836 MATHEMATICS

ANNUITY
17
17.1 Introduction
We already know how to compute compound interest of an amount deposited in a financial
institution. But, in general, people cannot save a large sum at one time for future
commitments, obligations and responsibilities like higher education of children, marriages
of children, to purchase a house, financial security for old age etc. Therefore, people save
money by depositing relatively small sum of money at different times in certain financial
institutions. On the other hand, people buy some items like house, car, television etc. on
loan and repay in instalments. All these transactions come under the heading Annuity.
In this chapter, we will discuss about the different types of annuities, viz., ordinary
annuity, annuity due, deferred annuity and sinking fund.
17.2 Annuity
A sequence of payments of equal amount made at equal intervals of time is called an annuity.
Examples of annuities are payments to a recurring deposit account, repayment of housing
loan in monthly instalments, monthly/ half-yearly insurance premium payments, etc. Let us
now have a look on some basic terms in annuity .
1 Periodic payment The size of each payment of an annuity is called the periodic payment
of the annuity. For example, if an insurance policy premium of Rs 5000 is paid in January
every year, then Rs 5000 is the periodic payment of the annuity.
2 Payment period The time period between two successive payment dates of an annuity is
called its payment period (or, payment interval). The payment period can be annual, half-
yearly, quarterly, monthly, daily, etc.
3 Term The total time from the beginning of the first payment period to the end of the last
payment period is called the term of the annuity.
If the premium of an LIC policy is to be paid every year in the month of June for twenty
years, then the payment period is yearly and the term of the annuity is twenty years.
PART C (CHAPTERS 17 19)
ELECTIVE - FOR NONSCIENCE STUDENTS
ANNUITY 837
4 Amount of an annuity The amount (future value) of an annuity is the total amount
which would be due at the end of the term of the annuity when each instalment paid is kept
on compound interest till the end of the term. For example, a person deposits Rs 100 per
month in his Savings Bank Account for 6 years and at the end of six years he gets Rs 8000.
Then, Rs 8000 is the amount (future value) of the annuity.
5 Present value of an annuity The present value of an annuity is the current value of a
sequence of equal periodic payments made over a certain period of time. For example,
Sunil pays Rs 1000 per month for one year for a loan of Rs 10000. Then, Rs 10000 is the
present value of the annuity.
17.3 Types of Annuity
(i) Ordinary annuity An annuity in which the payments are made at the end of each
payment period is called ordinary annuity, e.g., repayment of housing loan and car loan of
equal instalments.
(ii) Annuity due An annuity in which payments are made at the beginning of each period
is called annuity due. Payments of the premium of LIC policies and recurring deposit
payments in Banks or Post Offices are the examples of annuity due.
(iii) Deferred annuity It is an annuity in which payments start after the lapse of specified
number of payment periods. Pension Plan of Life Insurance Corporation of India is an
example of deferred annuity.
Thus, an annuity has the following characteristics:
(i) Periodic receipts/ payments (or instalments) are of the same amount.
(ii) Instalments are due at the end or beginning of each period.
(iii) The time interval between two consecutive or successive instalments is the same.
(iv) Interest is successively compounded at the end of each interval.
In the next sections, we shall derive formulae for the amount and present values of
different types of annuities.
17.4 Ordinary Annuity
17.4.1 Amount of an ordinary annuity The amount of an ordinary annuity is the sum of
all the payments made, plus the interest on them at the end of the term of the annuity.
Let us consider an ordinary annuity of Rs R per period for n periods at a rate of
interest r per rupee per period. The first payment is made at the end of the first period and
so on. Now, we consider the following Fig. 17.1 to determine the future amount of each
instalment and the amount of annuity.
838 MATHEMATICS
Present payment of Rs R Amount at the end of
n
th
period (in Rs)
1
st
( ) R 1
1
+

r
n
2
nd
( ) R 1
2
+

r
n
. . . . . .
. . . . . .
( ) n
th
1
( ) R 1+ r
n
th
(last payment) R
Since the payments are made at the end of each period, these do not earn interest for the
period at the end of which these are originally deposited. Hence, the first payment will earn
interest at the rate r per rupee per period compounded for (n 1) periods and so on. Thus,
the amount A of the annuity is given by
A = R + R(1 + r) + R(1 + r)
2
+ . . . . . . . . . . . . . . . + R(1 + r)
n1
Since it is a geometric series of n terms with first term R and common ratio (1 + r), we have
( ) ( )
A R R
+
+

