A sinking fund is a fund into which periodic payments are made in order to satis
ID: 2753483 • Letter: A
Question
A sinking fund is a fund into which periodic payments are made in order to satisfy a future obligation. A machine costing $7000 is replaced at the end of 8 years, at which time it will have a salvage value of $700. A sinking fund is set up. The amount in the fund at the end of 8 years is to be the difference between the replacement cost and the salvage value. If equal payments are placed in the fund at the end of each quarter and the fund earns 8% compounded quarterly, what should each payment be?
Explanation / Answer
At the End the accumulated amount in the fund equal to $7,000-$700= $6,300. Let R be the Periodic Payment
6300= R+R(1+r)+.............+R(1+r)31
=R(1+(1+r)................+(1+r)31
R= r/((1+r)32 -1)*6,300
R = $142.45