Sinking Fund

establishing a future amount through periodical payments

Future Value amount
FVOA
FVAD

from nothing to something

You have acquired a liability of P5,000,000 to be paid at the end of 5 years bearing an annual interest of 10%.
In order not to be burdened, you decided to establish a sinking fund that earns 8% to pay off the P5,000,000 at the end of 5 ye
How much must be set aside at the end of each of the 5 years to reach the P5,000,000 target?
5,000,000 10% 500,000.00

𝐹𝑉𝑂𝐴=𝑃𝑚𝑡 𝑥 ( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖

𝐹𝑉𝑂𝐴=𝑃𝑚𝑡 𝑥 ( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖 𝑥(1+𝑖)

𝐹𝑉𝑂𝐴/(( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖 𝑥 (1+𝑖))=(𝑃𝑚𝑡 𝑥 ( 〖 (1+𝑖) 〗 ^𝑛−

𝐹𝑉𝑂𝐴/(( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖)=(𝑃𝑚𝑡 𝑥 ( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖)/(( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖)

𝑃𝑚𝑡= 𝐹𝑉𝑂𝐴/(( 〖 (1+𝑖) 〗

𝑃𝑚𝑡= 𝐹𝑉𝑂𝐴/(( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖) ^𝑛−1)/𝑖 𝑥 (1+𝑖))

𝑃𝑚𝑡= 𝐹𝑉𝑂𝐴/(( 〖 [(1+𝑖) 〗 ^𝑛−1] 𝑥

𝑷𝒎𝒕=𝑭𝑽𝑶𝑨 𝒙 𝒊/( 〖 (𝟏+𝒊) 〗 ^𝒏−𝟏) (1+𝑖))/𝑖 )

𝑷𝒎𝒕=𝑭𝑽𝑶𝑨 𝒙 𝒊/( 〖 [(𝟏+𝒊) 〗 ^𝒏−𝟏] 𝒙 (𝟏+𝒊))

𝑥 0.10/( 〖 (1+.10) 〗 ^5−1)

𝑃𝑚𝑡=𝑃5,000,000818,987.40
𝑃𝑚𝑡=𝑃5,000,000 𝑥 0.10/( 〖 [(1+.10) 〗 ^5−1] 𝑥 (1+ .10
744,534.00

FVOA
(1) (2) (3) (4) (5) (6)

Periodic Periodic
At the end of Interest income Deposit in the Increase in Sinking Fund Book Value of
Period (Annual) on Sinking Fund Fund Fund Accumu- lated P5,000,000
0 0 5,000,000.00
 1 0 818,987.40 818,987.40 818,987.40 4,181,012.60
2 81,898.74 818,987.40 900,886.14 1,719,873.54 3,280,126.46
3 171,987.35 818,987.40 990,974.75 2,710,848.29 2,289,151.71
4 271,084.83 818,987.40 1,090,072.23 3,800,920.52 1,199,079.48
5 380,092.05 818,987.42 1,199,079.47 5,000,000.00 0.00
905,062.98 4,094,937.02 5,000,000.00
5,000,000.00
Total interest income for 3 years
253,886.09
Total Cost = Periodical Sinking Fund Payment + Periodical Interest Expense
1,318,987.40

FVAD
(1) (5) (3) (5) (2) (4)

Sinking Fund Periodic Sinking Fund

Accumulated Deposit in the Accumulated
(beg before Fund (made at (beg after Periodic
At the end of periodic beg of next periodic Interest income Increase in
Period (Annual) payment) period) payment) on Sinking Fund Fund
1 - 744,534.00 744,534.00 74,453.40 818,987.40
2 818,987.40 744,534.00 1,563,521.40 156,352.14 900,886.14
3 1,719,873.54 744,534.00 2,464,407.54 246,440.75 990,974.75
4 2,710,848.29 744,534.00 3,455,382.29 345,538.23 1,090,072.23
5 3,800,920.52 744,534.02 4,545,454.54 454,545.45 1,199,079.47
3,722,670.02 1,277,329.98 5,000,000.00
5,000,000.00
 Amortization
extinguishing a current amount through periodical payments

from something to nothing

5,000,000 at the end of 5 years

1)/𝑖 𝑥(1+𝑖)

