Question 6 A company estimates that it will have to replace

Question 6

A company estimates that it will have to replace a piece of equipment at a cost of $300,000 in 5 years. To have this money available in 5 years, a sinking fund is established by making equal quarterly payments into an account paying 2% compounded quarterly. How much should each payment be?

Solution

cost = 300,000

t = 5 years

n = 4

r = 2%

300,000 = p (1+(0.02/4))^(4*5)

p = $ 271,518.873

each payment = p/15 = $18,101.25 (answer)