1
]
1
+

1
]
1
1 1
1 1
1 1 r
r
r
r
n n
If the periodic payment is one rupee, the amount of the annuity is
( ) 1 1 + r
r
n
=
S
n r |
. The
symbol S
n r |
is read as S angle n at r. The amount of an ordinary annuity of Rs R per payment
period for n periods at the rate of interest r per rupee per period is given by A = R S
n r |
.
Note
1. The values of S
n r |
are computed for various rates and time periods and compiled in the
form of tables called annuity tables*.
Period
0 n
th
( 1) n
th
R R R R R
Term of Ordinary Annuity
Fig. 17.1
1st 2nd 3rd
* Annuity tables are given at the end.
ANNUITY 839
2. Most of the problems can be solved by using annuity tables as well as logarithmic tables
though the answers may differ a little. It is better to use annuity tables as it reduces the
calculation work. But, in order to give the practice of using both types of tables to the
students, we would be solving some questions by using annuity tables while others by
using logarithmic tables.
Example 1 Find the amount of an ordinary annuity of Rs 400 payable at the end of every 3
months for 6 years at 8% per annum compounded quarterly.
Solution We have A = R S
n r |
Here R = 400, r =
0 08
4
0 02
.
.
and n = 6 4 = 24
Therefore A = 400 S
24 0 02 | .
= 400 30.4219 = 12168.76
Hence, the amount of the annuity is Rs 12168.76.
Alternative Method
We have
( )
A R
+

1
]
1
1 1 r
r
n
Here R = 400, r =
0 08
4
0 02
.
.
, and n = 6 4 = 24
Therefore
( )
A
+

1
]
1 400
1 0 02 1
0 02
24
.
.
Let x = (1.02)
24
Then log x = 24 log 1.02
= 24 0.0086 = 0.2064

x = antilog 0.2064 = 1.608

Then, we have A = 400
1608 1
0 02

.
.
840 MATHEMATICS
=
400
0 608
0 02

.
.
= 12160
Hence, the amount is Rs 12160.
Note In Example 1, we find a difference of Rs 8.76 in the amounts obtained with two
different methods. Both the amounts are approximate amounts hence this difference
is negligible.
Example 2 What amount should be set aside at the end of each year to get Rs 148970 at the
end of 8 years at 5% per annum compounded annually. (Use log table)
Solution We have
( )
A R
+

1
]
1
1 1 r
r
n
Here A = 148970, r = 0.05 and n = 8
Therefore 148970 =
( )
R
1 0 05 1
0 05
8
+

1
]
1
.
.
=
( )
R
105 1
0 05
8
.
.

1
]
1
Let x = (1.05)
8
Then log x = 8 log 1.05 = 8 0.0212 = 0.1696

x = antilog 0.1696 = 1.478

Then we have 148970 = R
1478 1
0 05
.
.
or R

148970 0 05
0 478
15582 64
.
.
.
Hence, Rs 15582.64 has to be set aside at the end of each year.
17.4.2 Present value of an ordinary annuity In certain instances, one may like to determine
the current value V of a sequence of equal periodic payments that will be made over a
certain period of time. The amount V is referred to as the present value of an annuity. The
present value or capital value of an annuity is the sum of the present values of all the
payments. In order to obtain the general formula for the present value of an annuity, let us
consider an annuity of n payments of Rs R each, where the rate of interest per period per
rupee is r and the first payment is due at the end of first period (Fig. 17.2),
ANNUITY 841
where the value of each instalment is Rs R and V
1
, V
2
, . . ., V
n
are the present values of the
first, second, . . .,

n
th
payments, respectively, of an annuity.
The present value of the first payment = V
R
1
1

+ r
The present value of the second payment =
( )
V
R
2 2
1

+ r
. . . . . . . . .
. . . . . . . . .
The present value of the n
th
payment =
( )
V
R
n n
r

+ 1
(Fig. 17.2)
Thus V = V
1
+ V
2
+ . . . + V
n

( ) ( )

+
+
+
+ +
+
R R R
1 1 1
2
r r r
n
...
Since it is a geometric series of n terms with first term
R
1+ r
and common ratio
1
1+ r
, we get
( )
( )
V
R
R
+

1
]
1
1
1
1

1
]
1

1
1
1
1
1
1
1
1 1
r
r
r
r
r
n
n
Thus, the present value of an ordinary annuity of Rs R per payment period for n periods
at the rate of interest r per rupee per period is given by

( )
V R
+

1
]
1

1 1 r
r
n
= R a
n r |
.
Fig. 17.2
0 n
th
( 1) n
th
R=V (1+ )
1
r R=V (1+ )
2
r
2
R=V (1+ )
n1
r
n1
R = V (1+ )
n
r
n
Term of Ordinary Annuity
1st 2nd
Period
842 MATHEMATICS
The symbol a
n r |
(read a angle n at r) represents the present value of an ordinary annuity
of rupee one per payment for n periods at the rate r per period.
Note The values of a
n r |
are computed for various rates and time periods and compiled in
the form of tables called annuity tables.
Example 3 Find the present worth of an ordinary annuity of Rs 1200 per annum for
10 years at 12 % per annum compounded annually. (Use log table)
Solution We have
( )
V R
+

1
]
1

1 1 r
r
n
Here R = 1200, n = 10, r = 0.12
Therefore
( )
V
+

1
]
1

1200
1 1 012
10
.
r
( )

1
]
1

1200
1 112
012
10
.
.
Let x = (1.12)
10
Then log x = 10 log 1.12
= 10 0.0492 = 0.492 = 1 508 .
Hence x = antilog 1 508 . = 0.3221
Thus, we have V

1200
1 0 3221
012
.
.

