ANNUITIES

PREPARED BY: ENGR. JELZ DELA CRUZ GENOSAS

 ANNUITIES
• A series of equal payments made at equal interval of time.
 ORDINARY ANNUITY
• one where equal payments are made at the end of each payment period starting from the
first period.
𝒓 −𝒎𝒕
𝟏 − (𝟏 + )
𝑷=𝑨 𝒎
𝒊

𝒓 𝒎𝒕
(𝟏 + ) −𝟏
𝑭=𝑨 𝒎
𝒊
 SAMPLE PROBLEM 1
• A man paid 10% down payment of P200,000 for a house and lot and agreed
to pay the 90% balance on monthly installments for 60 months at an interest
rate of 15% compounded monthly. Compute the amount of the monthly
payment.

Ans. P42,821.87
 SAMPLE PROBLEM 2
• A manufacturing firm wishes to give each 80 employees a holiday bonus.
How much is needed to invest monthly for a year at 12% nominal interest
rate, compounded monthly, so that each employee will receive a P2,000.00
bonus.

Ans. P12,615.80
 SAMPLE PROBLEM 3
• How much money must you invest today in order to withdraw P2000
annually for 10 years if the interest rate is 9%?

Ans. P12,835.32
 SAMPLE PROBLEM 4
• Maintenance cost of an equipment is P20,000 for 2 years, P40,000 at the end
of 4 years and P80,000 at the end of 8 years. Compute for the semi-annual
amount that be set aside for this equipment. Money worth 10% compounded
annually.

Ans. P7425
 SAMPLE PROBLEM 5
• Mr. Ramirez borrowed P15,000 two years ago. The terms of the loan are
10% interest for 10 years with uniform payments. He just made his second
annual payment. How much principal does he still owe.

Ans. P13,023.52
SEATWORK:
1. What is the present worth of a 3 years annuity paying P3,000 at the end of each year, with interest at 8%
compounded annually?
2. How much must be deposited at 6% each year beginning on January 1, year 1, in order to accumulate P5,000 on
the date of the last deposit, January 1, year 6?
3. An instructor plans to retire in one year and want an account that will pay him P25,000 a year for the next 15
years. Assuming a 6% annual effective interest rate, what is the amount he would need to deposit now?
PROBLEM SET (ORDINARY ANNUITY)
1. A piece of machinery can be bought for 10,000 cash, or for 2,000 down and payments of P750 per year for 15
years. What is the annual interest rate for the time payments?
2. A debt of P10,000 with 10% interest compounded semi-annually is to be amortized by semi-annual payments
over the next 5 years. The first due is 6 months. Determine the semi-annual payments.
3. The president of a growing engineering firm wishes to give each of 50 employees a holiday bonus. How much is
needed to invest monthly for a year at 12% nominal interest rate compounded monthly, so that each employees
will receive a P1,000 bonus?
4. A man inherited a regular endowment of P100,000 every end of 3 months for 10 years. However, he may choose
to get a single lump sum payment at the end of 4 years. How much money is this lump sum if the cost of money
is 14% compounded quarterly.
5. A service car whose cash price was P540,000 was bought with a downpayment of P162,000 and monthly
installments of P10,874.29 for 5 years. What was the rate of interest if compounded monthly.
 DEFERRED ANNUITY
• It is also ordinary annuity but the payment of the first amount is deferred a certain number of
periods after the first.
𝒓 −𝒎𝒕
𝟏 − (𝟏 + )
𝑷𝒙 = 𝑨 𝒎 𝑷 = 𝑷𝒙 (𝟏 + 𝒊)−𝒙
𝒊
𝒓
(𝟏 + )𝒎𝒕 −𝟏
𝑭=𝑨 𝒎
𝒊
𝒓 𝒙+𝒎𝒕
𝑭 = 𝑷(𝟏 + )
𝒎
 SAMPLE PROBLEM 1
• A man loans P187,400 from a bank with interest at 5% compounded
annually. He agrees to pay his obligations by paying 8 equal payments, the
first being due at the end of 10 years. Find the annual payments.

Ans. P44,981
 SAMPLE PROBLEM 2
• A house and lot can be acquired a down payment of P500,000 and a yearly
payment of P100,000 at the end of each year for a period of 10 years,
starting at the end of 5 years from the date of purchase. If money is worth
14% compounded annually, what is the cash price of the property?

