economics problem help thanksss

Question

The following schedule of funds is available to form a sinking fund. Current year

(n). $50,000

n+ 1 $40,000

n+2. $30,000

n+3 $20,000

At the end of the fourth year, equipment costing $250,000. 00 will have to be purchased as a replacement for old equipment. Money is valued at 20% by the company. At the time of purchase, how much money will be needed to supplement the sinking fund?

a) $12,000 b) $11,000 c) $10,000 d) $9,000

Answer 1

Hi Dave,

You can calculate the contribution by calculating the FV of each of the sinking fund payments at the end of year 4, and then subtracting that from $250,000.

FV = PV*(1+r)^t, where r is interest rate, and t is the number of years between contribution and valuation.

 

The table below shows the future value of each of the sinking fund payments. As you can see, after earning 20% interest per year on each of the payments, the company is left with a $10,000 shortfall at the end of year 4.