𝑖))=(𝑃𝑚𝑡 𝑥 ( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖 𝑥 (1+𝑖))/(( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖 𝑥 (1+𝑖))

〗 ^𝒏−𝟏] 𝒙 (𝟏+𝒊))

(1+.10) 〗 ^5−1] 𝑥 (1+ .10))

Sinking Fund - Long term Asset

Long term liability
 Balance of Sinking Fund @ Year𝐹𝑉𝑂𝐴=𝑃𝑚𝑡
3 𝑥 ( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖

2,710,848.29
𝐹𝑉𝑂𝐴=𝑃818,987.40 𝑥 ( 〖 (1+.10) 〗 ^3−1)/.10 𝐹𝑉𝑂𝐴=𝑃818,987.40 𝑥 ( 〖 (1+.10) 〗

Balance of Sinking Fund @ Year 4

(5) (6) 3,800,920.52

𝐹𝑉𝑂𝐴=𝑃818,987.40 𝑥 ( 〖 (1+.10) 〗 ^4−1)/.10

Sinking Fund
Accumulated Book Value of
(end) P5,000,000
818,987.40 4,181,012.60 Balance at the end of year 1
1,719,873.54 3,280,126.46
2,710,848.29 2,289,151.71 𝐹𝑉𝐴𝐷=744,534 𝑥 ( 〖 (1+.10) 〗 ^1−1)/.10 𝑥(1+𝑖)
3,800,920.52 1,199,079.48 818,987.40
5,000,000.00 0.00
𝐹𝑉𝐴𝐷=𝑃𝑚𝑡 𝑥 ( 〖 (1+𝑖) 〗 ^𝑛−1)/𝑖 𝑥(1+𝑖)

Balance at the end of year 2

𝐹𝑉𝐴𝐷=744,534 𝑥 ( 〖 (1+.10) 〗 ^2−1)/.10 𝑥(1+𝑖)

1,719,873.54

Balance at the beginning of year 1

𝐹𝑉𝐴𝐷=744,534

744,534.00

Balance at the beginning of year 2

 1,563,521.40
𝐹𝑉𝐴𝐷=744,534+[744,534 𝑥 ((1+.10)^1−1)/.10 𝑥(1+𝑖)]

Balance at the beginning of year 3

2,464,407.54
𝐹𝑉𝐴𝐷=744,534+[744,534 𝑥 ((1+.10)^2−1)/.10 𝑥(1+𝑖)]
 Balance of Sinking Fund @ Year 2 Interest income on year 3
=balance in year 2 x interest rate

171,987.35
𝑥 ( 〖 (1+.10) 〗 ^2−1)/.10
1,719,873.54
𝐹𝑉𝑂𝐴=𝑃818,987.40
Interest income on year 4
271,084.83

Interest income on year 5

380,092.05

Balance at the end of year 3

1−1)/.10 𝑥(1+𝑖)
𝐹𝑉𝐴𝐷=744,534 𝑥 ( 〖 (1+.10) 〗 ^3−1)/.10 𝑥(1+𝑖)
2,710,848.29
〗 ^𝑛−1)/𝑖 𝑥(1+𝑖)

Balance at the end of year 3

〗 ^2−1)/.10 𝑥(1+𝑖)
𝐹𝑉𝐴𝐷=744,534 𝑥 ( 〖 (1+.10) 〗 ^4−1)/.10 𝑥(1+𝑖)
3,800,920.52

Interest at year 1

74,453.40
156,352.14

246,440.75
 Book value of liability at year 3
ear 2 x interest rate 2,289,151.71

total interest income earned on year 3

=balance at year 3 - periodic payments for 3 year

253,886.09
Amortization
something to be nothing PVOA
extinguishment of a debt through periodic payments PVAD

