i) Any entity that issues a bond to raise capital would need to pay off the bond when it matures. Paying the debt early via a sinking fund saves a company interest expense and prevents the company from being put in financial difficulties in the future if economic or financial conditions worsen.
Required:
What is Sinking Fund?                                                                                                                                                        (3 marks)

ii) The owner of a Business Centre purchased a robust photocopier for serving the UG University Students Community. The photocopier is expected to be replaced after 10 years. He therefore decided to set up a sinking fund and pay an equal annual amount to realise GH¢50,000 being the replacement cost.
Required:
Compute the equal annual amount he should invest if interest rate per annum is 10%.                                                     (4 marks)

Alpha Transport Company buys a vehicle for GH¢265,000. The value of the vehicle depreciates on a reducing balance basis at 17% per annum. The company plans to replace this vehicle in 5 years’ time and they expect the price of a new vehicle to increase annually by 12%.
Required:
i) Calculate the book value of the vehicle in five years’ time.                                                                                             (3 marks)

ii) Determine the amount of money needed in the sinking fund for the company to be able to afford a new vehicle in five years’ time.                                                                                                                                                                                    (3 marks)

iii) Calculate the required monthly deposits if the sinking fund earns an interest rate of 11% per annum compounded monthly. (3 marks)

a) One of the most important application of annuities is the repayment of interest- bearing debts. These debts can be paid by making periodic deposits into a sinking fund which is used as a future date to pay the principal of the debt or by making periodic payments that cover the outstanding interest and the principle. This second method is called amortization.
(i) Explain the term annuities as used in the statement above.                                                                                            (2 marks)

(ii) What is a sinking fund?                                                                                                                                                 (2 marks)

(iii) When is a loan with a fixed rate of interest said to be amortized ?                                                                               (1 mark)

c) Maame TorTor borrows GH¢ 3000.00 and agrees to pay interest quarterly at an annual rate of 8%. At the same time, she set up a sinking fund in order to repay the loan at the end of 5 years. If sinking fund earns interest at the rate of 6% compounded semi-annually,
Required:
Determine the size of each semi-annual sinking fund deposit.                                                                                           (5 marks)