EXAMPLE 12.1 A company requires` 50,00,000 to replace a machinery after 4 years.

The
necessary amount may be accumulated by investing regularly at the rate of 12% p.a. Find
how much Investment must be made on (i) monthly, (ii) quarterly, (iii) half-yearly, (iv) yearly
basis so as to have the required amount at the end of 4 years.

SOLUTION:
Let S n i be the future value of annuity for n periods at i interest rate per period, then
equated periodic Installment per period is
Amount
R
Sn i

(i) Monthly basis: We have i 12% 12 1% 0.01 and n 4 12 48 , corresponding

to which S n i = 61.22260777 (as per FVIFA table). Applying above formula, we get

Amount 5000000
R = 81669.18
Sn i 61.22260777

(ii) Quarterly basis: We have i 12% 4 3% 0.03 and n 4 4 16 , corresponding

to which S n i = 20.15688130 (as per FVIFA table). Applying above formula, we get

Amount 5000000
R= = 248054.25
Sn i 20.15688130
(iii) Half-yearly basis: We have i 12% 2 6% 0.015 and n 4 2 8 , corresponding
to which S n i = 9.89746791 (as per FVIFA table). Applying above formula, we get
Amount 5000000
R= = 505179.71
Sn i 9.89746791

(iv) Yearly basis: We have i 12% 0.12 and n 4 , corresponding to which Sn i =

4.77932800 (as per FVIFA table). Applying above formula, we get
Amount 5000000
R= = 1046172.18
Sn i 4.779328
Therefore, an equated amount of ` 81,669.18; ` 248,054.25; ` 505,179.71 or `
10,46,172.18 respectively need to be invested on monthly, quarterly, half-yearly or yearly
basis.
EXAMPLE 12.2. A man requires ` 20,00,000 to purchases a house after 5 years. He has
an opportunity to invest the funds in an account which can earn 6% p.a. compounded
quarterly. Find how much must be deposited in each quarter so as to have the required
amount at the end of 5 years. D.U. B.Com Hons 2006
SOLUTION:
Let S n i be the future value of annuity for n periods at i interest rate per period, then
equated periodic Installment per period is
12.2 BUSINESS MATHEMATICS

Amount
R= ; We have i 6% 4 1.5% 0.015 and n 5 4 20 ,
Sn i
corresponding to which S n i = 23.123667(as per FVIFA table). Applying above formula, we
get
Amount 2000000
R= = 86491.41
Sn i 23.12366710
Therefore, ` 86,491.41 need to be deposited every quarter for five years to accumulate the
required amount sum of ` 20,00,000.
EXAMPLE 12.3. At six month intervals, A deposited ` 100 in a savings account which
credits interest at 10% per annum compounded semi-annually. The first deposit was made
when As son was six months old and the last deposit was made when his son was 8 years old.
The money remained in the account and was presented to the son on his 10 th birthday. How
much did he receive? D.U. B.Com Hons 1998, 2011
SOLUTION:
Let S n i be the future value of annuity for n periods at i interest rate per period, and R
be the deposit per period then amount accumulated shall be as shown below:
Am ou n t = R S n i

We have i 10% 2 5% 0.05 and n 8 2 16 , corresponding to which

S n i = 23.65749177 (as per FVIFA table). Applying the above formula, we get
Amount (on 8th birthday) = R S n i 100 23.65749177 2365.75
Since this amount of 2365.75 remained deposited for another two years,
4
Amount (on 10th birthday) = 2365.75 1
10%
2365.75 1.21550625 2875.58
2
Therefore, His son received ` 2,875.58 on his 10th birthday.
EXAMPLE 12.4. Mr. X deposits in his sons account ` 500 times his sons age at the end
of each birthday. Find the balance accumulated at the tenth birthday, if the rate of interest is
10% per annum compounded annually. D.U. B.Com Hons 2004
SOLUTION:
Let S be the amount on 10th birthday; r be the rate of interest, and (i 1, 2,.....10) be the
various birth years, then Deposit on each birth day is D i 500 i . Accordingly,
10
10 i
S D i 1 r . We have r = 10%, D i 500,1000,1500....5000
i 1

S 500(1.1)9 1000(1.1)8 . 1500(1.1)7 ........ 4500(1.1) 5000 (1)

Dividing (1) by (1.1) , we get
S 5000
500(1.1)8 1000(1.1)7 ......... (2)
(1.1) 1.1
ANNUITIES 12.3

Subtracting (2) from (1), we get

1 5000
500 1.1 500 1.1 .....500 1.1
9 8
S 1
1.1
S (1.1)10 1 5000
500
11 (1.1) 1 1.1
S 5000
5000 (1.1)10 1
11 1.1
S 5000 5000
5000 (1.1)10 1 5000 (2.59374246) 1
11 1.1 1.1
S
7968.71 4545.45 3423.26 S 34.23.26 11 37655.86
11
Therefore, balance accumulated at 10th birthday shall be ` 37,655.86.

