Sinking Fund factor method one of the most popular method used by investors. Investors knows the proposed value of investment they require in future, accordingly they see to that, the fund made available by investing/depositing now viz the amount deposited with regular time intervals for fetching returns and those returns are accumulated for future needs till certain point of time.
The amount deposited with regular time interval is calculated based on the time availability, interest of deposit, required amount. This can be expressed in formula
A = FVA [(K/(1+K)^n) -1]
Where,
A = Amount to be deposited
FVA = Future Value of deposited Amount
K = Interest
n= Number of years
For example
Mr. X is running a business and planning to expand his business after 10 years and he arrives the value of proposed project is Rs. 20,000. The interest rate prevailing in market is 12%
Thus the Amount to be deposited annually is = Rs.20,000 [(0.12/(1+.12)^10) -1]
= 20,000*(0.05698) = Rs. 1,139.60. Therefore by depositing Rs 1,1,39.60 annually for 10 years yields the required amount of Rs. 20,000.
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