Annuity


In the previous examples, we never changed the Deposit type, currently
set at Regular. This is because we have not yet needed to change this. Recall
that the second example in the Future Value chapter needed the stepping function
in order to compute the answer. The stepping done was in a percentage amount.
We stepped the monthly amount you paid by 10%. The key word is percent. If we
wanted to step using a dollar amount, we would have to change the Deposit Type.
We will now look at a example that requires us to step using a dollar amount.
Therefore we must change the Deposit Type from the Regular setting to the
Amount Step setting.
The next example looks at the Amount type in an Annuity Example using the
Fixed Rate Present Value Form.
Annuity
The Present value concept can also be applied to Annuities. An annuity is an investment
that produces a level stream of cash flows for a limited number of periods. Annuities come
in many forms. The next few examples look at how annuities can be analyzed using
WinAmort Professional.
One type of annuity is a Lease. Leases come in many forms, but in all cases the
lessee (user’s) promises to make a series of payments to the lessor (owner).
The lease contract specifies the monthly or semiannual payments, with the first payment usually due as soon as
the contract is signed. This differs from a Mortgage or Loan, where the first
payment is usually due a month later.
The next example looks at a lease from the owner’s viewpoint.
Present Value  EXAMPLE 3a 
Suppose you wants to purchase a commercial unit on July 6, 2011 with the intention of leasing it out for five years. You want to set the lease payments large enough so that they allow you to earn an 14% annual rate of return. If you are willing to pay $130,000.00 for the unit, how much do you have to charge as a monthly lease payment in order to realize your objectives? 
Switch to the Fixed Rate Present Value Form if you have not already done so.
The monthly lease payment amount.
Use all the known information and your knowledge of the Fixed Rate Present Value Form
and fill in the fields. Then compute the answer.
Once you fill in all the fields, and set the drop down menus accordingly. Verify you form with the
one illustrated below.
Press

button beside the Withdrawal Amount field.
The monthly Lease amount is : $2989.99 
This is the amount you can charge per month on the lease if you want to earn a return of 14%. This will produce $179,399.40
(60 payments of $2,929.99), in 5 years, which will cover your initial investment of $130,000 and give you a gain of $49,399.40 in interest.
Present Value  EXAMPLE 3b 
Suppose your friend wants to invest in a duplex in your city which is renting for $1400 a month ($700 each). As a friend he wants you to become a partner in this long term venture. You are considering the proposition, but insist that the investment should earn a 16% return compounded monthly over the next twentyfive years, because you can get this by investing your money in a good mutual fund. What is the maximum amount both of you can spend for such a property, if you decide to buy on August 18, 2011? 
The maximum amount that should be paid for the property.
What is the Present Value or the Beginning Amount for the stream of withdrawals,
taking the effects of interest in to account? In this investment you already know that you would
expect a return of $1400 a month for the next twenty five years, starting immediately.
At 16% interest, the present value of a stream of payments of $1,400 for twentyfive years can
be determined using the Fixed Rate Present Value Form.
Use all the known information and your knowledge of the Fixed Rate Present Value Form
and fill in the fields. Then compute the answer.
Press

button beside the Initial Investment field.
The purchase price should be $111,107.29 
Fact: The answer obtained is not realistic since you would expect the rent to increase annually instead of being held constant.
The example we just did assumes a fixed rent amount for twentyfive years. Suppose the rent increases by 4.5% annually.
We can take this into account by using the Stepping feature.
What will the new beginning amount be, taking a rent increase of 4.5% per year into account?
By now you should be familiar with the STEPPING feature. Change the TYPE to Percent Step.
Use all the known information and your knowledge of the Fixed Rate Present Value Form
and fill in the fields. Then compute the answer.
Press

button beside the Initial Investment field.
The purchase price should be $111,107.29 
Example on page 149