1200 0 6779
012
6779
.
.
Hence, the present value of the ordinary annuity is Rs 6779.
Example 4 A woman borrows Rs 30000 at 6% effective and promises to repay the loan in
20 equal annual instalments beginning at the end of the first year. Find the value of each
instalment. (Use annuity table)
Solution We have V = Ra
n r |
Here V = 30000, r
6
100
0 06 . , n = 20
Therefore 30000 = R a
20 0 06 | .
= R 11.4699

R =
30000
114699
261554
.
.
Hence, the value of each instalment is Rs 2615.54.
ANNUITY 843
EXERCISE 17.1
1. Find the future value or amount of the following ordinary annuities:
(a) Rs 1000 a year for 5 years at 7% per year compounded annually. (Use log table)
(b) Rs 500 per quarter for 10 years at 8% per year compounded quarterly. (Use annuity table)
(c) Rs 4000 each six months for 15 years at 5% per year compounded half-yearly. (Use log table)
2. Find the amount of an annuity consisting of payments of Rs 500 made at the end of every
3 months for 4 years at the rate of 6% per annum compounded quarterly. (Use annuity table)
3. Mr. X deposits in a finance company Rs 1000 at the end of each month. The company pays
interest at 12% per annum, compounded monthly. What will be his total amount at the end of
2 years? (Use annuity table)
4. A bank pays 6% interest per year compounded quarterly. What equal deposits have to be made
at the end of each quarter for 3 years, if a person wants to have Rs 15000 at the end of 3 years?
(Use log table)
5. Mrs Sulochana wants to collect Rs 600000 for a house at the time of her retirement which is due
after 16 years. How much should she deposit at the end of each year, in a company paying
compound interest at 15% per annum, in order to receive the said amount. (Use log table)
6. How much money must be deposited at the end of each year if the objective is to accumulate
Rs 20000 by the time of eighth deposit? Assume that interest is earned at the rate of 10% per
year compounded annually. (Use log table)
7. Calculate the present value of an annuity of Rs 5000 per annum for 12 years, the interest being
4% per annum compounded annually. (Use annuity table)
8. Find the present value of an annuity of Rs 800 payable at the end of each 6 months for 5 years,
if money is worth 6% per annum converted semi-annually. (Use annuity table)
9. Find the present value of an annuity which pays Rs 200 at the end of each 3 months for 10 years,
assuming money to be worth 16% per annum compounded quarterly. (Use log table)
10. Find the present worth of an ordinary annuity of Rs 2400 per annum for 12 years at 16% per
annum compounded annually. (Use log table)
11. A loan of Rs 10000 is repaid at 5% per annum compound interest in 12 equal annual instalments
beginning at the end of the first year. Find the amount of each instalment. (Use annuity table)
12. A man purchases a house and takes a mortgage on it for Rs 800000 to be paid off in 12 years by
equal annual payments. If the interest rate is 9% per annum compounded annually, what
amount will be required to pay each year. (Use log table)
13. A house is sold for Rs 220000 down payment and 12 quarterly payments of Rs 10000 each. Find
the cash price of the house, if money is worth 16% per annum compounded quarterly. (Use
log table)
(Hint : cash price = 220000 + V)
844 MATHEMATICS
14.M. Khan buys a car paying Rs 20000 down and promising to pay Rs 2000 every month for next 18
months. If the seller charges interest at 18% per annum compounded monthly, what is the cash
price of the car? (Use log table)
17.5 Annuity Due
17.5.1 Amount of an annuity due In this section, we will find the amount (future value) of
an annuity when the payments are made at the beginning of each period.
To develop a result for the amount (future value) of an annuity due, consider a sum of
Rs R paid into an account at the beginning of each period for n periods at the rate of r per
rupee per period (Fig. 17.3).
Fig. 17.3
0
R R R R
n
th
R R R
Term of Annuity Due
1st 2nd 3rd
Period th th
Present payment of Rs R Amount at the end of
n
th
period (in Rs)
1
st
( ) R 1+ r
n
2
nd
( ) R 1
1
+

r
n
. . . . . .
. . . . . .
( ) n
th
1 ( ) R 1
2
+ r
n
t h
( ) R 1+ r
It is obvious that the first payment will earn interest at the rate of r per rupee per period
compounded for n periods and so on. Thus, the amount A of the annuity due is given by
A = R(1 + r) + R(1 + r)
2
+ . . . + R(1 + r)
n
( )
( )
+
+
+

1
]
1 R 1
1 1
1 1
r
r
r
n
( )

1
]
1
+
R
1 1
1
1
r
r
n
= R S
n r +

_
,

1
1
|
ANNUITY 845
Example 5 At the beginning of each quarter, Rs 2000 is deposited into a savings account
that pays 8% per annum compounded quarterly. Find the balance in the account at the end of
3 years. (Use annuity table)
Solution We have A = R S
n r +

_
,

1
1
|
Here R = 2000, r
0 08
4
0 02
.
. and n = 12
Therefore A = 2000 S
130 02
1
| .

