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)
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A sinking fund is a fund containing money set aside or saved to pay off a debt or bond. A company that issues debt will need to pay that debt off in the future, and the sinking fund helps to soften the hardship of a large outlay of revenue.
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)
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