EXAMPLE 12.5. At three month intervals, Mr. Ramesh deposited ` 1000 in a savings
account which credits interest at 12% per annum compounded quarterly. The first deposit
was made when Rameshs daughter was born and the last deposit was made when his
daughter turned 12 years old. The money remained in the account,compounded quarterly and
was presented to the daughter on her 15th birthday. How much did she receive?
SOLUTION:
Let S n i be the future value of annuity for n periods at i interest rate per period, and R
be the deposit per period then amount accumulated shall be as shown below:
Am ou n t = R S n i

We have i 12% 4 3% 0.03 and n 12 4 1 49 , corresponding to which S n i =

108.54064785 (as per FVIFA table). Applying above formula, we get
Amount (on 12th birthday) = R S n i 1000 108.54064785 108540.65

Since amount of 108,540.65 remained deposited for another three years,

4 3
Amount (on 15th birthday) = 108540.65 1
12%
108540.65 1.425761 154753.03
4

Therefore, His daughter received ` 154,753.03 on her 15th birthday.

EXAMPLE 12.6. Mr. Hemant buys a new house for ` 40,00,000. In discharge of purchase
consideration, he makes a down payment and agrees to pay the balance by installments of `
300,000 at the end of each quarter for 3 years. If the rate of interest is 12% p.a. compounded
quarterly, find out the amount of down payment.

SOLUTION:
12.4 BUSINESS MATHEMATICS

Let r be rate of Interest and n be number of periods, then Present value of annuity of
` 1 = an r and EPI = Equated Periodic Installment:

Present value (PV) of Installments = E P I a n r % ;

We have n 3 4 12 , r 12% 4 3% , a12 0.03 = 9.95400399 and EQI = 300,000,

accordingly,
Present value of EQI = E QI a n r % = 300000 9.95400399 29,86, 201

Down Payment = Cost of house PV of EQI

= 40,00,000 29,86,201 = 10,13,799
Therefore, the down payment made in discharge of purchase consideration is ` 10,13,799

EXAMPLE 12.7. Earnings after taxes (cost savings or profits) from a new machine are
expected to be ` 45,000 per year. The machine costs ` 2,00,000 and after five years has no
resale or scrap value. A loan can be made for this amount payable in five equal annual
installments at 6% per annum on the unpaid balance of the loan. Should management buy
the machine, given that a5 0.06 4.212364 . D.U. B.Com Hons 2008

SOLUTION:
As the purchase of machine is to be financed by taking a loan equal to the cost of
machine, we have P 200000 ; r 6% p.a. and n 5 years. The equated annual installment
of the loan is
prin cipa l 200000
EAI = = 47479.28
an r 4.212364

Since the annual installment of loan, amounting to ` 47,479.28 exceeds the earnings
after taxes of ` 45,000, it is not advisable to purchase the machine.

EXAMPLE 12.8. Mr. X sells his old car for ` 1,00,000 to buy a new one costing 2,58,000.
He pays ` x cash and balance payment of ` 7000 at the end of each month for 18 months. If
the rate of interest is 9% compounded monthly, find x given that (1.0075) 18 = 0.8741566.
D.U. B.Com Hons 2010
SOLUTION:
1 (1 r ) n
The Present value of annuity of ` 1 = an r = where r = rate of Interest and n
r
= number of periods. We have r 9% 12 0.0075 p.m. and n 18 months.
After selling old car the amount required to buy new car is 2,58,000 1,00,000 =
1,58,000. Since this amount is paid partly in cash and partly by installments
Balance payable = down payment + Present value of installments
ANNUITIES 12.5

1 (1 r ) n
158000 x 7000 a18 0.0075 158000 x 7000
r

1 (1 0.0075)18
158000 x 7000
0.0075

1 0.8741566
158000 x 7000
0.0075
158000 x 7000 16.779181 158000 x 117454.27
x 158000 117454.27 40545.73
Therefore, the initial down payment as x = ` 40,545.73
EXAMPLE 12.9. What would be the monthly sales volume of a company if it desires to
earn a 12% annual return convertible monthly on its investment of ` 2,00,000? Monthly costs
are ` 3000. The investment will have eight year life with no scrap value.
D.U. B.Com Hons 2003, 2007(C.C.)
SOLUTION:
Let us assume that the monthly sales volume = ` x . Given that principal: P 200000 ;
period: n 8 12 96 months ; Rate: r 12% 12 1% p.m.
Then
200000 ( x 3000) a96 0.01 200000 ( x 3000) 61.52770299
200000 61.52770299 x 3000 61.52770299
61.52770299 x 200000 3000 61.52770299 200000 18 3583.11
200000 183583.11 383583.11
x 6250.57 a
61.52770299 61.52770299
Therefore, the required monthly sales volume is ` 6250.57 per month
EXAMPLE 12.10. You have just won million rupees, the prize is awarded in 10 annual
payment of ` 1,00,000 each. Annual payments are received at the end of each year. You are
given the option to receive a single lump-sum payment of ` 6,00,000 instead of the million
rupees annuity. You want to find out which option is more in todays rupees. Money is worth
10% compounded annually. D.U. B.Com Hons 2008
SOLUTION:
Let r be rate of Interest and n be number of periods, then present value of annuity of ` 1
1 (1 r ) n
= an r = ; We have r = 10% p.a. and n 10 years, accordingly the present value of
r
10 annual payments of ` 1,00,000 each may be computed as under:
P 100000 a10 0.01 100000 6.14456711 614456.71
12.6 BUSINESS MATHEMATICS

