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Sinking Fund Method

The document discusses sinking fund methods, including the formula used to calculate the amount accumulated in a sinking fund. It provides two examples of applying the sinking fund formula. The first example calculates that a sinking fund with monthly contributions of $1,500 at an annual interest rate of 6% over 5 years would accumulate $104,655. The second example determines that with a required sinking fund of $1,000,000 at an annual 5% interest rate over 10 years with biannual payments, the periodic contribution would be $39,147.

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Joanna Duque
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76 views

Sinking Fund Method

The document discusses sinking fund methods, including the formula used to calculate the amount accumulated in a sinking fund. It provides two examples of applying the sinking fund formula. The first example calculates that a sinking fund with monthly contributions of $1,500 at an annual interest rate of 6% over 5 years would accumulate $104,655. The second example determines that with a required sinking fund of $1,000,000 at an annual 5% interest rate over 10 years with biannual payments, the periodic contribution would be $39,147.

Uploaded by

Joanna Duque
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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SINKING FUND METHO

A sinking fund is a fund


formed in order to pay an
obligation falling due at some
future date.

FORMULA:
A= Money Accumulated Fund
P= Periodic Contribution to the Sinking Fund
r= Annualized rate of Interest
n= No. of Years
m= No. of Payments per Year
Depreciation means the decrease in the
value of physical properties or assets with
the passage of time and use. It is the non-
cash method of representing the reduction
in value of a tangible asset. Specifically, it
is an accounting concept that sets an
annual deduction considering the factor of
time and use on an asset's value. An asset
is depreciable if it has a determinable
useful life of more than one year in
business or something to produce an
income.
Example #1
A sinking fund with a monthly periodic contribution of $1,500. The fund will
be required to retire a newly taken debt (zero-coupon bonds) raised for the
ongoing expansion project. Do the calculation of the amount of the sinking
fund if the annualized rate of interest is 6%, and the debt will be repaid in 5
years.

Given:
P= Php 1500
m= 12
n= 5
r= 6% or 0.06 ( 1+ 0.06/12)^5(12) - 1
A= ------------------------------ X 1500
0.06/12

A= 104,655.0458
Example #2
A company ABC Ltd which has raised funds in the form of 1,000 zero-coupon bonds worth
$1,000 each. The company wants to set up a sinking fund for repayment of the bonds,
which will be after 10 years. Determine the amount of the periodic contribution if the
annualized rate of interest is 5%, and the contribution will be done half-yearly.

Given: Formula:
Sinking fund
A = Par value of bond x No. of bonds r/m
= $1,000 x 1,000 P= ------------------------------ X A
= $1,000,000 [( 1 + r/m) ^ m x n -1]
No. of zero coupon bonds 1,000
0.05/ 2
par value of each bond Php 1,000
= ---------------------------------X 1,000,000
sinking fund required (A) Php 1,000,000 [( 1 + 0.05/ 2) ^ 10(2) -1]

no. of years (n) 10 P= 39, 147. 1287


no. of payment per year (m) 2
annualized rate of interest (r) 5% or 0.05

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