Your company wants to set aside a fixed amount every year to a sinking fund to replace a piece of industrial equipment costing $375,000 at the end of eight years from now. The sinking fund is expected to earn 7% interest. How much must your company deposit each year to meet this goal?

Question

Business

Jude Hahn

5 July, 15:14

Your company wants to set aside a fixed amount every year to a sinking fund to replace a piece of industrial equipment costing $375,000 at the end of eight years from now. The sinking fund is expected to earn 7% interest. How much must your company deposit each year to meet this goal?

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Answers (1)

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German · Answer 1

If the company makes 8 deposits, one per year earning 7% per year, in order to get $375000 at the 8 year, the company has to deposit $34,874.16 each year.

Explanation:

To get this number the best option is to use a excel spreadsheet and solver add-in. In a table with 8 columns (8 years), organize the payments and the rule of interest: payment year 1 * (1+7%) ^8+payment year 2 * (1+7%) ^7+payment year 3 * (1+7%) ^6+payment year 4 * (1+7%) ^5+payment year 5 * (1+7%) ^4+payment year 6 * (1+7%) ^3+payment year 7 * (1+7%) ^2++payment year 8 * (1+7%) ^1 where all the payments are equal (payment 1=p2=p3 ... = P8)