Since the lump sum payment of ` 6,00,000 falls short of present value of 10 annual
payments amounting by ` 14,456.71 that is (614,456.71 600,000), the option of 10 annual
payments of ` 1,00,000 each is better.
EXAMPLE 12.11. Mr. X purchases a house for ` 2,00,000. He agrees to pay for the house
in 5 equal installments at the end of each year. If money is worth 5% p.a. effective, what
would be the size of each installment? In case Mr. X makes a down payment of ` 50,000 what
would be the size of each installment? D.U. B.Com Hons 2012
SOLUTION:
Let r be rate of Interest and n be number of periods, then present value of annuity of
` 1 = an r and Equated Annual Installment:

Amount due
EAI = ;
an r %
We have a 5 0.05 = 4.32947667 and Amount due = 200,000, accordingly,

When no down payment is made

200000
EAI = 46194.96
4.32947667
When a down payment is made: (down payment being 50,000)
200000 50000 150000
EAI = 34646.22
4.32947667 4.32947667
Therefore, Size of installment is ` 46,194.96, when down payment is not made; and
` 34,646.22 when a down payment is made.
EXAMPLE 12.12. A company wants to buy a machine for ` 100,000 that will yield an
income stream of ` 6,400 per quarter for the next 6 years. If a loan can be obtained to buy
this machine at 12% p.a. effective compounded quarterly, find whether the investment is
worthwhile or not?
SOLUTION:
Let r be rate of Interest and n be number of periods, then present value of annuity of
` 1 = a n r , and if EQI is Equal Quarterly Income, then present value (PV) of future stream of
income:
P V = E AI a n r
; We have r 12% 4 3% p.q.; n 6 4 24 ; EQI 6400 and a24 0.03 =
16.93554212 . Accordingly,
PV 6400 16.93554212 108387.47
Therefore, the investment is worthwhile because the present value of future stream of
income amounting to ` 108,387.47 exceed the initial investment.
EXAMPLE 12.13. A person is contemplating to install a photocopying machine at a cost
of ` 10,00,000 with a productive life span of 6 years during which the machine is to be
maintained by the supplier free of cost. He knows that on an average, he can photocopy 3000
ANNUITIES 12.7

pages per day and charge 50 paise for each page from the customers. The toner cartridge
needs replacement after 5000 pages at a cost of ` 500. A loan can be obtained to buy this
machine at 9% p.a. effective, find out whether the purchase of this machine is worthwhile or
not, assuming that the machine will be put to use in a year for 360 days?
SOLUTION:
Let us compute his yearly income from photocopying:
Revenue = No. of pa ge da ys (per pa ge ch a rges) = 3000 360 0.5 = 5,40,000

No. of pa ges da ys
Cost of Toner Ink used = cost per t on er
pa ges per t on er ca r t r idge

3000 360
= 500 = 1,08,000
5000
Income = Revenue Cost = 5,40,000 1,08,000 = ` 4,32,000 per annum.
Let r be rate of Interest and n be number of periods, then present value of annuity of ` 1
= a n r , and if EAI is Equal Annual Income, then present value (PV) of future stream of
income:
P V = E AI a n r
; We have

r 9% p.a.; n 6 years; EAI 432,000 and a6 9% 4.48591859 . Accordingly,

PV 4320 00 4.48591859 1 9,37,916.83

Therefore, the investment is worthwhile because the present value of future stream of
income amounting to ` 19,37,916.83 exceed the initial investment of ` 10,00,000 in
photocopying machine.

