A firm has a $1,000,000 debt (e.g., a bond) outstanding that matures after 10 years. The sinking fund requires the firm to set aside annually an amount so the debt may be retired at maturity. If the firm can earn 10% annually on these funds, how much must it invest annually to meet the sinking fund??
What will be an ideal response?
X(15.937) = $1,000,000
X = $1,000,000/15.937 = $62,747
15.937 is the interest factor for the future value of $1 at 10% for 10 years. (PV = 0; N = 10; I = 10; PMT = ?, and FV = 1000000. PMT = -62745.39.)?
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