ANNUITIES

An annuity is a series of equal payment occurring at equal periods of time.

Symbols and their meaning
P = value or sum of money at present
F = value or sum of money at some future time
A = a series of periodic, equal amount of money
n = number of interest periods
i = interest rate per interest period
Ordinary Annuity
An ordinary annuity is one where the payments are made at the end of each period.
Finding P when A is given
P

0 1 2 3 n-1 n

A A A A A

A (P/F, i%, 1)
A (P/F, i%, 2)
A (P/F, i%, 3)
A (P/F, i%, n – 1)
A (P/F, i%, n)

Cash flow diagram to find P given A

1 – (1 + i) – n (1 + i) n – 1
P = A = A
i i (1 + i) n
The quantity in brackets is called the ‘uniform series present worth factor’ and is designated
by the functional symbol P/A, i%, n, reads as “P given A at i percent in n interest periods.” Hence the
above equation can be expressed as
P = A (P/A, i%, n)
Finding F when A is given
F
0 1 2 3 n-1 n

A A A A A

A (F/P, i%, 1)
A (F/P, i%, n – 3)
A (F/P, i%, n – 2)
A (F/P, i%, n – 1)

Cash flow diagram to find F given A

(1 + i) n – 1
F = A
i
 The quantity in brackets is called the ‘uniform series compound amount factor’ and is
designated by the functional symbol F/A, i%, n, read as ‘F given A at i percent in n interest periods.’
The above equation can now be written as
F = A (F/A, i%, n)
Finding A when P is given
i
A = P
1 – (1 + i) – n
The quantity in brackets is called the ‘capital recovery factor.’ It will be denoted by the
functional symbol A/P, i%, n which is read as ‘A given P at i percent in n interest periods.’ Hence
A = P (A/P, i%, n)
Finding A when F is given
i
A = F
(1 + i) n – 1
The quantity in brackets is called the ‘sinking fund factor.’ It will be denoted by the functional
symbol A/F, i%, n which is read as ‘A given F at i percent in n interest periods.’ Hence
A = F (A/F, i%, n)
Relation between A/P, i%, n and A/F, i%, n
i i + i (1 + i) n – i (1+ i) –n
+i = .
(1 + i) n – 1 i (1 + i) n – 1 (1 + i) –n
i i
+i =
(1 + i) n – 1 1 – (1 + i) –n
(A/F, i%, n) + i = (A/P, i%, n)
Thus,
Sinking fund factor + i = capital recovery factor
Examples
1. A man wishes to prepare the future of his 10 year old son. Determine the monthly savings that
the man should make with interest of 6% per annum to amount ₱ 500,000 at the time his son will
be 18.
i 0.06
A = F ; i = = 0.005
(1 + i) n – 1 12
n = 8 (12) = 96
0.005
A = 500,000
(1 + 0.005) 96 – 1
A = ₱ 4,070.72

2. A businessman borrowed ₱ 10,000 with interest at the rate of 5% payable annually. The debt will
be paid, principal and interest included, by equal installment at the end of each year for 3 years.
Compute the annual payment.
 i
A = P
1 – (1 + i) – n
0.05
A = 10,000
1 – (1 + 0.05) –3
A = ₱ 3,672.09

3. If ₱ 5,000 is invested at the end of each year for 6 years at an annual interest rate of 7%, what is
the total amount available upon the deposit of the sixth payment?
(1 + i) n – 1
F = A
i
(1 + 0.07) 6 – 1
= 5,000
0.07
F = ₱ 35,766.45

4. Mr. Bean borrows ₱ 600,000 at 12% compounded annually, agreeing to repay the loan in 15
equal annual payments. How much of its original principal is still unpaid after he has made the 8 th
payment?
i
A = P
1 – (1 + i) –n
0.12
A = 600,000
1 – (1 + 0.12) –15
A = ₱88,094.54
(1 + i) n – 1
F = A
i
(1 + 0.12) 8 – 1
F = 88,094.54
0.12
F = ₱ 1,083,535.81
F = P (1 + r) n = 600,000 (1 + 0.12) 8
F = ₱ 1,485,577.91
Original principal still unpaid after the 8th payment (B):
B = 1,485,577.91 – 1,083,535.81
B = ₱ 402,042.10
5. What is the present worth and the accumulated amount of a 10-year annuity paying ₱10,000 at
the end of each year, with interest at 15% compounded annually?
 P F

0 1 2 3 9 10

₱10,000 ₱10,000 ₱10,000 ₱10,000 ₱10,000

₱ 10,000 (P/A, 15%, 10) ₱ 10,000 (F/A, 15%, 10)

P = ₱ 10,000 (P/A, 15%, 10)

1 – (1 + i) – n
P = A
i
1 – (1 + 0.15) –10
P = 10,000 = ₱ 50,188
0.15
F = ₱ 10,000 (F/A, 15%, 10)
(1 + i) n – 1
F = A
i
(1 + 0.15) 10 – 1
F = 10,000 = ₱ 203,037
0.15

