The formula to calculate the periodic payment (PMT) is:
\[ PMT = \frac{FV \cdot i}{(1 + i)^n - 1} \]
Where:
A sinking fund is a financial tool used by individuals or organizations to set aside money regularly for a specific purpose. It involves making regular contributions to a separate account to accumulate funds over time, to eventually reach a target amount.
The significance of a sinking fund lies in its ability to provide financial security and stability. By consistently setting aside money, individuals or organizations can ensure they have sufficient funds when needed without resorting to borrowing or facing financial strain. Sinking funds are particularly important for long-term goals or anticipated expenses, such as replacing a vehicle or renovating a home.
Let's assume the following values:
Using the formula to calculate the periodic payment:
\[ PMT = \frac{10000 \cdot 0.05}{(1 + 0.05)^{12} - 1} \approx 769.23 $ \]
The Periodic Payment (PMT) is approximately $769.23.