each year, to what
sum will the investment
have grown at the time of
the tenth deposit?

Ans: $69,082.25

ANNUITIES AND THEIR

PRESENT VALUE

Re-Cap

Q1. A person plans to deposit

$1000 in a tax-exempt saving

plan at the end of this year AND
an equal sum at the end of each
following year.
If the interest is expected to be
earned at the rate of 6% per year
compounded annually.
To what sum will the investment
grow at the time of the fourth

Sn

1000 1000 1000 1000

0

1000

Future
Value

1000(1.06) 1160.0
1

1000(1.06) 1123.60
2

1000(1.06) 1191.02
3

4374.62

So Future value of Annuity

S4 = 1191.02 + 1123.60 +
1060
+1000
S4 = 4374.62

Method using Formula

R[(1 i ) 1]
Sn
i
4
1000[(1 0.06) 1]
S4
0.06
S 4 4374.62
n

Q4 (Lottery):
A person recently won a state lottery.
The term of the lottery are that the
winner will receive annual payments
of $1,000 at the end of this year and
each of the following 3 years.
If the winner could invest money
today at the rate of 6% per year
compounded annually,
What is the Present value of the four
payments?

1000 1000 1000 1000

Pr esent

4
4

1000(1.06) 792.1

Value

1000(1.06) 839.6

3465.1

1000(1.06) 890
1

1000(1.06) 943.4

Present Value =
943.4 + 890 +
839.6 +
792.1
= 3465.1

We can conclude that a

deposit today of 3465.1
which earns interest at the
rate of 6% per year
compounded annually
could generate a series of
four withdrawals of 1,000
at the end of each of the
next four years.

USING FORMULA

(1 i ) 1
AR
n
i (1 i )
n

(1 i ) 1
AR
n
i (1 i )
n

(1 0.06) 1
A 1000
4
0.06(1 0.06)
4

(1 i ) 1
AR
n
i (1 i )
n

(1 0.06) 1
A 1000
4
0.06(1 0.06)
4

A 3465.1

Q5 (Lottery):
A person recently won a state lottery.
The term of the lottery are that the
winner will receive annual payments
of $20,000 at the end of this year and
each of the following 3 years.
If the winner could invest money
today at the rate of 8% per year
compounded annually,
What is the Present value of the four
payments?

2000

2000

2000 A(1 0.08)

2000
A
1
(1 0.08)
A 18,518.6

2000

2000

2000

2000

2000

2000 A(1 0.08)

2000
A
2
(1 0.08)
A 17,146.8

2000

2000

2000
0

2000

2000

A 14, 700.6

A 15,876.6
A 17,146,8
A 18,518,6

Present Value =
18,518.6 + 17,146.8 +
15,876.6 + 14,700.6
= 66,242.6

We can conclude that a

deposit today of 66,242.6
which earns interest at the
rate of 8% per year
compounded annually
could generate a series of
four withdrawals of 20,000
at the end of each of the
next four years.

USING FORMULA

(1 i ) 1
AR
n
i (1 i )
n

(1 i ) 1
AR
n
i (1 i )
n

(1 0.08) 1
A 2000
4
0.08(1 0.08)
4

(1 i ) 1
AR
n
i (1 i )
n

(1 0.08) 1
A 2000
4
0.08(1 0.08)
4

A 66, 242.6

A R R R

R R

(1 i ) 1
Sn R
i
n

Sn

n -1

(1 i ) 1
Sn R
i
n

(1 i ) 1
Sn R
i
n

A S n (1 i )

(1 i ) 1
Sn R
i
n

A S n (1 i )

(1 i ) 1
n
A R
(1 i )

(1 i ) 1
Sn R
i
n

A S n (1 i )

(1 i ) 1
n
A R
(1 i )

n
(1 i ) 1
A R
n
i (1 i )
n

Q6. Determine the

present value of a series
of 8 annual payments of
$30,000 each, the first
of which begins 1 year
from today. Assume
interest of 6% per year
compounded annually.