EXAMPLE 12.14. A company wishes to invest ` 10,000 in a machine that will yield an
income stream of 1200 per year for the next 8 years. If money is worth 8% p.a. effective, find
whether the investment is worthwhile? D.U. B.Com Hons 2012

SOLUTION:
Let r be rate of Interest and n be number of periods, then present value of annuity of
` 1 = a n r , and if EAI = Equal Annual Income, the present value (PV) of future stream of
income:
P V=E AI a n r
; We have r 8%, n 8 and EAI 1200 . Accordingly,

P V 1200 5.74663894 6895.97

Therefore, the investment is not worthwhile because the present value of future stream
of income amounting to ` 6,895.97 falls short of the initial investment.
EXAMPLE 12.15. A person borrows 2,50,000 at 9% compounded annually to be
repayable in 8 equated annual installments at the end of each year. However, at the time of
12.8 BUSINESS MATHEMATICS

6th installment the individual elects to pay off the loan. How much should be paid by him to
settle the account?
SOLUTION:
Let r be rate of Interest and n be number of periods, present value of annuity of ` 1 = a n r
P refers to principal amount, EAI denotes Equal Annual Installment, and PV is the present
value (PV) of installments.
We have r 9% p.a. n 8 ; P 250000 , then as per PVIFA table a8 9% 5.53481911 and
accordingly
P 250000
EAI = 45168.59 ;
a8 9% 5.53481911

The PV of 5 installments paid:

PV = a5 9% E AI 3.88965126 45168.59 175690.08

PV of unpaid principal = 250000 175690.08 = 74309.92

Let A n be the amount after n period, then A n P 1 r
n

We have P 74309.92 , r 9% p.a.; n 6 , then FVIF = 1 r = 1.67710011 .

n

Accordingly A n P 1 r 74309.92 1.67710011 124625.17

n

Therefore, an amount of ` 124,625.17 need to be paid at the end of 6th year to settle the
account.
EXAMPLE 12.16. If the present value and amount of an ordinary annuity of ` 1 per
annum for n number of years are ` 8.1109 and ` 12.0061 respectively, find the rate of
interest and the value of n without consulting the compound interest table.
D.U. B.Com Hons 2002, 2004, 2008
SOLUTION:
Let r be rate of interest and n be number of periods, then present value of annuity of
` 1 = a n r and amount of annuity of S n r We have a n r 8.1109 and S n r 12.0061 . As we
know that
1 1
r , therefore
an r sn r
r
1 1
r 0.123291 0.083291 0.04 4%
8.1109 12.0061
(1 r )n 1
We also know that S n r = , therefore
r
(1 .04)n 1
12.0061 12.0061 0.04 (1.04)n 1
0.04
log(1.48) 0.1703
(1.04)n 1.48 n log(1.04) log(1.48) n 10
log(1.04) 0.0170
ANNUITIES 12.9

Therefore, rate is 4% p.a. and value of n is 10 years

EXAMPLE 12.17. An automobile advertisement reads: No money down. 5000 per month
for 30 months interest rate equals 12% per year compounded monthly on unpaid balance.
How much of ` 1,50,000 to be paid will go for interest and how much for the vehicle itself?
Given that a30 0.01 25.807708 D.U. B.Com Hons 2007(C.C.)

SOLUTION:
Let R be the EMI, r the rate of interest per month, n be the number of monthly
installments, then Present value of ` 1 annuity is a n r .
Present value of EMI = R a n r . As we have R = 5000, r 12% 12 1% , and n = 30,
then a30 0.01 25.807708 . Accordingly,
Cost of Vehicle = PV= R a30 0.01 5000 25.807708 129038.54

Interest = 1,50,000 1,29,038.54 = 20,961.46

Therefore payment towards vehicle is ` 1,20,038.54 and towards Interest is ` 20,961.46.

EXAMPLE 12.18. You have just won million rupees, the prize is awarded in 10 annual
payment of ` 1,20,000 each. Annual payments are received at the beginning of each year. You
are given the option of receiving a single lump-sum payment of ` 8,00,000 instead of the 1.2
million rupees annuity. You want to find out which option is more in todays rupees. Money is
worth 10% compounded annually. D.U. B.Com Hons 2008 (Modified)

SOLUTION:
Let r be rate of Interest and n be number of periods, then present value of annuity of ` 1
received in the beginning of year = a n r = a n 1 r 1 . We have r = 10% p.a. and n 10 years,
accordingly the present value of 10 annual payments of ` 1,20,000 each may be computed as
under:

P 120000 a9 0.01 1 120000 (5.75902382 1) 120000 (6.7590 2382)
= ` 811,082.86
Since the lump sum payment of ` 8,00,000 falls short of present value of 10 annual
payments amounting by ` 11,082.86 that is (811,082.86 - 800,000), the option of 10 annual
payments of ` 1,20,000 each is better.
Example 12.19. Mr. X purchases a house for ` 3,00,000. He agrees to pay for the house in
5 equal installments in the beginning of each year. If money is worth 5% p.a. effective, what
would be the size of each installment? D.U. B.Com Hons 2012(modified)
SOLUTION:
Let r be rate of interest and n be number of periods, then present value of annuity of ` 1
paid in the beginning of each year = a n 1 r 1 and Equated Annual Installment (EAI):
12.10 BUSINESS MATHEMATICS

