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OUTLINE:
This part of the lecture series will include topics and problem sets focusing on
the following:
ANNUITY
ELEMENTS OF ANNUITY
TYPES OF ANNUITY
PERPETUITY
UNIFORM GRADIENT
ARITHMETIC GRADIENT
GEOMETRIC GRACIENT
*ANNUITY SCHEDULE/TABLE

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ANNUITY
Annuity is a series of uniform payments made at equal intervals of time.
Annuities are established for the following purposes:
1. As payment for debt by 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.

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ELEMENTS OF ANNUITY
A = Periodic Payment
P = Present Worth of all periodic payments
F or S = Future Worth or sum of all the periodic payments after the last
payment is made
i = interest rate per payment
n = number of payments

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TYPES OF ANNUITY
A. Ordinary Annuity
The payment is made at the end of each period starting from the first
period.

0 1 2 3 4 5 6 7 n

A A A A A A A A

F
P
Future Worth of A is:
𝑨 (𝟏+𝒊)𝒏 −𝟏
F=
𝒊
(1+𝑖)𝑛 −1
The Factor is called the equal-payment-series
𝑖

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compound amount factor and is denoted as (F/A, i, n)
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TYPES OF ANNUITY
A. Ordinary Annuity (Continued)
Value of A with known F (Sinking Fund)
𝑭𝒊
A=
(𝟏+𝒊)𝒏 −𝟏
𝒊
The Factor is called the equal-payment-series
(𝟏+𝒊)𝒏 −𝟏
sinking fund factor and is denoted as (A/F, i, n)

Present Worth of A
𝑭 𝑨 (𝟏+𝒊)𝒏 −𝟏
P= =
(𝟏+𝒊)𝒏 (𝟏+𝒊)𝒏 𝒊
(𝟏+𝒊)𝒏 −𝟏
The Factor is called the equal-payment-series
(𝟏+𝒊)𝒏 𝒊
present worth factor and is denoted as (P/A, i, n)

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TUPES OF ANNUITY
A. Ordinary Annuity (Continued)
Value of A with known P (Capital Recovery)
𝑷(𝟏+𝒊)𝒏 𝒊
A=
(𝟏+𝒊)𝒏 −𝟏
(𝟏+𝒊)𝒏 𝒊
The Factor is called the equal-payment-series
(𝟏+𝒊)𝒏 −𝟏
capital recovery factor and is denoted as (A/P, i, n)

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TYPES OF ANNUITY
B. Deferred Annuity
The first payment is deferred a certain number of periods after the
first.

0’ 1’ 2’ 3’ 4’ 5’ 6’ 8’
0 1 2 3 4 5 6 7 9

A A A A A A A

F
n=8

P
n=9

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TYPES OF ANNUITY
B. Deferred Annuity (Continued)
Future Worth (F)
𝑨(𝟏+𝒊)𝟖 −𝟏
F=
𝒊
Present Worth (P)
𝑭 𝑨 (𝟏+𝒊)𝟖 −𝟏
P= =
(𝟏+𝒊)𝟗 (𝟏+𝒊)𝟗 𝒊

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TYPES OF ANNUITY
C. Annuity Due
If the payment is made at the beginning of each period starting from
the first period, the annuity is called annuity due.

0’
0 1 2 3 4 5 6 7 9

A A A A A A A A A

F
n = 10

P
n=9

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TYPES OF ANNUITY
C. Annuity Due (Continued)
Future Worth (F)
𝑨(𝟏+𝒊)𝟏𝟎 −𝟏
F=
𝒊
Present Worth (P)
𝑭 𝑨 (𝟏+𝒊)𝟏𝟎 −𝟏
P= =
(𝟏+𝒊)𝟗 (𝟏+𝒊)𝟗 𝒊

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PERPETUITY
Perpetuity is an annuity where the payment periods extends forever
or the periodic payments continue indefinitely.
If the payment is made at the end of each period starting from the first
period, the present worth of perpetuity is:
𝑨
P=
𝒊

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UNIFORM GRADIENT
Arithmetic Gradient

0 1 2 3 4 5 6 7 n

A
A+G
A+2G
A+3G
A+4G
A+5G
A+6G
A+nG

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UNIFORM GRADIENT
Arithmetic Gradient (Continued)
Present Worth (P)
𝑨 (𝟏+𝒊)𝒏 −𝟏 𝑮 (𝟏+𝒊)𝒏 −𝟏 𝒏
P= + −
(𝟏+𝒊)𝒏 𝒊 𝒊 (𝟏+𝒊)𝒏 𝒊 (𝟏+𝒊)𝒏
Future Worth (F)
𝑨 (𝟏+𝒊)𝒏 −𝟏 𝑮 (𝟏+𝒊)𝒏 −𝟏
F = (𝟏 + 𝒊)𝒏 = + −𝒏
𝒊 𝒊 𝒊

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UNIFORM GRADIENT
Geometric Gradient

