CS Executive · Corporate Accounting and Financial Management · Time Value of Money
Sundaram Textiles must accumulate ₹10,00,000 at the end of 5 years to redeem a liability. It will deposit equal amounts at the end of each year in a sinking fund earning 10% p.a. (FVIFA 10%, 5 years = 6.1051; PVIFA 10%, 5 years = 3.7908). What is the approximate annual deposit?
The annual sinking fund deposit is about ₹1,63,797. It is found by dividing the required ₹10,00,000 by the future value annuity factor of 6.1051 for 10% over five years. Using the present value annuity factor or simple division ignores how interest builds up.
- A₹1,63,797Correct
- B₹2,00,000
- C₹2,63,797
- D₹1,48,907
Explanation
Annual deposit = 10,00,000 / FVIFA = 10,00,000 / 6.1051 ≈ ₹1,63,797. Dividing by the PVIFA (3.7908) gives ₹2,63,797, which wrongly uses the capital recovery factor. Dividing by 5 ignores interest, and ₹1,48,907 wrongly treats deposits as made at the start of each year.
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