A company wants to set up a sinking fund to accumulate funds
needed in 5 years to purchase new equipment. The cost is estimated
to be $400,000. The company decides to make end-of-quarter
deposits into a fund earning 4% compounded quarterly. Prepare a
sinking fund table for the first four payments.
Solution:
Future value required = $400,000
Interest rate = 4%, 1% quarterly
Nos of quarterly period - 5*4 = 20
Required quarterly deposit = $400,000 / Cumulative FV factor at 1% for 20 periods
= $400,000 / 22.019 = $18,168
Payment no | Amount of deposit | Interest earned | Total in account |
1 | $18,168.00 | $0.00 | $18,168.00 |
2 | $18,168.00 | $181.68 | $36,517.68 |
3 | $18,168.00 | $365.18 | $55,050.86 |
4 | $18,168.00 | $550.51 | $73,769.37 |
A company wants to set up a sinking fund to accumulate funds needed in 5 years...