Question

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.

Complete the table for the first payment. Payment Number Amount of Deposit Interest Earned Total in Account $ (Round to the nearest cent as needed.)

Answer 1

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