6. What is the present worth of ₱ 500 deposited at the end of every three months for 6 years if the
interest rate is 12% compounded semiannually?
Solving for the interest rate per quarter,
2
0.12
4
(1 + i) – 1 = 1+ –1
2
1 + i = (1.06) 0.5
i = 0.0296 or 2.96% per quarter
P = A (P/A, 2.96%, 24)
1 – (1 + i) – n
P = A
i
1 – (1 + 0.0296) – 24
P = 500 = ₱ 8,504.37
0.0296

7. A young woman, 22 years old, has just graduated from college. She accepts a good job and
desires to establish her own retirement fund. At the end of each year thereafter she plans to
deposit ₱2,000 in a fund at 15% annual interest. How old will she be when the fund has an
accumulated value of ₱1,000,000?
1 + i) n – 1
F = A
 i
(1 + 0.15) n – 1
1,000,000 = 2,000
0.15
1,000,000 (0.15)
+ 1 = (1 + 0.15) n
2,000
76 = (1 + 0.15) n
log 76 = n log 1.15
n = 30.99 years, say 31 years
Age when the accumulated value of the fund is ₱1,000,000:
Age = 22 + n = 22 + 31 = 53 years
8. If ₱10,000 is deposited each year for 9 years, how much annuity can a person get annually from
the bank every year for 8 years starting 1 year after the 9 th deposit is made. Cost of money is
14%.
A (P/A, 14%, 8)(P/F, 14%, 9) A(P/A, 14%, 8)
A A A A

0 1 2 3 8 9
0 1 2 7 8

10,000 10,000 10,000 10,000 10,000

10,000 (P/A, 14%, 9)

Using today as the focal date, the equation of value is

A (P/A, 14%, 8)(P/F, 14%, 9) = 10,000 (P/A, 14%, 9)
1 – (1 + 0.14) –8 1 – (1 + 0.14) –9
–9
A (1 + 0.14) = 10,000
0.14 0.14
A (4.63886)(0.30751) = 10,000 (4.94637)
A = ₱ 34,675
Another solution A(P/A, 14%, 8)
A A A A

0 1 2 3 8 9
0 1 2 7 8

10,000 10,000 10,000 10,000 10,000

10,000 (F/A, 14%, 9)

Using 9 years from today as the focal date, the equation of value is
A (P/A, 14%, 8) = 10,000 (F/A, 14%, 9)
1 – (1 + 0.14) -8 (1 + 0.14)9 - 1
A = 10,000
0.14 0.14
 A (4.63886) = 10,000 (16.08535)
A = ₱ 34,675
Another solution
A (F/A, 14%, 8)
A A A A

0 1 2 3 8 9
0 1 2 7 8

10,000 10,000 10,000 10,000 10,000

10,000 (F/A, 14%, 9) 10,000 (F/A, 14%, 9)(F/P, 14%, 8)

Using 17 years from today as the focal date, the equation of value is
A (F/A, 14%, 8) = 10,000 (F/A, 14%, 9)(F/P, 14%, 8)
(1 + 0.14) 8 – 1 (1 + 0.14) 9 – 1
A = 10,000 (1 + 0.14) 8
0.14 0.14
A (13.23276) = 10,000 (16.08535)(2.85259)
A = ₱ 34,675

9. Using a compound interest of 8%, find the equivalent uniform annual cost for a proposed
machine that has a first cost of ₱ 100,000, an estimated salvage value of ₱ 20,000 and an
estimated economic life of 8 years. Annual maintenance will amount to ₱ 2,000 a year and
periodic overhaul costing ₱ 6,000 each will occur at the end of the second and fourth year.
20,000 (P/F, 8%, 8)
20,000

0 1 2 3 4 8 0 1 2 3 4 8

2,000 2,000 2,000 2,000 2,000 A A A A A

100,000 A (P/A, 8%, 8)
6,000
6,000
6,000 (P/F, 8%, 2)
6,000 (P/F, 8%, 4)
2,000 (P/A, 8%, 8)

Let A = the equivalent uniform annual cost

Using today as the focal date, the equation of value is
A (P/A, 8%, 8) = 100,000 + 2,000 (P/A, 8%, 8) + 6,000 (P/F, 8%, 2) + 6,000 (P/F, 8%, 4)
– 20,000 (P/F, 8%, 8)
1 – (1 + 0.08) –8 1 – (1 + 0.08) –8
A = 100,000 + 2,000 + 6,000 (1 + 0.08) –2
0.08 0.08
 + 6,000 (1 + 0.08) –4 – 20,000 (1 + 0.08) –8
A (5.74664) = 100,000 + 11,493.28 + 5,144.03 + 4,410.18 – 10,805.38
A = ₱ 19,183.75
CE Board Nov. 2000
A man deposited ₱100,000 annually for 10 years and waited for another 10 years. If money is worth
8% after tax, find the amount after 20 years.
F2
F1
F 1 (F/P, 8%, 10)

0 1 2 3 9 10 11 12 13 14 19 20

A A A A A
A (F/A, 8%, 10)

