Jeff wishes to accumulate $5,000 in 5 years. Use the appropriate formula to find the sinking fund payment she would need to make at the end of each year, at 5% interest, compounded annually.
A) $989.94
B) $917.47
C) $904.87
D) $949.87

Question

Quizplus · Accepted Answer

The sinking fund payment can be calculated using the formula for the future value of an annuity: $FV = P \times \frac{(1 + r)^n - 1}{r}$, where FV is the future value, P is the payment, r is the interest rate per period, and n is the number of periods. Rearranging to solve for P gives $P = FV \times \frac{r}{(1 + r)^n - 1}$. Plugging in the values $FV = 5000$, $r = 0.05$, and $n = 5$ gives $P = 5000 \times \frac{0.05}{(1 + 0.05)^5 - 1}$, which calculates to approximately $904.87.

Jeff Wishes to Accumulate $5,000 in 5 Years