_
,

[ ] 2000 14.6803 1
2000 13 6803 . = 27360.60
Thus, the balance in the account at the end will be Rs 27360.60.
Example 6 An annuity of equal payments at the beginning of every six months for 8 years
is to be calculated for Rs 20000. If the interest rate is 18% per annum compounded half-
yearly, how much is each payment? (Use log table)
Solution We have
( )
A R
+

1
]
1
+
1 1
1
1
r
r
n
Here A = 20000, r
018
2
0 09
.
. , n = 8 2 = 16
Therefore 20000 =
( ) ( )
R R
1 0 09 1
0 09
1
109 1
0 09
1
17 17
+

1
]
1

1
]
1
.
.
.
.
Let x = (1.09)
17
. Then
log x = 17 log 1.09 = 17 0.0374 = 0.6358
Hence x = antilog 0.6358 = 4.323
Thus, we have 20000 =
R
4 323 1
0 09
1
.
.

1
]
1

1
]
1
R
3323
0 09
1
.
.
( ) R 36 92 1 . = R 35.92
846 MATHEMATICS
giving
R ! !
20000
35 92
556 79
.
.
Hence, each payment is of Rs 556.79.
17.5.2 Present value of an annuity due The present value of an annuity due is the sum of
the present values of all the payments made in the beginning of each period. To obtain a
formula for the present value of an annuity due, let us consider an annuity due of Rs R per
period for n periods at a rate of r per rupee per period, when the first payment is due in the
beginning of first period.
The present value of the first payment = R
The present value of the second payment =
R
1" r
. . . . . . . . .
. . . . . . . . .
The present value of the n
th
payment
=
R
1+r
n
# $
%1
Thus, the present value V of the annuity due of n payments of Rs R each at a rate of interest
r per rupee per period is given by
V R
R R R
! "
"
"
" # $
" "
" # $
%
1
1 1
2 1
r
r r
n
...

!
%
" # $
%
"
&
'
(
(
(
(
(
)
*
+
+
+
+
+
R
1
1
1
1
1
1
r
r
n

! " # $
% " # $
" %
&
'
(
(
)
*
+
+
%
R 1
1 1
1 1
r
r
r
n

!
" # $% " # $
&
'
(
(
)
*
+
+
% "
R
1 1
1
r r
r
n

! "
% " # $
&
'
(
(
)
*
+
+
% % # $
R 1
1 1
1
r
r
n
,
or, equivalently
V R ! "
# $
%
1
1
a
n r |
.
ANNUITY 847
Example 7 What is the present value of an annuity due of Rs 1000 payable quarterly for 6
years, if the money is worth 8% per annum compounded quarterly? (Use annuity table)
Solution We have V R +

_
,

1
1
a
n r |
Here R = 1000, r
0 08
4
0 02
.
. , n = 6 4 = 24
Therefore V = 1000
1
230 02
+

_
,

a
| .
( ) + 1000 1 18 2922 . ( ) 1000 19.2922 = 19292.20
Thus, the present value of the annuity is Rs 19292.20.
Example 8 What equivalent payments made at the beginning of each month for 8 years will
pay for a house priced at Rs 500000, if money is worth 12% per annum compounded monthly?
(Use log table)
Solution We have
( )
( )
V R +
+

1
]
1
1

1
1 1
1
r
r
n )
Here V = 500000, r
012
12
0 01
.
. , n = 8 12 = 96
Therefore
( )
( )
500000 1
1 1 0 01
0 01
96 1
+
+

1
]
1
1

R
.
.
( )
+

1
]
1

R 1
1 101
0 01
95
.
.
Let x = (1.01)
95
Then log x = 95 log 1.01 = 95 0.0043
= 0.4085 = 1 5915 .
Therefore x = antilog 1 5915 . = 0.3904
848 MATHEMATICS
Thus, we have
500000 1
1 0 3904
0 01
+

