Tutorial work
Week 3
Chapter 5.4 – Annuities
• Annuity –A finite sequence of payments made at a fixed period over a given interval.
• Ordinary Annuity –payments are made at the end of each period. e.g., wages
• Annuity due - payments are made at the beginning of each period. e.g., rent payments.
NB: If not specified, then it is an ordinary annuity.
Questions:
1. Find the present value of the given ordinary annuity R600 per year for six years at the rate of 6%
compound annually.
2. Find the present value of the given ordinary annuity, R1000 every month for three years at the
monthly rate of 1% compounded monthly.
3. Find the future value of the given ordinary annuity R3000 per month for four years at the rate of
9% compounded monthly.
4. Find the future value of the given ordinary annuity R600 per quarter for four years at the rate of
8% compounded quarterly.
5. Find the present value of the given annuity due R900 paid at the beginning of each six-month
period for seven years at the rate of 8% compounded semiannually.
6. Find the future value of the given annuity due R1200 each year for 12 years at the rate of 8%
compounded annually.
7. An annuity consisting of equal payments at the end of each quarter for three years is to be
purchased for R15,000. If the interest rate is 4% compounded quarterly, how much is each
payment?
8. If R10,000 is used to purchase an annuity consisting of equal payments at the end of each year
for the next four years and the interest rate is 6% compounded annually, find the amount of
each payment.
9. For an interest rate of 4% compounded monthly, find the present value of an annuity of R150 at
the end of each month for eight months and R175 thereafter at the end of each month for a
further two years.
10. In 10 years, a R40,000 machine will have a salvage value of R4000. A new machine at that time is
expected to sell for R52,000. In order to provide funds for the difference between the
replacement cost and the salvage value, a sinking fund is set up into which equal payments are
placed at the end of each year. If the fund earns 7% compounded annually, how much should
each payment be?
11. In order to replace a machine in the future, a company is placing equal payments into a sinking
fund at the end of each year so that after 10 years the amount in the fund is R25,000. The fund
earns 6% compounded annually. After 6 years, the interest rate increases, and the fund pays 7%
compounded annually. Because of the higher interest rate, the company decreases the amount
of the remaining payments. Find the amount of the new payment. Round your answer to the
nearest rand.