Amou n t pa ya ble
EAI = ;
an 1 r % 1

We have a4 0.05 = 3.54595050 and Amount due = 300,000; Accordingly,

200000 200000
EAI = 43995.20
3.54595050 1 4.54595050
Therefore, size of installment is ` 43,995.20.
EXAMPLE 12.20. Mr. X wants ` 5,00,000 at the end of 7 years. If the rate of interest is
8%, what amount shall be deposited at the beginning of each quarter so as to get the above
amount? D.U. B.Com Hons 2007
SOLUTION:
Since amount is to be deposited in the beginning of each quarter, it is case of annuity
due.
Let r be rate of Interest and n be number of periods, S be amount required in future, then
future value of annuity of ` 1 paid in the beginning of each year = S n 1 r 1 and Equated
Periodic Installment (EPI):
S
EPI = . We have r 8% 4 2% ; n 7 4 28 , and S 500,000 , then
S n 1 r 1

S 29 0.02 = 38.79223451 (As per FVIFA table). Thus, Equated Quarterly Deposit

500000 500000 500000

(EQD)
S 28 1 0.02 1 S 29 0.02 1 S 29 0.02 1

500000 500000
13230.23
38.79223451 1 37.79223451
Therefore, a quarterly deposit of ` 13,230.23 need to be made.
EXAMPLE 12.21. Mr. X purchased an asset for ` 1,00,000 on installment basis. Each
installment is to be paid at the beginning of each quarter. Find the size of each installment if
the money is to be repaid in three years and the rate of interest is 6% compounded quarterly.
D.U. B.Com Hons 2007
SOLUTION:
Since amount is to be deposited in the beginning of each quarter, it is case of annuity
due.
Let r be rate of Interest and n be number of periods, P is present value of Equated
Periodic Installments (EPI) , then Present value of annuity of ` 1 paid in the beginning of
each year = a n 1 r 1 .Accordingly,
ANNUITIES 12.11

P
EPI . As we have r 6% 4 1.5% 0.015 ; n 3 4 12 , and P 100,000 ,
an 1 r 1
then a12 1 0.015 a11 0.015 10.07111779 (PVIFA table) and Equated Quarterly Installment
(EQI) is:

P 100000 100000
EQI 9,032.55
an 1 r 1 (10.07111779 1) 11.07111779

Therefore, a quarterly deposit of ` 9,032.55 need to be made.

EXAMPLE 12.22. A company buys a machinery by making a down payment of ` 75,000
and agrees to pay the balance amount in 4.5 years by equated quarterly installments of `
5000 each, the first installment to begin after 2 years from now. Find out the cash price of
machinery if the rate of interest is 8% p.a. compounded quarterly.
SOLUTION:
Let r be rate of Interest and m be number of periods of non-payment, n be the number of
periods of payment, P be present value of Equated Quarterly Installments (EQI), then
Present value of annuity of ` 1 paid during the period between m and n = (a n m r a m r ) .

Cash price of machine = (down payment) + ESI (an m r am r )

We have r 8% 4 2% ; m 2 4 8 ; n 4.5 4 18 . As per PVIFA table:

(a18 8 2% 24.99861933; a8 2% 7.32548144) and EQI = 5,000.Accordingly,

Cash price of machine = 75,000 + 5000 (7.60607951 3.79078677)

= 75,000 + 88,365.69 = 163,365.69
Therefore, the cash price of machine is ` 163,365.69
EXAMPLE 12.23. A house is sold for 50,000 down and 10 semi-annual payments of 5000
each, the first due 3 years hence. Find the cash price of the house if money is worth 20%
compounded semi-annually. D.U. B.Com Hons 2009
SOLUTION:
Let r be rate of Interest and m be number of periods of non-payment, n be the number of
periods of payment, P be present value of Equated Semi-year Installments (ESI), then
Present value of annuity of ` 1 paid during the period between m and n = (a n m r a m r ) .
Cash price of house = (down payment) + E SI ( a n m r a m r )
We have r 20% 2 10% ; m 2 2 1 5 ; n 10 and ESI = 5,000. As per PVIFA table:
(a10 5 10% 7.60607951; a5 10% 3.79078677) . Accordingly,

Cash price of machine = 50,000 + 5000 (7.60607951 3.79078677)

= 50,000 + 19,076.46 = 69,076.46
Therefore, the cash price of house is ` 69,076.46
12.12 BUSINESS MATHEMATICS

EXAMPLE 12.24. A piece of land leased with eucalyptus plantations shall start yielding
timber and oil from the end of sixth year onwards for 30 years in all and is expected to yield
an annual income of ` 120,000. Find the cash price of the land-lease if the money is worth 6%
per annum.
SOLUTION:
Let r be rate of Interest and m be number of periods of no-yield and income, n be the
number of periods of yield and income, P be present value of Equated Annual Income (EAI),
then Present value of annuity of ` 1 paid during the period between m and n = (a n m r a m r )
Cash price of house = E QI ( a n m r a m r )
We have r 6% ; m 5 ; n 30 , EAI = 120,000. As per PVIFA table
a30 5 6% 14.49824636; and a5 6% 4.21236379 . Accordingly,