1
]
1
R
.
.
i.e.
+

1
]
1
R 1
0 6096
0 01
.
.
( ) + R 1 60 96 .
giving R
500000
6196 .
= 8069.72
Hence, the required payment is Rs 8069.72.
EXERCISE 17.2
1. Find the amount at the end of 6 years of an annuity of Rs 5000 payable at the beginning of each
year if money is worth 5% per annum compounded annually. (Use annuity table)
2. At the beginning of each month, Rs 500 is deposited into a savings account in a post office that
pays 12% per year compounded monthly. Find the balance in the account at the end of 6 years.
(Use log table)
3. A sum of Rs 8000 is deposited into an account at the beginning of each year over a period of
4 years at the rate of 8% per annum compounded annually. Find the future value of the annuity.
(Use annuity table)
4. A bank pays interest at the rate of 6% p.a. (per annum) compounded quarterly. Find how much
should be deposited in the bank at the beginning of each quarter for 10 years in order to
accumulate Rs 16000. (Use annuity table)
5. Determine the half-yearly payments for a 10 years term for an annuity due having future value
Rs 10000, if the money is worth 6% p.a. compounded semi-annually. (Use log table)
6. A bank pays interest 8% p.a. compounded quarterly. Find how much should be deposited in the
bank at the beginning of each quarter in order to accumulate Rs 12000 in 5 years? (Use log table)
7. Find the present value of an annuity of Rs 15000 payable at the beginning of each six months for
10 years if money is worth 6% per annum compounded semi-annually. (Use log table)
8. A person buys a house for which he agrees to pay Rs 5000 at the beginning of each month for
5 years, the first instalment being paid immediately. If money is worth 6% per annum compounded
monthly, what is the cash price of the house? (Use log table)
9. The premiums on an insurance policy are Rs 600 quarterly, payable at the beginning of each
quarter for a period of 15 years. If the interest rate is 6% per annum compounded quarterly, what
is the amount of sum insured. (Use log table)
ANNUITY 849
10. Determine the monthly payments over a period of 5 years for an annuity due having a present
value of Rs 50000, if money is worth 9% per annum compounded monthly. (Use log table)
(Hint : log 1.0075 = log
2.0150
2
)
11. What equal payments made at the beginning of each year for 10 years will pay for a piece of land
priced at Rs 400000, if money is worth 7% per annum compounded annually. (Use log table)
12. A man buys a car worth Rs 200000 and he agrees to repay in 20 equal half-yearly instalments. If
the first instalment is paid immediately, calculate the value of each instalment if the money is
worth 6% per annum compounded half-yearly. (Use annuity table)
17.6 Deferred Annuity
In a deferred annuity the first payment is postponed until the expiry of a certain specified
period, if an annuity consisting of n payments begins after m periods and then the payments
are made regularly at the end of each period for n periods, the annuity is said to be deferred
annuity of n payments, deferred m periods.
The length of time between now and the beginning of the term of the deferred annuity is
called the interval of deferment (Fig. 17.4), which ends one period before the first payment
is due.
17.6.1 Amount of a deferred annuity The amount of a deferred annuity is the value of the
annuity at the end of its term and it does not depend on the deferment interval. Thus, if a
deferred annuity consists of n payments of Rs R each at the rate of r per rupee per period
and the annuity is deferred for m periods, then the amount A of this annuity is given by
( )
A R
+

1
]
1
1 1 r
r
n
RS
n r |
which is the amount of an ordinary annuity of n payments of Rs R each at the rate of r per
rupee per period.
Fig. 17.4
Period
( +1) m
th
( +2) m
th
( + ) m n
th
m
th
n
th
1st 2nd 3rd
Term of Deferred Annuity
Interval of Deferment
1st 2nd 3rd
850 MATHEMATICS
Example 9 An annuity consists of 8 annual payments of Rs 1500 each, the first being made
at the end of 5 years. Find the amount of this annuity, if money is worth 6% per annum
compounded annually. (Use annuity table)
Solution We have A= RS
n r |
Here R = 1500, r = 0.06, n = 8
Therefore A 1500 S
8 0 06 | .
= 1500 9.8975 = 14846.25
Hence, the amount of the deferred annuity is Rs 14846.25.
17.6.2 Present value of a deferred annuity The present value of a deferred annuity is the
value of the annuity at the beginning of the interval of deferment.
To develop a formula for the present value of a deferred annuity, deferred m periods, let
us consider an annuity of n payments of Rs R each at the rate of interest r per rupee per
period and the first payment is due at the end of (m + 1)
th
payment interval.
Since the first payment of Rs R is made at the end of (m + 1)
th
payment interval, we have
the present value of the first payment =
( )
R
1
1
+
+
r
m
The present value of the second payment =
( )
R
1
2
+
+
r
m
. . . . . . . . .
. . . . . . . . .
The present value of n
th
payment =
( )
R
1+
+
r
m n
Therefore, the present value V of the annuity is given by

( ) ( ) ( )
V
R R R

+
+
+
+ +
+
+ + +
1 1 1
1 2
r r r
m m m n
...
( ) ( )

+
+
+
+ +
+

1
]
1
+
R R R
1 1 1
2
r r r
m n
...
( ) ( )

+
+
+
+ +
+

1
]
1
R R R
1 1 1
2
r r r
m
...
( )
( )
( )

1
]
1
1

1
]
1
+
R R
1 1 1 1 r
r
r
r
m n m
ANNUITY 851
= R a a
m n r mr +

_
,

| |
.
Note Write
( ) ( )
( )
[ ]
V
R
+ +
+
r
r r
m m n
1 1 when using log table.
Example 10 Find the present value of a sequence of annual payments of Rs 6000 each, the
first being made at the end of 5 years and the last at the end of 12 years, if money is worth
6% per annum compounded annually. (Use annuity table)
Solution We haveV = R a a
m n r mr +

_
,

| |
Here R = 6000, m = 4, m + n = 12, r = 0.06
Therefore
V 6000

a a
12 0 06 4 0 06 | . | .

