Lee Associates borrowed $60,000. The company plans to set up a sinking fund that will pay back the loan at the end of 12 years. Assuming a rate of 8% compounded semiannually, the amount to be paid into the fund each period is (use the tables in the handbook):

Question

Quizplus · Accepted Answer

Using the sinking fund formula:

P = (A/i) * (1 - (1+i)^-n)

Where:
P = Principal amount ($60,000)
A = Periodic deposit
i = Interest rate per period (8%/2 = 4%, since it is compounded semiannually)
n = Number of periods (12 years * 2 = 24 since it is compounded semiannually)

Substituting the values:

$60,000 = (A/0.04) * (1 - (1+0.04)^-24)

Solving for A:

A = $1,536 (rounded to the nearest cent)

Therefore, the company should deposit $1,536 semiannually into the sinking fund to pay back the loan at the end of 12 years. The answer is B).

Lee Associates Borrowed $60,000