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Math Help - Sinking fund,thats sinking me

  1. #1
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    Question 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.
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  2. #2
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    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 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 P as a loan, or what is the same, an annuity.
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  3. #3
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    Smile thank you

    Thanks for he help.
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