Question

a company anticipates a capital expenditure of $22,000 in 2 years for the purpose of purchasing new computers and has decided to set up a sinking fund to finance this purchase. if the fund earns interest at the rate of 10% per year compounded quarterly determine the size of each equal quarterly installment that should be deposited in the fund

Answer 1

We are given,

Future Value(FV) = $22,000

Time = 2 years

No of periods = 2 * 4 = 8(Quarterly installments)

Interest rate = 10%

Quarterly rate = 10%/4 = 2.5%

Quarterly installments(pmt) = ?

We can calculate pmt using a financial calculator or by using excel,

fv	22000
n	8
r	2.50%
pmt	$2,518.28	(=PMT(2.5%,8,0,-22000,0)

Hence the company will deposit an installment of $2,518.28 in every quarter.

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