Question 2.S2.11: Company XYZ is establishing a sinking fund to retire Rs 5,00......
Company XYZ is establishing a sinking fund to retire Rs 5,00,000, 8 per cent debentures, 10 years from today. The company plans to put a fixed amount into the fund each year for 10 years. The first payment will be made at the end of the current year. The company anticipates that the funds will earn 6 per cent a year.
What equal annual contributions must be made to accumulate Rs 5,00,000, 10 years from now?
The solution to this problem is closely related to the process of finding the compounded sum of an annuity. Table A-2 indicates that the annuity factor for 10 years at 6 per cent is 13.181. That is, one rupee invested at the end of each year for 10 years will accumulate to Rs 13.181 at the end of the 10th year. In order to have Rs 5,00,000 the required amount would be Rs 5,00,000 \div 13.181= Rs 37,933.39. If Rs 37,933.39 is deposited at the end of each year for ten years, there will be Rs 5,00,000 in the account.
2. When the amount of loan taken from financial institutions or commercial banks is to be repaid in a specified number of equal annual instalments, the financial manager will be interested in determining the amount of the annual instalment. Consider Example 2.12.