0 1 2 3 4 5 6 7 n

A+G
A+G(1+r)
A+G(1+r)2
A+G(1+r)3
A+G(1+r)4
A+G(1+r)5
1+𝑟
Let w =
1+𝑖 A+G(1+r)6

A+G(1+r)n

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UNIFORM GRADIENT
Geometric Gradient (Continued)
Present Worth (P)
If w is not equal to 1
𝑨 (𝟏+𝒊)𝒏 −𝟏 𝑮 𝟏−𝒘𝒏
P= +
(𝟏+𝒊)𝒏 𝒊 𝟏+𝒊 𝟏−𝒘
For w = 1 (for r = i)
𝑨 (𝟏+𝒊)𝒏 −𝟏 𝑮
P= +
(𝟏+𝒊)𝒏 𝒊 𝟏+𝒊
Future Worth (F)
F = P(𝟏 + 𝒊)𝒏

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PROBLEM SOLVING
Problem 1. 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:

0 1 2 3 4 5

n=4

A A A A A

P1 + A = P120,000.00
𝐴 (1+0.08)4 −1
P1 =
(1+0.08)4 0.08
𝐴 (1+0.08)4 −1
+ A = P120,000.00
(1+0.08)4 0.08
A = P27,829.00
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PROBLEM SOLVING
Problem 2. A contract calls for semi-annual payments of P40,000.00 for the
next 10 years and an additional payment of P250,000.00 at the end of that
time. Find the equivalent cash value of the contract at 7% compounded semi-
annually?

0 1 2 3 4 5 6 7 20

A=40k A=40k A=40k A=40k A=40k A=40k A=40k A=40k

P1
n = 20

P250,000.00

P2
n = 20

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PROBLEM SOLVING
Present Worth, P = P1 + P2
𝑨 (𝟏+𝒊)𝒏 −𝟏 𝑃40,000.00 (1+0.035)20 −1
P1 = =
(𝟏+𝒊)𝒏 𝒊 (1+0.035)20 0.035
𝐹 250,000.00
P2 = =
(1+𝑖)𝑛 (1+0.035)20
𝑃40,000.00 (1+0.035)20 −1 250,000.00
P= +
(1+0.035)20 0.035 (1+0.035)20
P = P694,137.60

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PROBLEM SOLVING
Problem 3. Mr. Rankine bought a piece of property for P100,000.00 down
payment and 10 deferred semi-annual payments of P8,000.00 starting 3 years
from now. If the interest rate is 12% compounded semi-annually, what is the
present worth of the property?

0’ 1’ 2’ 10’
Year 3
0 1 2 3 4 5 6 7 15

A=100k A=8k A=8k A=8k

P1
n = 10

P2
n=5

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PROBLEM SOLVING
Present Worth, P2 + P100,000.00
i = 0.12/2 = 0.06
𝑨 (𝟏+𝒊)𝒏 −𝟏 𝑃8,000.00 (1+0.06)10 −1
P1 = = = P58,880.70
(𝟏+𝒊)𝒏 𝒊 (1+0.06)10 0.06
𝐹
P2 = ; F = P1
(1+𝑖)𝑛
𝑃58,880.70
P2 = = P43,999.08
(1+0.06)5
P = P43,999.08 + P100,000.00
P = P143,999.08

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ANNUITY SCHEDULE/TABLE
Problem. Prepare an annuity schedule/table for a loan payable for one (1) year
with the following information:
Principal Amount = Php1,500,000.00
Interest Rate = 4.5% Compounded Monthly
Term of Payment = 1 Year
Accomplish the table below:
Unpaid Balance
Month Payment Interest Unpaid Balance
Reduction
0
1
2
3
n

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ANNUITY SCHEDULE/TABLE
Solution:
P = Php1,500,000.00
i = 4.5%/12 = 0.375% = 0.00375
n = 12 periods
𝐴 (1+𝑖)𝑛 −1 𝐴 (1+0.00375)12 −1
P= = = Php1,500,000.00
(1+𝑖)𝑛 𝑖 (1+0.00375)12 (0.00375)
A = Php128,067.78 1,500,000 *
0.00375
128,067.78 –
5,625.00
1,500,000.00
– 122,442.78

Payment Interest Unpaid Balance


Month Unpaid Balance
(128,067.78) (0.00375) Reduction
0 - - - 1,500,000.00
1 128,067.78 5,625.00 122,442.78 1,377,557.22
2 128,067.78 5,165.84 122,901.94 1,254,655.28
3 128,067.78 4,704.96 123,362.82 1,131,292.46
… … … … …
1,377,557.22
n * 0.00375

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ANNUITY SCHEDULE/TABLE
Payment Interest Unpaid Balance
Month Unpaid Balance
(128,067.78) (0.00375) Reduction
0 - - - 1,500,000.00
1 128,067.78 5,625.00 122,442.78 1,377,557.22
2 128,067.78 5,165.84 122,901.94 1,254,655.28
3 128,067.78 4,704.96 123,362.82 1,131,292.46
4 128,067.78 4,242.35 123,825.43 1,007,467.02
5 128,067.78 3,778.00 124,289.78 883,177.24
6 128,067.78 3,311.91 124,755.87 758,421.38
7 128,067.78 2,844.08 125,223.70 633,197.68
8 128,067.78 2,374.49 125,693.29 507,504.39
9 128,067.78 1,903.14 126,164.64 381,339.75
10 128,067.78 1,430.02 126,637.76 254,702.00
11 128,067.78 955.13 127,112.65 127,589.35
12 128,067.78 478.46 127,589.32 0.03

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