Cash price of land leas = 120000 (14.49824636 4.21236379)

= 12000 0 (10.28 588 257) = 12,34,305.91
Therefore, the cash price of house is ` 12,34,305.91
EXAMPLE 12.25. An orchard will yield its first full crop at the end of 5 years and is
expected to maintain an annual income of 5,000 for 20 years in all. Find the cash price of the
orchard if the money is worth 3% per annum. D.U. B.Com Hons 1999
SOLUTION:
Let r be rate of Interest and m be number of periods of no-income, n be the number of
periods of income, P is present value of Equated Annual Income (EAI), then Present value of
annuity of ` 1 paid during the period between m and n = (a n m r a m r ) .

Cash price of house = E QI ( a n m r a m r )

We have r 3% ; m 5 1 4 ; n 20 , EAI = 5,000. As per PVIFA table

a20 4 3% 16.9355 42 12; and a4 3% 3.71709840 . Accordingly,

Cash price of land lease = 5000 (16.93554212 3.717 09 84 0)

= 5000 (13.2184 4372) = 66,092.22
Therefore, the cash price of house is ` 66,092.22
EXAMPLE 12.26. Mr. Goverdhan borrows from a bank ` 12,00,000 at the rate of 9% p.a.
to be repaid in six equal installments with interest with the first installment falling due at
the end of fourth year. Find the amount of each installment.
SOLUTION:
Let r be rate of Interest and m be number of periods of no-payment, n be the number of
periods of payment, P is Principal amount, EAI is Equated Annual Installment, then Present
value of annuity of ` 1 paid during the period between m and n = (a n m r a m r ) .
P
EAI =
(an m r am r )
ANNUITIES 12.13

We have r 9% ; m 4 1 3 (for three years there is no payment); n = 6,

P = 12,00,000. As per PVIFA table a6 3 9% 5.99524689 and a3 9% 2.53129467 .
Accordingly,
1200000 1200000
EAI = 346425.1
(5.99524689 2.53129467) 3.46395222
Therefore, the Equated Annual Installment is ` 346,425.10

12.3.4 Continuous Compounded Annuity

It refers to any annuity: ordinary, due or deferred, that is compounded continuously for n
number of periods at r% rate of interest. Given that
S = Amount (or future value) of an annuity
P = Present value of an annuity
n = number of payment periods of annuity
r = rate of interest per period
t = the time variable that can extend up to n periods.
Then the future as well as present value of annuity can be computed as shown below:

Future Value Present Value

n n

S Re r t d t
0

P Re r t dt
0

R r t n R r t n
S e P e
r 0 r 0

S
r

R r n
e e0 P
r

R r n
e e0
Compounded to FV Discounted to PV

Clearly these computations are based on the concept of integration that we have learnt in
chapter-8.
EXAMPLE 12.27. Find the amount to be deposited into an endowment fund that is to be
compounded continuously at the rate of 8.5% to provide for an annual scholarship of ` 25,500
for 10 years.
SOLUTION:
Let Pbe endowment fund , r be rate of interest, t be the time, n be period of annuity and
R be annuity, then by continuous compounding:
n
P Re rt d t
0

We have r = 8.5% = 0.085; n = 10 and R 25500 . Accordingly,

12.14 BUSINESS MATHEMATICS

10
0.085 t 25500 0.085 t 10
P 25500 e dt
0.085
e 0
0

300000 e0.85 e0 = 300000 0.427415 1

300000 (0.572585) 171775.50

Therefore, Amount of ` 1,71,775.50 need to be deposited into Endowment fund to enable
annual scholarship of ` 25,500
EXAMPLE 12.28. A person desires to create an endowment fund to provide for a prize of
` 5000 per year. If the fund can be invested at 12% per annum compounded continuously,
find the amount of endowment D.U. B.Com Hons 2011
SOLUTION:
Let P be endowment fund, r be rate of interest, n be period of annuity t be the time and R
be annuity, then by continuous compounding:
n
P Re rt d t
0

We have r = 12% = 0.12; and R 5000 . Suppose t = n years, then

n
P 5000 e 0.12 t d t
0.12
e
5000 0.12 t
1
0

Since income is forever, t and

5000 0.12 t
P lim
t r
e 5000
1
0.12

41666.67
t

lim e0.12 t 0

It implies that sum of ` 41,666.67 need to be deposited in endowment

EXAMPLE 12.29. Anincome stream decreases continuously over time for x years, the
income rate at t years from now being ae bt per year. What is its present value if interest is
reckoned at 100 r% compounded continuously? Show that this equals the capital value of a
uniform income stream of a rupee per year for x years if the rate of interest is raised to 100
(r + b) % per year. D.U. B.Com Hons 1999, 2006(C.C.)
SOLUTION:
Let P be Present Value, r be rate of interest, n be period of annuity t be the time and R be
annuity, then by continuous compounding:
n
bt
P Re rt d t , Accordingly, the present value of income stream that is expressed as ae
0

