Calculating a Sinking Fund Payment
The basic steps in calculating a sinking fund payment are as follows:
- Enter the proper payments per year. You first must type in the appropriate
number (eg. monthly would be 12, quarterly would be 4, etc.), then push the
cream colored key , then
the P/YR key.
- The order of the next three steps is not important, but I recommend that
you follow across the financial tour of your calculator from left to right.
If you do this, then the next step would be to enter in the proper number of
years. You first type the appropriate number, then push the cream colored
key , then the xP/YR
- Now enter the appropriate interest rate per year. This is done by entering
the appropriate annual interest rate as a whole number, not as a decimal
(the calculator will convert it to decimal automatically), then pressing the
- Next enter the amount to be accumulated in the future and press the FV
- Finally all that is necessary is push the PMT
Now let's try a problem. Suppose that you wish to invest a certain amount
which over a three-year period will accumulate to $1,000. How much would you
have to invest each year for three years at 8 percent interest to reach the
First let's see what we know. We know that at the end of your three deposits,
you wish to accumulate $1000. That indicates that the Future Value (FV) is
$1000. We know that the number of years (xP/YR) is 3. We know that the annual
interest rate is 8% (8 is the I/YR). Finally, we may assume that the periods per
year is one since we are not told it is monthly, quarterly, etc. (If the
payments per year would have been, for example, monthly, the problem would have
read, ". . . at 8% annual interest, compounded monthly.")
Now let's compute the problem:
- First we must enter the appropriate payments per year by pushing 1, then
the P/YR key.
- Next we will enter the number of years by pushing 3, then the cream
colored key , then the
- Now we will enter the interest rate per year by pushing 8 and then
pressing the I/YR key.
- Next we enter 1000, and then press the FV
- Finally, we press the the
key to compute the answer. The display then shows -308.03 if the display was
set to show two decimal places. Note that the answer is negative.
This indicates that the direction of the cash flow is out. (This is logical
if we will be getting $1000 three years from now, we must pay $308.03 each
year for the next three years.)
Would you like to review the
mathematics of this calculation?
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Copyright © 2006 Dr. Jerry D. Belloit