You have acquired a liability of P5,000,000 to be paid at the end of 5 years bearing an annual interest of 10%.
Contruct the interest payment schedule

Portion of
Principal
Outstanding Reduced by
Period Principal (beg) Interest Due Payment payment
1 5,000,000.00 500,000.00 500,000.00 -
2 5,000,000.00 500,000.00 500,000.00 -
3 5,000,000.00 500,000.00 500,000.00 -
4 5,000,000.00 500,000.00 500,000.00 -
5 5,000,000.00 500,000.00 500,000.00 -
2,500,000.00

You have acquired a liability of P5,000,000 to be paid in 5 years bearing an annual interest of 10%.
You and your creditor agreed that the liability will be paid in 5 equal installments.
How much, should you pay at the end of each of the 5 years to extinquish the liability at its maturity date

PVOA PVAD
𝑃𝑉𝐴𝐷=𝑃𝑚𝑡 𝑥 (1− 〖 (1+𝑖) 〗 ^(−𝑛))/𝑖 𝑥 (1+𝑖)
𝑃𝑉𝑂𝐴=𝑃𝑚𝑡 𝑥 (1− 〖 (1+𝑖) 〗 ^(−𝑛))/𝑖

𝑃𝑚𝑡= 𝑃𝑉𝑂𝐴/((1− 〖 (1+𝑖) 〗 ^(−𝑛))/𝑖) 𝑃𝑚𝑡= 𝑃𝑉𝐴𝐷/((1− 〖 (1+𝑖) 〗

^(−𝑛))/𝑖 𝑥 (1+𝑖))

𝑷𝒎𝒕=𝑷𝑽𝑶𝑨 𝒙 𝒊/(𝟏− 〖 (𝟏+𝒊) 〗 ^(−𝒏) )

𝑃𝑚𝑡=𝑃5,000,000 𝑥 .10/(1− 〖 (1+.10) 〗 ^(−5) )

1,318,987.40

PVOA
 Portion of
Principal
Outstanding Reduced by
Period Principal (beg) Interest Due Payment payment
1 5,000,000.00 500,000.00 1,318,987.40 818,987.40
2 4,181,012.60 418,101.26 1,318,987.40 900,886.14
3 3,280,126.46 328,012.65 1,318,987.40 990,974.75
4 2,289,151.71 228,915.17 1,318,987.40 1,090,072.23
5 1,199,079.48 119,907.95 1,318,987.42 1,199,079.47
1,594,937.02 6,594,937.02
1,594,937.02

PVAD

Outstanding
Principal (beg Outstanding
before Principal (beg
Period payment) Payment After payment) Interest Due
1 5,000,000.00 1,199,079.46 3,800,920.54 380,092.05
2 4,181,012.59 1,199,079.46 2,981,933.13 298,193.31
3 3,280,126.45 1,199,079.46 2,081,046.99 208,104.70
4 2,289,151.69 1,199,079.46 1,090,072.23 109,007.22
5 1,199,079.45 1,199,079.45 - 0.00 - 0.00
5,995,397.29 995,397.29
995,397.29
 Portion of
Principal
Outstanding Reduced by
Period Principal (beg) Interest Due Payment payment
1 5,000,000.00 500,000.00 1,500,000.00 1,000,000.00
2 4,000,000.00 400,000.00 1,500,000.00 1,100,000.00
3 2,900,000.00 290,000.00 1,500,000.00 1,210,000.00
4 1,690,000.00 169,000.00 1,500,000.00 1,331,000.00
5 359,000.00 35,900.00 394,900.00 359,000.00
1,394,900.00 6,394,900.00

Outstanding
Principal (beg Outstanding
before Principal (beg
Period payment) Payment After payment) Interest Due
1 5,000,000.00 1,300,000.00 3,700,000.00 370,000.00
2 4,070,000.00 1,300,000.00 2,770,000.00 277,000.00
3 3,047,000.00 1,300,000.00 1,747,000.00 174,700.00
4 1,921,700.00 1,300,000.00 621,700.00 62,170.00
5 683,870.00 683,870.00 - -
5,883,870.00 883,870.00
l interest of 10%.

