Question

Novak Corporation, having recently issued a $20,075,700, 15-year bond issue, is committed to make annual sinking fund deposits of $625,000. The deposits are made on the last day of each year and yield a return of 10%. Click here to view factor tables Determine the amount of deficiency. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Deficiency $enter a dollar amount rounded to 0 decimal places

Answer 1

Answer :

we need to calculate the FV of annuity after 15 years, with 10% rate of return.

FV of annuity is given by the formula:

FV = P [(1+r)^n -1] / n

Here P = 625,000, r =10%, n = 15. Substituting the values in above formula,

The future value of the sinking funds deposit equals :

Future Value of Annuity   =        $625,000 [ (1+0.10)15 -1 ] / 0.10

FVA      =     $ 625,000 x 31.77248                                           FVA     =      $19,857,800

The amount of deficiency = Face Value of bonds (-) Favce value of ordinary Annuity                                                       = $20,075,700 - $ 19,857,800

The amount of deficiency = $ 217,900