The management of Gibraltar Brokerage Services anticipates a capital expenditure of $22,000 in 4 years' time for the purpose of purchasing new fax machines and has decided to set up a sinking fund to finance this purchase. If the fund earns interest at the rate of 10 %/year compounded quarterly, determine the size of each (equal) quarterly installment that should be deposited in the fund. Please round the answer to the nearest cent.

Question

The management of Gibraltar Brokerage Services anticipates a capital expenditure of $22,000 in 4 years' time for the purpose of purchasing new fax machines and has decided to set up a sinking fund to finance this purchase. If the fund earns interest at the rate of 10 %/year compounded quarterly, determine the size of each (equal) quarterly installment that should be deposited in the fund. Please round the answer to the nearest cent. ​

Quizplus · Accepted Answer

The future value of a sinking fund can be calculated using the formula for the future value of an annuity: FV = Pmt * [(1 + r)^nt - 1] / r. Here, FV = $22,000, r = 0.10/4 = 0.025, n = 4*4 = 16. Solving for Pmt gives approximately $1,135.18.

The Management of Gibraltar Brokerage Services Anticipates a Capital Expenditure