Sinking Fund Factor
The sinking fund factor provides the annuity payment that must be made each conversion period at a given rate of compound interest to have available a specified sum at some given future time period.
This calculation for a sinking fund is used to make real estate investment decisions such as how much money must be placed on reserve to have a specified sum at a given future time period to take care of scheduled capital expenditures or other expenses.
In other words, when a real estate investor wants to start setting aside money so he or she has enough available at some future date to replace, let’s say, for a roof on an apartment complex he or she owns, the investor would create a sinking fund.
The formula:
P = 1 / Sn
Where:
P = Cash flow payments of equal size at equal intervals
Sn = Future value of a series of annuity cash flows
Example: A real estate investor needs $10,000 in 5 years to replace refrigerators in an apartment complex that he or she owns. If the investor starts an ordinary annuity fund (payments made at the end of each year) that yields 15% per year, the investor would use the sinking fund factor to calculate what each annual payment would have to be to accumulate the $10,000.
Use of Excel Spreadsheet:
PMT (15,5,,10000,0) = $1,483.16
Use of HP-10B/12C Calculators:
N = 5
%i = 15
FV = 10,000
PMT = -1,483.16
Note: The HP-I0B/12C calculator must be set for payments to be made at the beginning of each conversion period to make this calculation.
Use of ProAPOD Mortgage Calculator:
Amount = $10,000
When Needed (years) = 5
Frequency (select from menu) = Annually
Type of Annuity (select from menu) = Payment at end of the interval
Compound Rate = 15.00%
Compounding Period (select from menu) = Annually
REQUIRED DEPOSIT = $1,483.16
A sinking fund is a prudent way for real estate investors to plan for future capital expenditures. The idea is straightforward, start depositing some amount of money into an account with compound interest at regular intervals so you have the total amount of money you need at some prescribed future time.
Author: James Kobzeff, March 6th, 2008
