Question

A company borrowed $ 74,500. The company plans to set up a sinking fund that will...

A company borrowed $ 74,500. The company plans to set up a sinking fund that will pay back the loan at the end of 6 years. Assuming a rate of 6% compounded semiannually, find the Sinking Fund of the ordinary annuity. (please make answer clear not handwriting)

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Homework Answers

Answer #1

Sol:

Present value (PV) = $74,500

Period (nper) = 6 years, Semiannual = 6 x 2 = 12

Rate = 6%, Semiannual = 6%/2 = 3%

To determine sinking fund payment per period we can use PMT function in excel:

PV -74500
rate 0.03
Period 12
PMT $7,484.43

Working

Alternatively we can determine the payment per period with the below formula:

PMT = PV/ ((1-(1/(1+r)^n))/r)

PMT = 74500 / ((1-(1/(1+3%)^12)) /3%)

PMT = 74500 / ((1-(1/(1.03)^12)) /0.03)

PMT = 74500 / 9.95400399

PMT = $7484.43

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