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Sinking Fund Factor

James R Kobzeff

The sinking fund factor provides the annuity payment that must be made each conversion period ata given rate of compound interest to have available a specified sum at some given future time period.This calculation for a sinking fund is used to make real estate investment decisions such as howmuch money must be placed on reserve to have a specified sum at a given future time period totake care of scheduled capital expenditures or other expenses.In other words, when a real estate investor wants to start setting aside money so he or she hasenough available at some future date to replace, let's say, for a roof on an apartment complex he or she owns, the investor would create a sinking fund.

The formula:

P = 1 / SnWhere:P = Cash flow payments of equal size at equal intervalsSn = Future value of a series of annuity cash flowsExample: A real estate investor needs $10,000 in 5 years to replace refrigerators in an apartmentcomplex that he or she owns. If the investor starts an ordinary annuity fund (payments made at theend of each year) that yields 15% per year, the investor would use the sinking fund factor tocalculate what each annual payment would have to be to accumulate the $10,000.

Use of Excel Spreadsheet:

PMT (15,5,,10000,0) = $1,483.16

Use of HP-10B/12C Calculators:

N = 5%i = 15FV = 10,000PMT = -1,483.16 Note: The HP-I0B/12C calculator must be set for payments to be made at the beginning of eachconversion period to make this calculation.

Use of ProAPOD Mortgage Calculator:

Amount = $10,000