Chapter 3:

Simple Annuities
FDNBUSM
 Definition of Annuity

Annuity is a sequence of periodic

payments made at equal intervals of time
and most of the time in equal amounts.
 Important Terms
Payment interval – time between two
consecutive payments of annuity; equivalent to 1
period.

Term – starts immediately and ends on the last

payment interval.

Periodic Rent or Periodic Payment (R)

– size of each payment.
 ANNUITY

ANNUITY CONTINGENT
CERTAIN ANNUITY
 simply called “annuity”  is a sequence of periodic
 is one in which payments payments in which the
begin and end at definite payments extend over an
times. indeterminate length of time.

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

2.Annuity due – payments are made at the beginning of each period.
3.Deferred Annuity – first payment is made at some later date.
Relationship between A and S

PRESENT VALUE
A = S(1+i)-n

FUTURE VALUE
S = A(1+i)n
Example 3.1
If the prevailing worth of money is 12% interest compounded
monthly, find the present value and the amount of an
annuity of P2,000 payable monthly for 10 years.
Given: j = 0.12; t = 10; m = 12; R = P2,000; n = 120; i = 0.01
Required: A and S
Solution:
1  (1  0.01) 120   (1  0.01)120  1
A  2000  S  2000  
 0 . 01   0 .01 

Worth of annuity today present value A = P139,401.04

Worth of annuity 10 yrs from now future value S = P460,077.38
Self-Check Exercise 3.1
Find the present value and amount of an annuity (same
as the earlier problem) of P13,250 payable quarterly for 2
years and 6 months at 11% compounded quarterly.

To create a fund for his forthcoming business venture,

Matthew decides to deposit P5,000 at the end of each
month to his bank account. If the bank pays 1%
compounded monthly on his deposits, how much will he
have at the end of 2 years?
 Self-Check Exercise 3.1
Find the present value and amount of an annuity
of P13,250 payable quarterly for 2 years and 6
months at 11% compounded quarterly.
Given: j = 0.11; t = 2.5; m = 4; R = P13,250; n = 10; i = 0.0275
Required: A and S
Solution:
1  (1  0.0275) 10   (1  0.0275)10  1
A  13250  S  13250 
 0.0275   0 . 0275 

A = P114,481.0092 S = P150,159.1339
 Self-Check Exercise 3.1
To create a fund for his forthcoming business venture,
Matthew decides to deposit P5,000 at the end of each
month to his bank account. If the bank pays 1%
compounded monthly on his deposits, how much will he
have at the end of 2 years?
Future or present value computations?

Given: j = 0.01; t = 2; m = 12; R = P5,000; n = 24; i = 0.0033

Required: S
Solution:

 (1  0.00083333) 24  1
S  5000  
 0. 00083333 

S = P121,157.0586
 Cash Value or Cash Price

Cash Price = Down Payment + A

or
CP = DP + A
Example 3.2
Mrs. Myrna Mendoza, a car buyer, makes a down payment
of P225,000 and pays P20,794.52 at the end of each
month for 5 years to discharge all principal and interest
costs at 36% interest rate compounded monthly. Find the
equivalent cash price of the car.
Given: DP = P225,000; j = 0.36; t = 5; m = 12;
R = P20,794.52; n = 60; i = 0.03
Required: Cash Price
Solution:
Cash Price = Down Payment + A

1  (1  0.03) 60 
CP  225000  20794.52  
 0.03 
CP = P800,500.06, what is its application? Given the terms of payment, is this actual
price of the car now? Yes or no?
 Self-Check Exercise 3.2
Mr. Coronacion acquired a resort by making a P5M down
payment and a sequence of P600,000 payments made at
the end of each year for 5 years. If money is worth 18%
effective rate computed annually, how much is the cash
price of the resort?
Given: DP = P5,000,000; j = 0.18; t = 5; m = 1;
R = P600,000; n = 5; i = 0.18
Required: Cash Price
Solution:
Cash Price = Down Payment + A
1  (1  0.18) 5 
CP  5000000  600000  
 0 .18 
CP = P6,876,302.6126
 Amount of an Annuity at Any Time (Sk)