Outstanding
Principal (END)
5,000,000.00
5,000,000.00
5,000,000.00
5,000,000.00
5,000,000.00

maturity date

+𝑖) 〗 ^(−𝑛))/𝑖 𝑥 (1+𝑖)

〖 (1+𝑖) 〗 𝑃𝑚𝑡= 𝑃𝑉𝐴𝐷/(([1−(1+𝑖)^(−𝑛) ] 𝑥

(1+𝑖))/𝑖 )

𝑷𝒎𝒕=𝑷𝑽𝑨𝑫 𝒙 𝒊/([𝟏−(𝟏+𝒊)^(−𝒏) ] 𝒙 (𝟏+𝒊))

𝑃𝑚𝑡=𝑃5,000,000 𝑥 .10/([1−(1+.10)^(−5) ] 𝑥 (1+.10))

1,199,079.46
Outstanding
Principal (END)
4,181,012.60 Balance of your liability
3,280,126.46 𝑃𝑉𝑂𝐴=𝑃𝑚𝑡 𝑥 (1− 〖 (1+𝑖) 〗 ^(−𝑛))/𝑖
2,289,151.71
1,199,079.48
𝑃𝑉𝑂𝐴=𝑃1,318,987.40 𝑥 (1− 〖 (1+.10) 〗 ^(−4))/.10
0.00 at end of year 1
4,181,012.58
3,800,920.52
𝑃𝑉𝑂𝐴=𝑃1,318,987.40 𝑥 (1− 〖 (1+.10) 〗 ^(−1))/.10
1,475,029.08 at end of year 4
1,199,079.45

Outstanding
Principal (END)
4,181,012.59 Balance of your liability
3,280,126.45 𝑃𝑉𝐴𝐷=𝑃𝑚𝑡 𝑥 (1− 〖 (1+𝑖) 〗 ^(−𝑛))/𝑖 𝑥 (1+𝑖)
2,289,151.69
1,199,079.45
- 0.00 at end of year 1𝑃𝑉𝐴𝐷=𝑃1,199,079.46 𝑥 (1− 〖 (1+.10) 〗 ^(−4))/.10 𝑥 (1+.1

4,181,012.60

3,800,920.55 at end of year 2𝑃𝑉𝐴𝐷=𝑃1,199,079.46 𝑥 (1− 〖 (1+.10) 〗 ^(−3))/.10 𝑥 (1+.1

886,390.07
3,280,126.46

at end of year 3𝑃𝑉𝐴𝐷=𝑃1,199,079.46 𝑥 (1− 〖 (1+.10) 〗 ^(−2))/.10 𝑥 (1+.1

2,289,151.70

at end of year 4𝑃𝑉𝐴𝐷=𝑃1,199,079.46 𝑥 (1− 〖 (1+.10) 〗 ^(−1))/.10 𝑥 (1+.1

1,199,079.46
Outstanding Alternative
Principal (END) solution
4,000,000.00 4,000,000.00 How many years will it take for the debt to be extniguished?
2,900,000.00 2,900,000.00 5 years
1,690,000.00 1,690,000.00
359,000.00 359,000.00 How much should the last payment be
- - 394,900

balance @ year 3
1,690,000

Outstanding
Principal (END)
4,070,000.00
3,047,000.00 How many years will it take for the debt to be extniguished?
1,921,700.00 5 years
683,870.00
- How much should the last payment be
683,870 Interest 62,170.00
Principal 621,700.00

balance @ year 3
1,921,700
+.10) 〗 ^(−4))/.10 𝑃𝑉𝑂𝐴=𝑃1,318,987.40 𝑥 (1− 〖 (1+.10) 〗 ^(−3))/.10
at end of year 2
3,280,126.44

