Sinking fund,thats sinking me

• Jul 9th 2006, 01:13 AM
kwtolley
Sinking fund,thats sinking me
A sinking fund is established to obtain \$75,000 in five years. The interest ate is 10% and payments are made quarterly. Find the periodic payments. My guess is 2,500.00. I worked on this problem for a long time and I need some help. Thanks so much for looking at this problem.
• Jul 9th 2006, 02:42 AM
JakeD
Quote:

Originally Posted by kwtolley
A sinking fund is established to obtain \$75,000 in five years. The interest ate is 10% and payments are made quarterly. Find the periodic payments. My guess is 2,500.00. I worked on this problem for a long time and I need some help. Thanks so much for looking at this problem.

The answer is too rounded a number to be correct.

There are different ways to solve this. Not knowing what tools you're learning, I hesitate to give you a method. But here's how I look at it.

The difference between a sinking fund and a loan is that the sinking fund is valued in future dollars, the loan is valued in present dollars. To treat the sinking fund as a loan, discount the future dollars to convert them to present dollars.

So calculate \$\displaystyle P = 75,000/(1.025^{20}) = 75,000/1.6386 = 45,770.32\$ to calculate the present value of the fund. The discount factor uses 2.5% quarterly interest for 20 quarters. Then treat that \$\displaystyle P\$ as a loan, or what is the same, an annuity.
• Jul 11th 2006, 08:04 AM
kwtolley
thank you
Thanks for he help.