 (1  i )  1
k
Sk  R  
 i 

k = number of deposits or payments made

 Example 3.3
At the end of each 6 months for 7 years, ABC Printing will
deposit P50,000 in a depreciation fund to provide for the
replacement of its printing machinery at the end of 7 years.
If the fund accumulates at 8% compounded semi-annually,
how much is in it (a) just after the last deposit and (b) just
after the 5th deposit?
Given: R = P50,000; j = 0.08; t = 7; m = 2; n = 14; i = 0.04
Required: (a) S (b) S5
Solution: (a)
 (1  0.04)14  1
S  50000 
 0 .04 

a) S = P914,595.56
 Example 3.3
At the end of each 6 months for 7 years, ABC Printing will
deposit P50,000 in a depreciation fund to provide for the
replacement of its printing machinery at the end of 7 years.
If the fund accumulates at 8% compounded semi-annually,
how much is in it (a) just after the last deposit and (b) just
after the 5th deposit?
Given: R = P50,000; j = 0.08; t = 7; m = 2; n = 14; i = 0.04
Required: (a) S (b) S5
Solution: (b)

 (1  0.04) 5  1
S5  50000 
 0 . 04 
b) S5 = P270,816.13 see the difference between the two
computations?
Remaining liability just after the kth payment
(RLk)

1  (1  i )  ( n  k ) 
RLk  R  
 i 
Remaining liability just before the kth payment
(kRL)

k RL  R  RLk
 Example 3.4
Michael bought a laptop and paid P10,000 as down
payment plus P3,000 at the end of each month for a year. If
money is worth 24% converted monthly, find (a) the cash
price of the laptop,(b) Michael’s remaining liability just after
his 5th installment and (c) his remaining liability just before
he pays his 7th installment.
Given: DP = P10,000; R = P3,000; t = 1; m = 12; n = 12; i = 0.02
Required: (a) CP (b) RL5 (c) 7RL
Solution: (a)
CP  DP  A
1  (1.02) 12 
CP  10000  3000  
 0 . 02 
CP  P 41,726.02
 Example 3.4
Michael bought a laptop and paid P10,000 as down
payment plus P3,000 at the end of each month for a year. If
money is worth 24% converted monthly, find (a) the cash
price of the laptop,(b) Michael’s remaining liability just after
his 5th installment and (c) his remaining liability just before
he pays his 7th installment.
Given: DP = P10,000; R = P3,000; t = 1; m = 12; n = 12; i = 0.02
Required: (a) CP (b) RL5 (c) 7RL
Solution: (b)

1  (1.02)  (125) 
RL5  3000 
 0.02 
RL5  P19,415.97
 Example 3.4
Michael bought a laptop and paid P10,000 as down
payment plus P3,000 at the end of each month for a year. If
money is worth 24% converted monthly, find (a) the cash
price of the laptop,(b) Michael’s remaining liability just after
his 5th installment and (c) his remaining liability just before
he pays his 7th installment.
Given: DP = P10,000; R = P3,000; t = 1; m = 12; n = 12; i = 0.02
Required: (a) CP (b) RL5 (c) 7RL
Solution: (c)
7 RL  R  RL 7
1  (1.02) (127 ) 
7 RL  3000  3000 
 0 .02 
7 RL  P17,140.38
Periodic Payment given the Present Value A

1  (1  i )  n  Ai
A  R R n
 i  1  (1  i )
Periodic Payment given the Amount S

 (1  i )  1
n
Si
S  R R
 i  (1  i )  1
n
 Example 3.6
Mrs. Anonas acquired a loan of P50,000 from a credit
union that charged an interest of 16% compounded
quarterly. She promised to settle her obligation by making
quarterly payments for 3 years. Find her quarterly payment.
Given: A = P50,000; j = 0.16; t = 3; m = 4; n = 12; i = 0.04
Required: R
Solution:
Ai 50000(0.04)
R n
R 12
1  (1  i ) 1  (1.04)
R = P5,327.61
 Example 3.7
To create a fund for the purchase of a brand new car,
Frances will make equal monthly deposits to a bank that
pays [4%, m = 12] for 5 years. If she intends to buy a car
that will cost her P700,000, how much should she deposit
monthly to the bank.
Given: S = P700,000; j = 0.04; t = 5; m = 12; n = 60; i = 0.0033
Required: R
Solution:
Si 700000(0.00 3 3 )
R R
(1  i )  1
n
(1  0.00 3 3 )  1
60

R = P10,558.23