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Deferred Annuity: Sample Problem

The document contains two sample problems solving for present values of annuities using the annuity formula. The first problem solves for the value R of an annuity of R pesos payable annually for eight years with the first payment in 10 years, given the present value is P187,481.25 and the interest rate is 5%. The second problem solves for the lump sum P that would need to be deposited now at 5% interest to withdraw P20,000 at ages 18, 19, 20, and 21 of a newborn child.

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Chelsiemea Vargas
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3K views

Deferred Annuity: Sample Problem

The document contains two sample problems solving for present values of annuities using the annuity formula. The first problem solves for the value R of an annuity of R pesos payable annually for eight years with the first payment in 10 years, given the present value is P187,481.25 and the interest rate is 5%. The second problem solves for the lump sum P that would need to be deposited now at 5% interest to withdraw P20,000 at ages 18, 19, 20, and 21 of a newborn child.

Uploaded by

Chelsiemea Vargas
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Deferred Annuity

Sample Problem
1. The present value of an annuity of R pesos payable annually for eight years, with the
first payment at the end of 10 years is P187,481.25. Find the value of R if money is worth
5%.
Given: Cash Flow Diagram: Solution:
i = 5% = 0.05 P From:
P = P187,481.25 years 𝑖(1+𝑖)𝑛
A=P (1 + i)t
(1+𝑖)𝑛 −1
n=8 1 2 10 11 16 17
m = 17
Then;
t = 17 – 8 = 9
0.05(1+0.05)8
R = P187,481.25 (1 + 0.05)9
(1+0.05)8 −1
Find: R = ? R = P187,481.25(0.240024)

Therefore;
R = P45,000.06
2. A parent on the day that child is born wishes to determine what lump sum would have to be
paid into an account bearing interest at 5% compounded annually, in order to withdraw P20,000
each on the child's 18th, 19th, 20th, and 21st birthdays?
Given: Cash Flow Diagram: Solution:
i = 5% = 0.05 From:
A = P20,000 (1+𝑖)𝑛 −1
P=A (1 + i)-t
𝑖(1+𝑖)𝑛
n=4
1 2 16 17 18 19 20 21
m = 21 years
P Then;
t = 21 – 4 = 17
(1+0.05)4 −1
P = P20,000 (1 + 0.05)-17
0.05(1+0.05)4
Find: P = ? P = P20,000(1.547086)

Therefore;
P = P30,941.73

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