Question

Your company wants to set aside a fixed amount every year to a sinking fund to replace a piece of industrial equipment costing $250,000 at the end of five years from now. The sinking fund is expected to earn 5% interest. How much must your company deposit each year to meet this goal?

Answer 1

Answer:

$4,5243.63

Explanation:

Data provided in the question:

Future value = $250,000

Interest rate = 5% = 0.05

Time = 5 years

Now,

Future value = $C\times\left[ \frac{(1+i)^{n}-1}{i} \right]$

here,

C = Regular deposit amount

i = Interest rate per period

n = number of periods

Future value = $C\times\left[ \frac{(1+i)^{n}-1}{i} \right]$

or

$250,000 = $C\times\left[ \frac{(1+0.05)^{ 5}-1}{ 0.05} \right]$

$250,000 = $C\times\left[ \frac{ 1.05^{ 5}-1}{ 0.05} \right]$

$250,000 = $C\times\left[ \frac{ 1.276282 - 1}{ 0.05} \right]$

$250,000 = C × 5.52564

or

C = $\frac{ 250000 }{ 5.52564 }$

C = $4,5243.63