(1 + i) n – 1 (1 + 0.08)10 – 1
F1 = A = 100,000
i 0.08
F1 = ₱ 1,448,656.25
F2 = 1,448,656.25 (1 + 0.08)10
F2 = ₱ 3,127,540.19 - - - (amount after 20 years)
OR,
F2 = A (F/A, 8%, 10)(F/P, 8%, 10)
(1 + i) n – 1 (1 + 0.08)10 – 1
n
F2 = A (1 + i) = 100,000 (1 + 0.08)10
i 0.08
F2 = ₱ 3,127,540.18
CE Board Nov. 2005
A self-employed engineer wants to get a lump sum of 5 million pesos when he retires at the end of
25 years. How much in pesos should he deposit every end of 3 months in a fund that gives an
interest of 10% compounded quarterly to satisfy his desire?

F = ₱ 5,000,000

0 1 2 3 90 91 92 93 94 95 96 97 98 99 100

A A A A A A A A A A A A A A
A (F/A, i%, n)

F = A (F/A, i%, n)
(1 + i) n – 1 0.10
F = A ; n = 4 (25) = 100 ; i = = 0.025
i 4
(1 + 0.025)100 – 1
 5,000,000 = A
0.025
A = ₱ 11,559.39
OR
A = F (A/F, i%, n)
i 0.10
A = F ; n = 4 (25) = 100 ; i = = 0.025
n
(1 + i) – 1 4
0.025
A = 5,000,000
(1 + 0.025) 100 – 1
A = ₱ 11,559.39

CE Board May 2007

A man wants to buy a car by paying a down payment of ₱100,000 and the balance to be paid at
₱300,000 at the end of the second year and ₱600,000 at the end of the 5 th year. The rate of interest
is 18% compounded annually.
a. What is the present worth of all the payments?
b. Find the lump sum of all the payments at the end of the 5th year.
c. If instead he will pay his balance by a monthly payment at the rate of 1.5% monthly, how
much is his monthly payment until the 5th year?
Present worth of all the payment:

0 1 2 3 4 5

₱100,000 ₱300,000 ₱600,000

300,000 (P/F, 18%, 2)

600,000 (P/F, 18%, 5)

P

P = 100,000 + 300,000 (1 + 0.18) –2 + 600,000 (1 + 0.18) –5

= 100,000 + 215,455.33 + 262,265.53
P = ₱ 577,720.86
Lump sum after 5 years
F
0 1 2 3 4 5

₱100,000 ₱300,000 ₱600,000

300,000 (F/P, 18%, 3)

100,000 (F/P, 18%, 5)

F = 100,000 (F/P, 18%, 5) + 300,000 (F/P, 18%, 3) + 600,000

= 100,000 (1 + 0.18) 5 + 300,000 (1 + 0.18) 3 + 600,000
= 228,775.78 + 492,909.60 + 600,000
F = ₱ 1,321,685.38
 Monthly payment of balance:
Balance, P = 300,000 (1 + 0.18) –2 + 600,000 (1 + 0.18) –5
= 215,455.33 + 262,265.53
P = ₱ 477,720.86
P = ₱ 477,720.86

0 1 2 3 4 5 59 60

A A A A A A A

A = P (A/P, i%, n) ; n = 12 (5) = 60 ; i = 1.5%

i
A = P
1 – (1 + i) – n
0.015
= 477,720.86
1 – (1 + 0.015) –60
A = ₱ 12,130.97
CE Board May 2015
In five years, ₱ 1.8 million will be needed to pay for the building renovation. In order to generate this
sum, a sinking fund consisting of three annual payments is established now. For tax purposes, no
further payments will be made after three years. What payments are necessary if money is worth
15% per annum?
F 2 = ₱ 1,800,000
F1 F1 (F/P, 15%, 2)

0 1 2 3 4 5

A A A
A (F/A, 15%, 3)

F1 = A (F/A, 15%, 3)
(1 + i) n – 1 ( 1 + 0.15) 3 – 1
F1 = A = A = 3.4725 A
i 0.15
F2 = F1 (F/P, 15%, 2)
F2 = F1 (1 + i) n
1,800,000 = 3.4725 A (1 + 0.15) 2
A = ₱ 391,953.52
CE Board May, 2019
A printing machine costs ₱ 400,000 to purchase with a life of 10 years with no salvage value. If the
rate of interest is 10% per annum, compounded annually, compute the equivalent annual cost of the
machine if it will cost ₱ 100,000 per year to operate.
 0 1 2 3 9 10 0 1 2 3 9 10

100,000 100,000 100,000 100,000 100,000 A A A A A

400,000 A (P/A, 10%, 10)

100,000 (P/A, 10%, 10)

Let A = the equivalent uniform annual cost

Using today as the focal date, the equation of value is
A (P/A, 10%, 10) = 400,000 + 100,000 (P/A, 10%, 10)
1 – (1 + 0.10) –10 1 – (1 + 0.10) –10
A = 400,000 + 100,000
0.10 0.10
A (6.144567) = 400,000 + 614,456.71
A = ₱ 165,098.16