per year for x years at the rate of 100r% compounded continuously shall be:
x x
P a e bt e rt d t a e ( b r ) t d t
0 0
ANNUITIES 12.15

a x a ( b r ) x
= e(b r )t e e0
(b r ) 0 (b r )
a ( b r ) x a
e 1 1 e(b r ) x
(b r ) (b r )
The capital value of an income stream of ` 1per year for x years if the rate of interest is
raised to 100(r + b) % per yearcompounded continuously is:
x
a a

x
P a e (r b)t dt e( r b ) t e(r b) x e0
(r b) 0 (r b)
0

a

(r b)

e ( r b ) x 1
a

(r b)
1 e ( r b ) x
EXAMPLE 12.30. A bank pays interest at the rate of 6% p.a. compounded continuously.
Find how much should be deposited in the bank each year in order to accumulate ` 6000 in 3
years? D.U. B.Com Hons 1992
SOLUTION:
Let S be amount after three years, r be rate of interest, t be the time, n be period of
annuity and R be annuity, then by continuous compounding:
n
S Re rt d t
0

We have r = 6% = 0.06 p.a. ; n = 3 and S 6000 . Accordingly,

3 3
6000
6000 R e 0.06 t d t e 0.06 t d t
0
R 0

6000 1 3
e0.06 t
R 0.06 0

6000 0.06

R
e0.18 e0
6000 0.06 6000 0.06
R 1825,56
e 0.18
e 0
0.1972

Therefore, Amount of ` 1,825.56 need to be deposited annually.

EXAMPLE 12.31. What is the present value of a continuous income stream of 5000 per
year for three years of interest if it is discounted continuously at the rate of 6% per year?
D.U. B.Com Hons 2006(C.C.)
SOLUTION:
Let P be Present value of income stream; r be rate of interest, t be the time, n be period of
annuity and R be annuity, then by continuous compounding:
12.16 BUSINESS MATHEMATICS

n
P Re rt d t
0

We have r = 6% = 0.06 p.a. ; n = 3 and R 5000 . Accordingly,

3 3
P 5000 e 0.06 t d t 5000 e 0.06 t d t
0 0

5000 0.06 t 3
e
0.06 0

5000 0.18 5000

0.06
e e0 = 0.06
0.8353 1
5000 (0.1647)
13725
0.06
Therefore, the present value of stream of income is ` 13,725.
EXAMPLE 12.32. According to an investment proposal an initial investment of `
1,00,000 is expected to yield a uniform income stream of ` 10,000 per annum. If money is
worth 8% per annum compounded continuously, what is the expected payback period i.e.
after what time the initial investment will be recovered? D.U. B.Com Hons 2009
SOLUTION:
Let P be Present value of income stream; r be rate of interest, t be the time, n be period of
annuity (payback period) and R be annuity, then by continuous compounding:
n
P Re rt d t
0

We have r = 8% = 0.08 p.a. ; P = 100000 and R 5000 . Accordingly,

n
100000 10000 e 0.08 t d t
0

10000 0.08 t n 10000 0.08 t n

100000 e 100000 e
0.08 0 0.08 0

100000 125000 e0.08 n e0 100000 125000 e0 e0.08 n

100000 125000 1 e0.08 n 100000 125000 125000 e0.08 n

25000
125000 e0.08 n 25000 e0.08 n 0.2
125000
log(0.2) 0.699
0.08 n log( e) log(0.2) n 20.12
0.08 log(e) 0.08 0.4343
Therefore, the payback period is 20.12 years
ANNUITIES 12.17

EXAMPLE 12.33. According to the will of a man, his life insurance of ` 40,000 should be
deposited in a bank soon after his death. The bank has to pay ` 5,000 annually to his heir
and if the interest is 5% p.a. compounded continuously how many annual payments could be
made? D.U. B.Com Hons 2012
SOLUTION:
Let P be Present value of income stream; r be rate of interest, t be the time, n denote the
number of annual payments and R be annuity, then by continuous compounding:
n
P Re rt d t
0

We have r = 5% = 0.05 p.a. ; P = 40000 and R 5000 . Accordingly,

n
40000 5000 e 0.05 t d t
0

5000 0.05 t n 5000 0.05 t n

40000 e 40000 e
0.05 0 0.05 0

40000 100000 e0.05 n e0 40000 100000 e0 e0.05 n

40000 100000 1 e0.05 n 40000 100000 100000 e0.05 n

60000
100000 e0.05 n 60000 e0.05 n 0.6
100000
log(0.4) 0.2218
0.05 n log( e) log(0.4) n 10.21
0.05 log(e) 0.05 0.4343
Therefore, the 10.21 annual payments could be made.
EXAMPLE 12.34. Find out the capital value of a uniform income stream of R rupee per
year for m years, reckoning interest continuously at 100r% per year. What will be the result
if income is forever? D.U. B.Com Hons 2006
SOLUTION:
Let P be capital value of income stream; i be rate of interest, t be the time, n denote the
number of annual payments and R be annuity, then by continuous compounding:
n

