When a specified amount of money is needed at a specified future date, it is good practice to accumulate systematically a fund by means of equal periodic deposit. Such a fund is called a sinking fund. Sinking funds are used to pay-off debts, to redeem bond issues, to replace worn-out equipment, to by new equipment, or in one of the depreciation method. Since the amount needed in sinking fund, the time the amount is needed and interest rate that the fund earns are known, we have an annuity problem in which the size of payment, sinking
fund deposit, is to be determined. A schedule showing how a sinking fund accumulates to the desired amount is called a sinking-fund schedule.
Illustration:
If you wish an annuity to grow to Rs. 17,000 over 5 years so that you can repalce your car, what monthly deposit would be required if you could invest at 12% compounded monthly?
F = A[(1+i)^n-1/i]
i = 12%/12 = 0.01
n = 5*12 = 60
F = 17,000
17,000 = A[(1+0.01)^60-1/0.01]
A = 208.6
The monthly payment should be Rs. 208.16
fund deposit, is to be determined. A schedule showing how a sinking fund accumulates to the desired amount is called a sinking-fund schedule.
Illustration:
If you wish an annuity to grow to Rs. 17,000 over 5 years so that you can repalce your car, what monthly deposit would be required if you could invest at 12% compounded monthly?
F = A[(1+i)^n-1/i]
i = 12%/12 = 0.01
n = 5*12 = 60
F = 17,000
17,000 = A[(1+0.01)^60-1/0.01]
A = 208.6
The monthly payment should be Rs. 208.16
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