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Module 5 - Es 125

This document discusses different types of annuities, including ordinary annuity and annuity due. An ordinary annuity has payments made at the end of each period, while an annuity due has payments made at the beginning of each period. The key differences between ordinary annuity and annuity due are that for ordinary annuity, the number of payments equals the number of periods, while for annuity due, the future value is one period further out than the future value of an equivalent ordinary annuity. Formulas are provided to calculate the future value, present value, and payment amount for both types of annuities.

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Rolly Mar Aranding
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32 views2 pages

Module 5 - Es 125

This document discusses different types of annuities, including ordinary annuity and annuity due. An ordinary annuity has payments made at the end of each period, while an annuity due has payments made at the beginning of each period. The key differences between ordinary annuity and annuity due are that for ordinary annuity, the number of payments equals the number of periods, while for annuity due, the future value is one period further out than the future value of an equivalent ordinary annuity. Formulas are provided to calculate the future value, present value, and payment amount for both types of annuities.

Uploaded by

Rolly Mar Aranding
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MIDTERM ORDINARY ANNUITY

In ordinary annuity, the equal payments are made at the beginning of


WEEK/MODULE-5 each compounding period starting from the first period. The diagram
below shows the cash flow in ordinary annuity.
ANNUITY
An annuity is a series of equal payments made at equal intervals of
time. Financial activities like installment payments, monthly rentals,
life-insurance premium, monthly retirement benefits, are familiar
examples of annuity.

Annuity can be certain or uncertain. In annuity certain, the specific


amount of payments is set to begin and end at a specific length of
time. A good example of annuity certain is the monthly payments of a
car loan where the amount and number of payments are known.
In annuity uncertain, the annuitant may be paid according to certain
event. Example of annuity uncertain is life and accident insurance. In
this example, the start of payment is not known, and the amount of From the cash flow diagram shown above, the future amount F is the
payment is dependent to which event. sum of payments starting from the end of the first period to the end of
the nth period. Observe that the total number of payments is n and the
total number of compounding periods is also n. Thus, in ordinary
Elements of Annuity annuity, the number of payments and the number of compounding
periods are equal.
A = amount of periodic payment
P = present amount of all periodic payments Future amount of ordinary annuity, F
F = future worth of all periodic payments after the last payment is
made 𝑨[(𝟏 + 𝒊)𝒏 − 𝟏]
i = interest rate per compounding period 𝑭=
𝒊
n = total number of payments
m = nominal rate (see compounded interest)
t = number of years

Types of Simple Annuities Present amount of ordinary annuity, P

In engineering economy, annuities are classified into four categories.


These are:
(1) ordinary annuity, 𝑭 𝑨[(𝟏 + 𝒊)𝒏 − 𝟏]
𝑷= =
(2) annuity due, (𝟏 + 𝒊)𝒏 (𝟏 + 𝒊)𝒏 𝒊
(3) deferred annuity, and
(4) perpetuity.

1 ES 125 | E N G I N E E R I N G E C O N O M Y
Periodic payment of annuity, A

Value of A if F is known:

𝑭𝒊
𝑨=
(𝟏 + 𝒊)𝒏 − 𝟏

Value of A if P is known:

𝑷(𝟏 + 𝒊)𝒏 𝒊
𝑨=
(𝟏 + 𝒊)𝒏 − 𝟏 As indicated in the figure above, F1 is the sum of ordinary annuity
of n payments. The future amount F of annuity due at the end
EXAMPLE: If $ 500 is invested at the end of each year for 6 year at
of nth period is one compounding period away from F1. In
an effective annual interest rate of 7 %, what is the total dollar amount symbol, F = F1(1 + i).
available upon the deposit of sixth payment?
Solution:
EXAMPLE: A man bought a car at $ 60,000 payable in 12 quarterly
payments, each installment payable at the beginning of each period.
How much is the amount of each payment if rate of interest is 24 %
compounded quarterly?

Solution:

EXAMPLE: What annuity over a 10-year period at 8 % interest is


equivalent to a present worth of $ 100?

Solution:

ANNUITY DUE

In annuity due, the equal payments are made at the beginning of each
compounding period starting from the first period. The diagram below
shows the cash flow in annuity due.

2 ES 125 | E N G I N E E R I N G E C O N O M Y

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