A sinking fund is established to replace a machine that will be obsolete 5 years from now. The machine will cost R140.00 to replace. The fund earns 10% per annum. What monthly instalment must be paid into the sinking fund?
1)
50,000 x 8% =4,000 simple interest for 1 year.
4,000 x 12 =48,000 simple interest for 12 years.
2)
Use this formula to calculate the monthly payment for the sinking fund:
FV=P{[1 + R]^N - 1/ R}
140 = P {[1 + 0.10/12]^(5*12) - 1 / 0.10/12}
140 = P {[1.00833333]^60 - 1 / 0.00833333}
140 = P x 77.43707217........
P =140 / 77.43707217....
P =1.81 R - Monthly deposit that must be paid in the sinking fund.
P.S. I have taken your interest rate of 10% as compounded monthly.