Ans. P808,835.92
SEATWORK:
1. A father wishes to provide P4,000 for his son on his 21st birthday. How much should he deposit every 6 months
in a savings bank which pays 3% converted semi-annually, if the first deposit is made when the son is 3 ½ year
old?
2. A businessman borrowed P300,000 and agrees to discharge his obligations by paying a series of 8 equal
payments of P57434.78 the first being due at the end of 5 ½ years. Find the rate of interest he is paying if it is
compounded semi-annually.
3. An annual deposit of P1,270 is placed on the fund at the end of year for 6 years. If the fund invested has a rate
of interest of 5% compounded annually, how much is the worth of this fund at the end of 9 years?
PROBLEM SET (DEFERRED ANNUITY)
1. The cash price of an apartment condominium is P85,908 and can be acquired by a down payment of P50,000
and a yearly payment of P10,000 at the end of each year for 10 years starting at the end of 5 years from the
date of purchase. If money is worth “x” percent compounded annually, what is the value of x?
2. If money is worth 5% compounded semi-annually, find the present value of a sequence of 12 semi-annual
payments of P500 each, the first of which is due at the end of 4 ½ years.
3. A businessman borrowed P300,000 with interest at the rate of 6% compounded semi-annually. He agrees to
discharge his obligation by paying a series of 8 equal semi-annual payment, the first being due at the en of 5 ½
years. Find the semi-annual payments.
4. XYZ Inc. plans to construct an additional building at the end of 10 years for an estimated cost of P5,000,000.
To accumulate this amount it will have equal year-end deposit in a fund earning 13%. However, at the end of
the 5th year, it was decided to have a larger building that originally intended to an estimated cost of P8,000,000.
What should be the annual deposit for the last 5 years?
5. Today is September 2, 1978. Ten years ago, you deposited P10,00 per month. You made the deposit
continuously for 6 years and then stopped. In September 2, 1982, you established a belt and nut factory.
Starting September 2 1982, you withdraw P100 a month for advertisement. How many months can you
withdraw before the money is exhausted? Interest is 6% compounded monthly.
 ANNUITY DUE
• Annuity Due – is one where payments are made at the start of each period, beginning
from the first period.
𝟏 − (𝟏 + 𝒊)−(𝒏−𝟏)
𝑷=𝑨 +𝑨
𝒊

(𝟏 + 𝒊)𝒏+𝟏 −𝟏
𝑭=𝑨 −𝑨
𝒊
 SAMPLE PROBLEM 1
• A man wishes to have 35,000 when he retires 15 years from now. If he can
expect to receive 4% annual interest, how much he set aside in each of 15
equal annual beginning of year deposits?

Ans. P1680.71
 SAMPLE PROBLEM 2
• A man owes P10,000 with interest at 6% payable semi-annually What equal
payments at the beginning of each 6 months for 8 years will discharge his
debt?

Ans. P772.93
 SAMPLE PROBLEM 3
• Engr. Sison borrows P100,000 at 10% effective annual interest. He must pay
back the loan over 30 years with uniform monthly payments due on the first
day of each month. What does Engr. Sison pay each month?

Ans. P839
 PERPETUITY
• Perpetuity – is one where the payment periods extend forever or in which the periodic
payments continue indefinitely.
𝑨
𝑷=
𝒊
 SAMPLE PROBLEM 1
• What present amount would be needed for annual end of year payments of
P15,000 each, forever if money is worth 8%

Ans. 187500
 SAMPLE PROBLEM 2
• What amount of money deposited 20 years ago at 4% interest would
provided perpetual payment of P2,000 per year?

Ans. P22819.35
CONTINUOUSLY COMPOUNDING
• Compounded Continuously
𝒆𝒓𝒏 − 𝟏
𝑭=𝑨 𝒓
𝒆 −𝟏

𝟏 − 𝒆−𝒓𝒏
𝑷=𝑨
𝒆𝒓 − 𝟏
 SAMPLE PROBLEM 1
• Six hundred pesos is deposited each year into a savings account that pays 6%
nominal interest, compounded continuously. How much will be in the
account at the end of 8 years.

Ans. P5977.77
 SAMPLE PROBLEM2
• A man borrows P100,000 at a rate of 6% compounded continuously for 5
years. How much must he pay annually if money is compounded
continuously.

Ans. P23858.37
SEATWORK:
1. On retirement, a workman finds that his company pension calls for a payment of P300 to him or to his estate
if he dies at the beginning of each month for 20 years. Find the present value of this pension at 5%
compounded monthly.
2. Under a factory savings plan, a workman deposits P25 at the beginning of each month for 4 years, and the
management guarantees accumulation at 6% compounded monthly. How much stands to the workman’s credit
at the end of 4 years.
3. Find the present value of a perpetuity of P100 payable semi-annually if money is worth 4% compounded
quarterly.
4. Each year a single payment of P1766 is deposited in an account that earns 6% compounded continuously.
What is the amount in the account immediately after the 5th payment.
PROBLEM SET (ANNUITY DUE)
1. A man will deposit P200 with a savings and loan association at the beginning of each 3 months for 9 years.
If the association pays interest at the rate of 5.5% quarterly, find the sum to his credit just after the last
deposit.
2. Engr. Peter Aventajado loan an amount of P100,000 at a local commercial bank at 10% compounded
annually. How much is his monthly payment if he is required to pay at the beginning of the first day of the
month for a period of 30 years?
3. At what interest rate payable quarterly will payments of P500 at the beginning of each 3 months for 7 years
discharge a debt of P12,500 due immediately.
(PERPETUITY)
1. If money is worth 8%, obtain the present value of perpetuity of P1,000 payable annually when the first
payment due at the end of 5 years.
2. Find the present value, in pesos, of a perpetuity payable semi-annually if money is worth 8% compounded
quarterly.
(CONTINUOUSLY COMPOUNDING)
1. A businessman borrowed P200,000 and agrees to pay P47,719.73 annually for “x” year at the rate of 6%
compounded continuously. Find the value of x.
2. A man wishes to have an amount of P2769.84 after 5 years. He deposited P500 each year into a savings bank
that pay “r” per cent annum compounded continuously. Compute the value of r.