_
,

[ ] 6000 8 3838 34651 . .

= 6000 4.9187 = 29512.20
Hence, the present value of the annuity is Rs 29512.20.
Example 11 A house is sold for Rs 50000 down and 10 semi-annual payments of
Rs 5000 each, the first due 3 years hence. Find the cash price of the house if money is worth
6% per annum compounded semi-annually. (Use annuity table)
Solution The cash price of the house = Rs (50000 + V), where V is the present value of the
deferred annuity.
We have the formula V = R a a
m n r mr +

_
,

| |
Here R = 5000,
r
0 06
2
0 03
.
.
, m 2
1
2
2 5, n = 10, m + n = 15
Therefore V R

_
,

a a
150 03 50 03 | . | .
[ ] V 5000 119379 4.5797 .
= 5000 7.3582 = 36791
Hence, the cash price of the house is Rs (50000 + 36791) i.e., Rs 86791.
852 MATHEMATICS
17.7 Sinking Fund
A sinking fund is a fund that is accumulated for the purpose of paying off a financial obligation
at some future designated date through regular equal payments. The use of sinking funds is
more common in business where these are used to plan ahead for anticipated expenses like
replacement of plant or machinery, modernisation of a manufacturing plant, expansion of
business, redemption of debentures etc.
Note If Rs R be the regular payments in the sinking fund to be used after n periods then the
amount A in the sinking fund is the amount of an ordinary annuity of equal payments of
Rs R for n periods, i.e.,
( )
A R R S
+

_
,

1 1 r
r
n
n r |
, where r is the rate of interest per
rupee per period.
Example 12 A company establishes a sinking fund to provide for payment of
Rs 250000 debentures, maturing in 4 years, contributions to the fund are to be made at the
end of every year. Find the amount of each annual deposit if the interest is 18% per annum.
(Use log table)
Solution We use the formula
( )
A R
+

1
]
1
1 1 r
r
n
Here A = 250000, r = 0.18, n = 4
Therefore
( )
250000
1 018 1
018
4

1
]
1 R
.
.
( )

1
]
1 R
118 1
018
4
.
.
Let x = (1.18)
4
Then log x = 4 log 1.18 = 4 0.0719 = 0.2876
Therefore x = antilog 0.2876 = 1.939
Thus
250000
1939 1
018

1
]
1
R
.
.

1
]
1
R
0 939
018
.
.
giving
R

250000 018
0 939
47923 32
.
.
.
Hence, Rs 47923.32 has to be deposited annually.
ANNUITY 853
Example 13 A machine costs a company Rs 525000 and its effective life is estimated to be
20 years. A sinking fund is created for replacing the machine at the end of its lifetime when
its scrap realises a sum of Rs 25000 only. Calculate what amount should be provided every
year out of profits, for the sinking fund if it accumulates an interest of 5% p.a. compounded
annually. (Use annuity table)
Solution Given Hint :
Cost of machine = Rs 525000
Scrap value = Rs 25000
Therefore Balance amount = Rs (525000 25000) = Rs 500000
Clearly, this amount will be the required amount after 20 years to purchase the machine.
We use the formula A = RS
n r |
Here A = 500000, r = 0.05, n = 20
Therefore 500000 = RS
20 0 05 | .
= R 33.0660
giving R
500000
33 066
1512127
.
.
Hence, the required amount is Rs 15121.27.
EXERCISE 17.3
1. Mrs Rekha buys a flat for which she agrees to make 10 annual payments of
Rs 50000 each, the first being made at the end of 4 years. Find the amount paid by her, if money
is worth 12% per annum compounded annually. (Use log table)
2. An annuity consists of 30 quarterly instalments of Rs 2000 each, the first being made at the end
of 3 years. Find the amount of this annuity if money is worth 8% per annum compounded
quarterly. (Use annuity table)
3. Find the amount of deferred annuity of Rs 3200 payable at the end of every six months for
10 years, the first being paid at the end of 2 years. The money is worth 15% per annum compounded
semi-annually. (Use annuity table)
4. Find the present value of a sequence of annual payments of Rs 1500 each, the first being made
at the end of 7 years and the last at the end of 16 years, if money is worth 7% p.a. compounded
annually. (Use annuity table)
5. Mr X buys a flat for which he agrees to make 10 semi-annual payments of Rs 20000 each, the
first being made at the end of 3 years. Find the equivalent cash price of his property, if money is
worth 10% p.a. compounded half yearly. (Use annuity table)
854 MATHEMATICS
6. Find the present value of a sequence of monthly payments of Rs 200 each, the first being made
at the end of 3 years and the last at the end of 8 years, if money is worth 15% per annum
compounded monthly. (Use log table)
7. A person purchased a television paying Rs 5000 down and promising to pay
Rs 200 every month for 3 years, the first being made at the end of first year. Find the cash price
of the television if money is worth 9% per annum compounded monthly. (Use log table)
8. Mr John buys a house. It was agreed that Mr John will pay Rs 300000 in cash and 12 semi-annual
instalments of Rs 10000 each, the first being paid at the end of 4 years. Find the cash price of the
house if money is worth 16% per annum compounded semi-annually. (Use annuity table)
9. A firm anticipates a capital expenditure of Rs 50000 for a new equipment in 5 years. How much
should be deposited quarterly in a sinking fund carrying 12% per annum compounded quarterly
to provide for the purchase? (Use annuity table)
10. A person has set up a sinking fund in order to have Rs 100000 after 10 years for his childrens
college education. How much amount should be set aside bi-annually into an account paying
5% p.a. compounded half yearly? (Use log table)
11. A sinking fund is created for redemption of debentures of Rs 100000 at the end of 25 years. How
much money should be provided out of profits each year for sinking fund if the investment can
earn interest at 4% per annum? (Use annuity table)
12. A machine costs a company Rs 97000 and its effective life is estimated to be 12 years. If the
scrap realizes Rs 2000 only, what amount should be retained out of profits at the end of each
year to accumulate at compound interest at 5% p.a. (Use log table)
13. A machine being used by a company is estimated to have a life of 15 years. At that time, the new
machine would cost Rs 75000 and the scrap of the old machine would yield Rs 9600 only.
A sinking fund is created for replacing the machine at the end of its life. What sum should be
retained by the company at the end of every year to accumulate at 6% per annum? (Use
annuity table)
14. A machine costs a company Rs 65000 and its effective life is estimated to be 25 years. A sinking
fund is created in order to replace the machine by a new model at the end of its life time, when its
scrap realizes a sum of Rs 2500 only. Find what amount should be set aside each year, out of the
profit for the sinking fund, if it accumulates at
3
1
2
%
per annum compounded annually. (Use
log table)
MISCELLANEOUS EXAMPLES
Example 14 A company borrows a loan of Rs 400950 on condition to repay it with compound interest
at 6% p.a. by annual instalments of Rs 150000 each. In how many years will the debt be paid off? (Use
log table only)
ANNUITY 855
Solution We use the formula
( )
V R
+

