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Calculating a Sinking Fund Payment

The basic steps in calculating a sinking fund payment are as follows:

  1. Enter the Payments/Year
  2. Enter the rest of the information you know
  3. Solve for the unknown.

Let's try it with 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 desired figure?

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

  1. Enter the Payments/Year.
    You first must type in the appropriate number (eg. monthly would be 12, quarterly would be 4, etc.), then push the orange SHIFT key , then the P/YR key.

    In our problem, first we must enter the appropriate payments per year by pushing 1, then push the orange SHIFT key , then the P/YR key .
  2.  

  3. Enter the rest of the information you know.
    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 orange SHIFT key , then the xP/YR key.

      In our problem, next we will enter the number of years by pushing 3, then the orange SHIFT key , then the xP/YR key.

       

    • 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 I/YR key.

      In our problem, now we will enter the interest rate per year by pushing 8 and then pressing the I/YR key.

       

    • Next, enter the amount to be accumulated in the future and press the FV key.

      In our problem, next we enter 1000, and then press the FV key.
  4.  

  5. Solve for the unknown.
    Finally, all that is necessary is push the PMT key to compute the answer.

    Correct 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 2005  Dr. Jerry D. Belloit