Module 3

ANNUITY
 ANNUITY
 Annuity – it is a series of equal cash flows
occurring each period over a range of periods or
a series of uniform payments made at equal
intervals of time.

 Types of Annuity:
1. Ordinary Annuity
2. Deferred Annuity
3. Annuity Due
4. Perpetuity
Annuities are established for the
following purposes:
1. As payment of a debt by a series of equal
payment at equal time intervals, also known
as amortization.
2. To accumulate a certain amount in the
future by depositing equal amounts at equal
time intervals. These amounts are called
sinking fund.
3. As a substitute periodic payment for a future
lump sum payment.
 Ordinary Annuity
 Ordinary Annuity – is a series of equal payments or receipts occurring over a
specified number of periods with the payments or receipts occurring at the end
of each period, starting from the first period. It is also referred as annuity-

[ ]
immediate.
𝐧
(𝟏+ 𝐢 ) − 𝟏
𝐅=𝐀
𝐢
0 1 2 3 n

A A A A Where:
F F= Future worth
P = present worth
P A = series of periodic equal payments
n = number of interest period
i = interest rate per interest period
 Value of A with known P (capital recovery)
A=

 Value of A with known F (sinking fund)

A=
 P/A and A/P Factors:
Notation and Equations
FACTOR FACTOR NAME FIND/ GIVEN FACTOR FORMULA STANDARD
NOTATION NOTATION

UNIFORM SERIES
(P/A,i%,n) PRESENT WORTH P= A(P/A,i%,n)
FACTOR or EQUAL-
PAYMENT- SERIES P/A
PRESENT- WORTH
FACTOR

(A/P,i%,n) EQUAL- PAYMENT- A/P A= P(A/P,i%,n)

SERIES-CAPITAL-
RECOVERY
 F/A and A/F Factors:
Notation and Equations
FACTOR FACTOR NAME FIND/ GIVEN FACTOR FORMULA STANDARD
NOTATION NOTATION

UNIFORM SERIES
(F/A,i%,n) COMPOUND AMOUNT F= A(F/A,i%,n)
FACTOR or EQUAL-
PAYMENT- SERIES F/A
COMPOUND AMOUNT
FACTOR

(A/F,i%,n) EQUAL- PAYMENT-

SINKING FUND A/F A= F(A/F,i%,n)
FACTOR
 Deferred Annuity

 Deferred Annuity – are annuities that are computed on different present year
and/or future year. It is annuity where the first payment is made several
periods after the beginning of the annuity.

0 1 2 3 n

k
Where:
k = number of deferred periods
A A A A
F
P
DEFERRED ANNUITY

0 1 2 3 n

k
Present Worth, P:
P= [ A A A A
F
P
Methods of Solving
Deferred Annuity Problems
1. Draw the cash flow diagram.
2. Select any convenient focal date.
 Temporary focal date is used to convert deferred annuity to
ordinary annuity
 Final focal date is used to obtained the required value.
3. Project all values to temporary focal date.

𝐏 ′= 𝐀 [
𝟏−(𝟏+ 𝐢 )− 𝐧
𝐢 ]
4. Obtain the final value.−𝒌
𝐏 =𝐏 ′ (𝟏+𝒊)
 ANNUITY DUE

 Annuity Due – is a series of equal payments or receipts occurring over a specified

number of periods with the payments or receipts occurring at the beginning of each
period.

0 1 2 3 n 𝐅=𝐀 [
( 𝟏+ 𝐢 )𝐧 −𝟏
𝐢 ]
(𝟏+ 𝐢 )

[ ]
−𝐧
𝟏 − ( 𝟏+ 𝐢 )
𝐏=𝐀 (𝟏+ 𝐢 )
𝐢
A A A A A
Where:
F
P = present worth
P
A = series of periodic equal payments
n = number of interest period
i = interest rate per interest period
 Sample Problems on
Annuity
 A contractor bought a concrete mixer at P120,000.00 if paid in cash. The mixer may also
be purchased by installment to be paid within 5 years. If money is worth 8%,the amount of
each annual payment if all payments are made at the beginning of each year, is:
a. P27,829.00 b. P31,005.00
c. P29,568.00 d. P32,555.00
 Mr. Rankine bought a piece of property for P100,000.00 down payment at 10 deferred semi
annual payments of P8,000 starting 3 years from now. If the interest rate is 12%
compounded semiannually, what is the present worth of the property?
a. P143,999.08 b. P152,444.05
c. P148,555.02 d. P166,888.01
 PERPETUITY

 Perpetuity – are uniform payments which are done infinitely. It is

also called as perpetual annuity.
0 1 2 3 ∞

A A A A
F
P
 TYPES OF PERPETUITY
1. Ordinary Perpetuity – first payment is done one period after the focal date.
0 1 2 3 ∞
−𝒏
𝟏 − (𝟏+ 𝒊 ) 𝟏 − (𝟏+ 𝒊 )
−
𝐏= 𝑨 [ ] 𝐏= 𝑨 [ ]
𝐢 𝐢
𝐀 A A A A
𝐏=
𝐢 P
F

2. Deferred Perpetuity – first payment is done several periods after the focal
date. 0 1 2 3 8
𝐀 −𝒌
𝐏= (𝟏+ 𝒊)
𝐢 k

Where: k = number of deferred periods A A A

F
P
 Sample Problems on
Perpetuity
1. What amount of money invested today at 15% interest can provide the
following scholarships: P30,000 at the end of each year for 6 years;
P40,000 for the next 6 years and P50,000 thereafter?