Sol:
R = 30,000
i = 0.06
n=8
A=?

Sol:
R = 30,000
i = 0.06
n=8
A=?

(1 i ) 1
A R
n
i (1 i )
n

n
Sol:
(1 i ) 1
A

R
i (1 i ) n
R = 30,000

i = 0.06
8
n=8
(1 0.06) 1
A 30, 000
A=?
8
0.06(1 0.06)

n
Sol:
(1 i ) 1
A

R
i (1 i ) n
R = 30,000

i = 0.06
8
n=8
(1 0.06) 1
A 30, 000
A=?
8
0.06(1 0.06)

A 186, 293.8

Q7. You win a $1,000,000

lottery, which is paid in
annual installments
of$50,000 over 20
years.
How much did you
really win, assuming
that you could earn 5%

Sol:
R = 50,000
i = 0.05
n = 20
A=?

Sol:
R = 50,000
i = 0.05
n = 20
A=?

(1 i ) 1
A R
n
i (1 i )
n

n
Sol:
(1 i ) 1
A

R
i (1 i ) n
R = 50,000

i = 0.05
20
n = 20
(1 0.05) 1
A 50, 000

20
A=?
0.05(1 0.05)

n
Sol:
(1 i ) 1
A

R
i (1 i ) n
R = 50,000

i = 0.05
20
n = 20
(1 0.05) 1
A 50, 000

20
A=?
0.05(1 0.05)

A 623,110.5

Q8. Parents of a teenage girl

want to deposit a sum of
money which will earn interest
at the rate of 9% per year
compounded SEMI-ANNUALY.
The deposit will be used to
generate a series of 8
semiannual payments of 2,500
beginning 6 months after the
deposit. These payments will

(i) What amount must be

deposited to achieve
their goal?

Sol: R = 2,500
i = 0.09/2 = 0.045
n
i = 0.045 A R (1 i ) 1
i (1 i ) n
n=8

A=?

Sol: R = 2,500
i = 0.09/2 = 0.045
n
i = 0.045 A R (1 i ) 1
i (1 i ) n
n=8

A=?
8

(1 0.045) 1
A 2500
8
0.045(1 0.045)

Sol: R = 2,500
i = 0.09/2 = 0.045
n
i = 0.045 A R (1 i ) 1
i (1 i ) n
n=8

A=?
8

(1 0.045) 1
A 2500
8
0.045(1 0.045)
A 16, 489.73

(ii) How much interest will

be earned on this deposit?
Sol:

(ii) How much interest will

be earned on this deposit?
Sol:
Since 16,489.73 will
generate 8 payments
totaling 20,000, interest of
20,000 16,489.73 =
3,510.27 will be earned.

Q9. You want to get a

mortgage, but can

only afford to
pay$1,000 per
month. How much
can you borrow, if the
interest rate is5%

Sol:
R = 1,000
i = 0.05/12
i = 0.004167
n = 30(12)=360
A=?

Sol:
R = 1,000
n
i = 0.05/12
(1 i ) 1
i = 0.004167 A R
n
i (1 i )
n = 30(12)=360
A=?

Sol:
R = 1,000
n
i = 0.05/12
(1 i ) 1
i = 0.004167 A R
n
i (1 i )
n = 30(12)=360
360
A=?

(1 0.004167) 1
A 1000
360
0.004167(1 0.004167)

Sol:
R = 1,000
n
i = 0.05/12
(1 i ) 1
i = 0.004167 A R
n
i (1 i )
n = 30(12)=360
360
A=?

(1 0.004167) 1
A 1000
360
0.004167(1 0.004167)

A 186, 281.62

Q10. If at the end of

each month, a saver
deposited$100into a
savings account that
paid6% compounded
monthly, how much
would he have at the
end of10 years?

Sol:
R = 100
n
(1 i ) 1
i = 0.06/12
Sn R
i
i = 0.05
n = 10(12)=120
Future Value = ?

Answer
$16,387.93

BEST
WISHES!