Sinking Fund Gr 12 Financial Maths #Finance

in this CashNews.co we’re going to look at the concept of a sinking fund so imagine we have a company that has just purchased a brand new truck now the owner of the business he knows that the value of this truck is going to decrease over time that’s just called depreciation

because in a few years from now the components in the truck they would have been used and the truck’s value will just be less and at that moment the owner of the company would perhaps want to purchase a brand new truck and they so what they’re going to do on that day is they’re

going to sell the old truck and then haven’t hopefully have enough money saved so that they can contribute to be able to buy a brand new truck but now another thing that the company owner knows about is that the value of a new truck is going to be more than what it is today and that’s

something called Inflation so the value of his current truck is going to get less and the value of a brand new truck is going to get more so he needs to be able to save up enough money so that he can add in the difference so let’s see with an example what we actually mean by

this so let’s say that the cost of this new truck that he bought let’s say this is in 2000 and it said 2019 and he buys this truck for 1 million now we want to know what the value of that truck will be in 5 years time so in 2024 so that value of that truck will decrease due to

depreciation and so we’ll use this formula over here so we’ve got a minus now let’s say that the depreciation value is about six percent and that’s never compounded monthly that’s always compounded yearly so then we can work out the price of that truck or what it will

be worth in 2024 and so the value of his truck will be worth 700 733 904 rand and zero two cents all right now on that same day he’s going to want to purchase a new truck so let’s see what the new truck is going to cost okay so this is going to be the old truck and now let’s look

at the price of the new truck well that’s due to Inflation and let’s say that the average rate of Inflation was seven percent so then we can use this formula and we can work out what this truck that he bought in 2019 we can see what a similar model will

cost in five years time because you’ll want to buy a brand new one again so the new truck is going to be worth 1.4 million or 1 402 551.73 okay so now we have to be able to analyze what’s just happened here so his old well his truck that he’s bought now in 2019 that’s going

to decrease in value so by the time 2024 comes his truck will be worth that amount he’ll probably be able to sell it to someone the the new truck that he’ll want to buy at that time will be 1.4 million so how much money will this truck owner have to have saved up by that time well he

needs 1.4 million but he’s going to sell this truck for 733 000 so he’ll only need to have the difference between those numbers and if you subtract those two numbers from each other you end up with six hundred and sixty eight thousand six hundred and forty seven rand and seventy one

cents so i should be putting around for each of these but this is the value that the truck owner will need to have saved up in those five years so what he does or he or she is on the day that they purchased this truck in 2019 they asked their accountants to do a quick calculation to get an estimate

of what they might need to be of of how much they would need to have saved by the time 2024 come and the accountant approximate or estimates that the new truck that they’ll need to purchase is that amount they’ll be able to sell their old truck for that amount and so they’re going

to need an extra 668 000. so what they do in 2019 is they will set up a sinking fund all it is is a future value account where they will make regular payments so the owner of the truck company knows how much money they’re going to need they’re going to need a future value of 668 647.71

rand they don’t know how much they’re gonna have to save every month let’s say that the bank offers them an interest rate of 12 percent compounded monthly so that will if it’s for five years that’ll be 60 payments we’re not going to change anything now from

starting late or anything like that and then we can go and work out the value of x and that is the amount that the the truck company would need to save every month from 2019 up to 2024 so that they’ll have enough money to purchase the new truck so let’s see how much their monthly

payment will have to be they’ll need to save 8187 rand and 22 cents so that is how a sinking fund works you buy something but then you want to replace that item in a few years time and you know that the value of your item will become less that’s depreciation the value of the new model

will go up that’s called Inflation and so you’re going to need a bit of money you’re going to need a bit of extra money because if you sell the old item that store won’t be enough money to cover the cost of the new item and that’s where the sinking

fund comes in you you you create a sinking fund to be able to purchase the new item in a few years time