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ME005 ENGINEERING

ECONOMICS
ANNUITY PART 1

Engr. Christian Roice Tayag


Annuity
 Annuity – it is a series of equal cash flows
occurring each period over a range of periods.

 Types of Annuity:
1. Ordinary Annuity
2. Deferred Annuity
3. Annuity Due
4. Perpetuity
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. It is also referred as annuity-immediate.

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

A A A A Where:
F P = present worth
A = series of periodic equal payments
P n = number of interest period
i = interest rate per interest period
What is the current value of a $50 payment to be made at
the end of each of the next three years if the prevailing rate
of interest is 7% compounded annually?
What is the present worth of P500 deposited at the end of every three months
for 6 years if the interest rate is 12% compounded semi-annually.
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.

Where:
k = number of deferred periods
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.

𝟏 − (𝟏 + 𝐢)−𝐧
𝐏′ = 𝐀
𝐢

4. Obtain the final value.


Where:
−𝒌
𝐏 = 𝐏′(𝟏 + 𝒊) k = number of deferred periods
Sample Problems on
Deferred Annuity
1. Find the value of x in the cash flow diagram, given that would make
the equivalent present worth of the cash flow diagram to Php22,000
and interest rate is at 13% per year.

1, 000 per 5x
year

0 2
1 3 4 5 6 7 8 9 10 11

22, 000
Sample Problems on
Deferred Annuity
2. Determine the uniform annual payments which would be equivalent to the
cash flow diagram given. Interest rate of 12% per year.

0 1 2 3 4 5 6 7 8 9
years

1,200
2,000

3,000

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