1
]
1
1 1 r
n
r
Here V = 400950, R = 150000, r = 0.06, n = ?
Therefore
( )
[ ]
400950
150000
0 06
1 1 0 06 +

.
.
n
( )
[ ]


150000
0 06
1 106
.
.
n
or
( ) 1 106
400950 0 06
150000
01604

.
.
.
n
or
( ) 106 1 01604 0 8396 . . .

n
or n log (1.06) = log 0.8396
giving n
log .
log .
0 8396
106

1 9241
0 0253
.
.

0 0759
0 0253
3
.
.
Hence, the required time is 3 years.
Example 15 A man buys a car for Rs 80000 on the following conditions : he will pay Rs 20000 cash
down and balance in 10 equal semi-annual instalments, the first to be paid six months after the date of
purchase. Calculate the amount of each instalment, the rate of interest is 10% per annum compounded
half yearly. (Use annuity table)
Solution Value of the car = Rs 80000
The cash down payment = Rs 20000
Balance = Rs (80000 20000) = Rs 60000
The balance is to be paid in 10 equal semi-annual instalments. Let Rs R be the amount of each
instalment. The sum of Rs 60000 is the present value V of annuity R for 5 years at a rate 10% per
annum compounded semi-annually.
We have
V R a
nr |
Here V = 60000, n = 10, r = 0.05
Therefore 60000 = R a
100 05 | .
= R 7.7217
giving R
60000
7.7217
7770 31 .
Hence, Rs 7770.31 must be deposited at the end of each half year.
856 MATHEMATICS
Example 16 A purchased a television paying Rs 5000 down and promising to pay Rs 200 every three
months for next 6 years. The seller charges interest at 8% per annum compounded quarterly.
(i) If A missed the first three payments, what must he pay at the time the fourth is due to bring him
upto date?
(ii) If A missed the first 10 payments, what must he pay when 11
th
payment is due, to discharge his
entire loan?
(Use annuity table)
Solution (i) If A missed the first three payments, the amount he must pay at the time the fourth is due
to bring him upto date = 200S
4 0 02 | .
= 200 4.1216 = 824.32.
The amount he must pay is Rs 824.32.
(ii) If A missed the first 10 payments, the amount he must pay at the time the 11
th
is due to bring him
upto date = 200 S
110 02 | .
.
To discharge his entire loan at the time of 11
th
payment, he must also pay an amount equal to the
present amount of an annuity of Rs 200 of (6 4 11) = 13 quarterly instalments at the rate of interest
8% per annum compounded quarterly
i.e. 200 a
13 0 02 | .
Thus, the total amount to pay in this case is
= 200 S
110 02 | .
+ 200
a
13 0 02 | .
= 200 12.1687 + 200 11.3484
[ ] + 200 12.1687 113484 .
[ ] 200 235171 .
= 4703.42
Hence, he must pay Rs 4703.42.
MISCELLANEOUS EXERCISE ON CHAPTER 17
1. A person purchased a house on instalment basis. He pays instalment of Rs 5000 at the beginning
of each month for 8 years. If the money is worth 6% per annum compounded monthly, what is
the cash price of the house? (Use log table)
2. Paramjeet deposits in a bank Rs 10000 at the end of each year for 10 years. If compound interest
at 10% p.a. is reckoned, what would be the sum standing to his credit at the end of that period?
(Use log table)
ANNUITY 857
3. Find the present value of a sequence of quarterly payments of Rs 3000 each, the first being made
at the end of 4 years and the last at the end of 12 years, if money is worth 6% per annum
compounded quarterly. (Use annuity table)
4. At six-months intervals, Mrs Jain deposited Rs 300 in a savings account which credits interest
at 10% per annum compounded semi-annually. The first deposit was made when Mrs Jains son
was 4 years old and the last deposit was made when her son was 12 years old. How much did she
receive? (Use annuity table)
5. A company sets aside a sum of Rs 1000 at the end of each year in a sinking fund so that at the
end of 10 years, it would amount to a balance sufficient to replace the machinery. Assuming that
the cost of machinery remains constant at the end of 10 years and that money earns 5% p.a.