P R e rt dt
0

We have i = 100r% = r p.a. ; n m . Accordingly,

m

Re
rt
P dt
0

R rt R rm
R 0

m
P e P e e0 P e e rm
r 0 r r
12.18 BUSINESS MATHEMATICS

P
R
r

1 e rm lim P lim
m
R
m r

1 e
R
e 0
r
Therefore, the capital value of stream of earnings forever is the capitalized value of
R
annual income at given rate of interest. That is .
r
EXAMPLE 12.35. Derive, by using calculus, the present value of an annuity of ` 1 per
annum assumed to be payable continuously for n years at the rate of interest i per rupee per
annum convertible continuously. D.U. B.Com Hons 2003, 2006, 2007
SOLUTION:
Let P be capital value of income stream; r be rate of interest, t be the time, n denote the
number of annual payments and R be annuity, then by continuous compounding:
n
P Re rt d t
0

We have r i p.a. Accordingly,

n
P R e it d t
0

1 ein
1 it

1 in

n
P e e e0
i 0 i i
EXAMPLE 12.36. Find the amount to be deposited into an endowment fund that is to be
compounded annually at the rate of 9% p.a. to provide for an annual scholarship of ` 27,000
for an indefinite period of time.

SOLUTION:
Let P be the principal amount to be deposited, r be the rate interest and R be the
R
annuity, then the value of perpetual annuity is computed as : P . Now we have r = 9% =
r
R 27000
0.09 p.a., and R = 27,000. Accordingly, P = 3,00,000
r 0.09
Therefore, an amount of ` 300,000 need to be deposited as endowment.

EXAMPLE 12.37. How much money is needed to ensure a series of lectures costing `
2,500 at the beginning of each year indefinitely, if the money is worth 3% compounded
annually. D.U. B.Com Hons. 1999

SOLUTION:
Let P be the principal amount to be deposited, r be the rate interest and R be the annuity
payable at the beginning of each year, then the value of perpetual annuity is computed as:
R
P =R .
r
ANNUITIES 12.19

Now we have r = 3% = 0.03 p.a., and R = 2,500. Accordingly,

R 2500
P =R = 2500 2500 85,833.33
r 0.09
Therefore, an amount of ` 85,833.33 needed.
Example 12.38. How much money is needed to ensure a monthly pension of ` 60,000 at
the beginning of each month forever, if the money is worth 9% p.a. compounded monthly.
SOLUTION:
Let P be the principal amount to be deposited, r be the rate interest and R be the annuity
payable at the beginning of each month, then the value of perpetual annuity is computed as:
R
P =R .
r
Now we have r 9% 12 0.75% = 0.0075 p.m., and R = 60,000. Accordingly,
R 60000
P =R = 60000 60000 8000000 = 80,60,000
r 0.0075
Therefore, an amount of ` 80,60,000 needed for this pension plan.

EXAMPLE 12.39. The principal amount demanded by a bank to guarantee a perpetual

annuity is reduced by 20% after rate of interest compounded annually in increased by 2%.
Find out the rate of interest allowed by the bank after reduction in principal amount.

SOLUTION:
Let P be the principal amount demanded by the bank, R be the perpetual annuity, r be
the rate of interest before reduction in principal amount, then rate of interest after reduction
in principal amount is (r 2%) .
R
The principal amount before increase in rate of interest: (1)
r
R
Principal amount after increase in rate of interest rate: ...(2)
r 0.02
Accordingly,
R R
r r + .02
R
20% 0.2 1 r .02 0.2
R R
r
r

r r
1 0.2 0.8 r 0.8(r .02)
r .02 r .02
0.016
r 0.8 r 0.016 0.2 r .16 a r 0.08 8%
0.2
Therefore, the rate of interest allowed by the bank after reduction in principal amount is
8% + 2% = 10% p.a.
12.20 BUSINESS MATHEMATICS

EXAMPLE 12.40. How much money is needed to ensure a pension of ` 60,000 at the end
of each year forever that grows at the rate of 2% p.a., if the money is worth 10% p.a.
compounded yearly.
SOLUTION:
Let P be the principal amount needed, r be the rate of interest, R be the annuity payable
at the end of each year, and g be the annual rate of growth in annuity, then the value of
perpetual annuity is computed as:
R
P .
rg
We have R = 60,000; r = 10%; and g = 2%. Accordingly,
R 60000 60000
P 750000
r g 0.1 0.02 0.08
Therefore, amount of ` 7,50,000 is needed to ensure a growing pension of ` 60,000
annually.