Question

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?

Answer 1

Answer:

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)