compound interest, find the cost of the machinery. (Use annuity table)
6. Find the least number of years for which an ordinary annuity of Rs 800 per annum must run in
order that its amount just exceeds Rs 20000 at 16% p.a. compounded annually. (Use log
table only)
7. Mr Prakash buys a house paying Rs 40000 in cash and the balance in 25 instalments of Rs 6000
each at the end of each year. If the interest be reckoned at
5
1
2
% per annum, how much is the
cash price of the house. (Use annuity table)
8. What equal payments made at the beginning of each month for 3 years will pay for a house priced
at Rs 400000, if money is worth 15% per annum compounded monthly? (Use annuity table)
9. An orchard will yield its full crop at the end of 5 years and is expected to maintain an annual
income of Rs 5000 for 20 years. Find the cash price of the orchard if money is worth 3% per
annum. (Use annuity table)
10. At the beginning of each quarter, Rs 200 are deposited into a savings account that pays 8% per
annum compounded quarterly. Find the balance in account after 3 years. (Use log table)
11. The present value of an ordinary annuity of Rs 1000 per annum for a number of years is Rs
16000. Find the number of years, the annuity is to run if the rate of interest is 5% per annum.
(Use log table)
12. An equipment is purchased on an instalment basis such that Rs 5000 is to be paid on the signing
of the contract and four yearly instalments of Rs 3000 each payable at the end of first, second,
third and fourth years. If interest is charged at 5% per annum, what would be the cash down
price? (Use log table)
13. A man buys a computer for Rs 70000 on the following condition. He will pay
Rs 10000 cash down and the balance in 10 equal quarterly instalments. If the first is to be paid
three months after the date of purchase, calculate the amount of each instalment, interest being
calculated at the rate of 5% per annum compounded quarterly. (Use annuity table)
14. A man buys a machine for Rs 33000 and agrees to make 16 semi-annual payments, the first
payment being made at the end of 4 years. Find half-yearly payments if the money is worth 7%
per annum compounded bi-annually. (Use annuity table)
858 MATHEMATICS
15. A Company sets aside a sum of Rs 2000 at the end of each year for 15 years to pay off a
debenture issue of Rs 40000. If the fund accumulates at 12% per annum compounded annually,
find the surplus amount after redemption of debenture issue. (Use log table)
16. If a bank pays interest at 15% p.a. compounded monthly, what equal deposits have to be made
at the end of each month for 5 years, in order to have Rs 35550 at that time. (Use log table)
17. An annuity consists of 15 semi-annual payments of Rs 300 each, the first being made at the
beginning of the first year. Find the present value of this annuity if money is worth 6% per
annum compounded semi-annually. (Use log table)
18. A company establishes a sinking fund to provide for the payment of Rs 100000 debt maturing in
4 years. Contributions to the fund are to be made at the end of every year. Find the amount of
each annual deposit if the interest is 18% per annum compounded annually. (Use log table)
19. Abha purchased a car on instalment basis and pays Rs 3000 every month for next 4 years. The
rate of interest is 12% per annum compounded monthly. If she misses the 4th, 5th, 6th and 7th
instalment, what amount she has to pay at the time of 8th instalment
(i) to bring her upto date (ii) to discharge her entire loan
(Use annuity table)
20. Vibhor purchased a house paying Rs 50000 cash and balance in 30 quarterly instalments of
Rs 5000 each. The rate of interest is 10% per annum compounded quarterly. If he missed the 15th
to 19th instalments what amount he has to pay with the 20th instalment to discharge his entire
loan. (Use annuity table)