Professional Documents
Culture Documents
ANNUITIES
Capital Budgeting
Capital budgeting is a process used by
companies for evaluating
investments/expenditures.
PV =
FV
(1+r)^n
FV = Future Value
PV = Present Value
r= Rate of interest
n = term in years
Example
What is the balance in an account at the end of
10 years if $2,500 is deposited today and the
account earns 4% interest compounded
annually?
FV = PV (1+r)^n
= $2,500 (1+0.04)^10
= $3,700.61
Example
How much I have to deposit in an account today
that pays 12% interest, compounded annually,
so that I have a balance of $20,000 in the
account at the end of 10 years.
PV = FV
(1+r)^n
PV = $20,000
(1+0.12)^10 = $6,439.46
Annuity
Annuity is a series of (usually) equal
payments made at (usually) equal intervals of
time. EX of annuity:
Shop rentals
Insurance policy premium
regular deposits to saving accounts
installment payments
Classes of Annuity
FVa(normal)
= PM
(1+r/n)^nt 1
r/n
Classes of Annuity
FVa(due)
= PM
(1+r/n)^nt 1
r/n
x (1+r)
Example
Investment was set up and quarterly payments
of $1,500 have to be made for 6 years at the
end of each month. If annual interest rate is
16%, what is the value of investment after 6
years.
Sinking Fund
If a person wants to purchase
asset/ordinary annuity to guarantee
certain amount of money in future, person
can determine the amount of payment by
using sinking fund payment method
FV x r
[ (1+r)^n 1]
Example
Jeannette, owner of Jeanettes Health
Club, wants to purchase new pec-deck
machine in 3 years. The cost of machine
is $900. Find the sinking fund method if
the interest rate is 10% annually.
SF=
FV x r
[ (1+r)^n 1]
FV- $900
r- 10%x1 , 0.1 x 1
n- 3x1
$900x0.1/((1+0.10)^3-1) = $271.90
Amortization
The process of paying off a loan (plus
interest) by making a series of regular,
equal payments is called amortization,
and such a loan is called an amortized
loan.
Amortization
Table value for Interest factor for mortgage
Years
7%
8%
9%
10%
10
11.61
12.14
12.67
13.22
20
7.75
8.37
9.00
9.66
30
6.65
7.34
8.05
8.78
1st Month
2nd Month
3rd Month
Interest
Amount Paid
to Principal
Balance of
Principal
Principle
1000
x table value
Example
1. A person purchased a home with $80,000
loan at 8% for 20 years. Make amortization
table for 3 months.
Find amortization for month 1
I = Prt
= $80,000x0.08x1/12
= $533.33
Example
Monthly payment
MP=
80,000 x 8.27
1,000
= 669.6
Amount paid to principal
MP-I
669.6- 533.33
= 136.27
Example
Balance of principle (Principle Amt paid to
principle)
80,000-136.27 = 79,863.73
Month 2
I=Prt
= 79,863.73 x 0.08 x 1/12
= 532.42 continue step 2 and 3
THE END