+.10) 〗 ^(−1))/.10 𝑃𝑉𝑂𝐴=𝑃1,318,987.40 𝑥 (1− 〖 (1+.10) 〗 ^(−2))/.10

at end of year 3
2,289,151.69

1+.10) 〗 ^(−4))/.10 𝑥 (1+.10) at the beg of year 1 Principal - Payment

3,800,920.54

1+.10) 〗 ^(−3))/.10 𝑥 (1+.10) at the beg of year 2 ending balance of prior period - payment
2,981,933.14

1+.10) 〗 ^(−2))/.10 𝑥 (1+.10) at the beg of year 3 2,081,047.00

1+.10) 〗 ^(−1))/.10 𝑥 (1+.10) at the beg of year 4 1,090,072.24

at the beg of year 5 -

to be extniguished? at year 3
=𝐹𝑉 𝑜𝑓 𝑃𝑉𝑂𝐴 𝑎𝑡 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 −𝐹𝑉𝑂𝐴 𝑜𝑓 𝑃𝑚𝑡 𝑎𝑡 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 =𝑃5,000,000 𝑥 〖 (1+.1
( 〖 (1+.10) 〗 ^3−1)/.10
1,690,000
Principal 359,000.00
Interest 35,900.00
Gross Pay 394,900.00

to be extniguished? at year 3
=𝐹𝑉 𝑜𝑓 𝑃𝑉𝐴𝐷 𝑎𝑡 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 −𝐹𝑉𝐴𝐷 𝑜𝑓 𝑃𝑚𝑡 𝑎𝑡 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 =𝑃5,000,000 𝑥 〖 (1+.10
(1+𝑖)
1,921,700
Gross 683,870.00
Principal 621,700.00
Interest 62,170.00
Interest Expense

at year 1 500,000.00 at year 2 418,101.26

at year 4 228,915.17 at year 3 328,012.64

at year 5 119,907.95

Interest expense Portion of Principal Paid

=Original principal - PVAD at the period questioned
5,000,000.00

380,092.05 818,987.40

298,193.31 1,719,873.54

208,104.70 2,710,848.30

109,007.22 3,800,920.54

-
 at year 4
=𝑃5,000,000 𝑥 〖 (1+.10) 〗 ^3−1,500,000 𝑥 =𝑃5,000,000 𝑥 〖 (1+.10) 〗 ^4−1,500,000 𝑥
( 〖 (1+.10) 〗 ^3−1)/.10 ( 〖 (1+.10) 〗 ^4−1)/.10
359,000

at year 4
=𝑃5,000,000 𝑥 〖 (1+.10) 〗 ^3−1,300,000 𝑥 ((1+.10)^3−1)/.10 𝑥 =𝑃5,000,000 𝑥 〖 (1+.10) 〗 ^4−1,300,000 𝑥 ((1+.10)^
(1+𝑖) (1+𝑖)
683,870
Portion of principal paid How much interest was paid for the first four year
=gross total payments - portion of principal paid
5,000,000.00 1,475,029.05
at year 1 818,987.42
at year 2 1,719,873.56
at year 3 2,710,848.31
ay year 4 3,800,920.55

Portion of payments going to interest

=gross payments-portion of principal paid

1,199,079.46

380,092.06

678,285.38

886,390.08

995,397.30
 at year 5
.10) 〗 ^4−1,500,000 𝑥 =𝑃5,000,000 𝑥 〖 (1+.10) 〗 ^5−1,500,000 𝑥
0 ( 〖 (1+.10) 〗 ^5−1)/.10
-1,105,100

at year 5
0) 〗 ^4−1,300,000 𝑥 ((1+.10)^4−1)/.10 𝑥 =𝑃5,000,000 𝑥 〖 (1+.10) 〗 ^5−1,300,000 𝑥 ((1+.10)^5−1)/.10 𝑥
(1+𝑖)
-677,743
𝑥 ((1+.10)^5−1)/.10 𝑥