Second Hand Software needs to accumulate $12,000 in 3 years to meet future needs. What sinking fund payment would they need to make at the end of each year, at 6% interest compounded annually? (Use Table 12-1 from your text)
A) $4,110.34
B) $3,769.32
C) $4,392.65
D) $4,634.15

Question

Quizplus · Accepted Answer

To find the annual sinking fund payment, use the formula for the future value of an annuity: $FV = P \times \frac{(1 + r)^n - 1}{r}$, where FV is the future value, P is the payment, r is the annual interest rate, and n is the number of periods. Rearranging to solve for P gives $P = FV \times \frac{r}{(1 + r)^n - 1}$. Plugging in $12,000 for FV, 0.06 for r, and 3 for n, and using the appropriate factor from Table 12-1 or calculating directly, you find the annual payment to be approximately $3,769.32.

Second Hand Software Needs to Accumulate $12,000 in 3 Years