5.2. Future Salvage Value and Sinking Fund Factor

Try these first

1. 1.

   What is the use of the Uniform Series Capital Recovery Factor?

   Hint

   Think about how businesses plan their finances.

2. 2.

   Define the Sinking Fund Factor.

   Hint

   What do we want to save for in the future?

3. 3.

   What does the Uniform Series Capital Recovery Factor calculate?

   • Annual cash inflows
   • Annual cash outflows
   • Annual ownership costs

   Hint

   Think of cash as money going OUT.

4. 4.

   True or False: The Sinking Fund Factor is used to determine how much to save annually for future expenditures.

   • True
   • False

   Hint

   Think about your savings for a new car in the future.

5. 5.

   You have a machine that costs $250,000 with a life expectancy of 10 years. If you know the salvage value is$40,000, calculate the actual annual costs including depreciation and savings for replacement.

   Hint

   Don’t forget to consider the time value in your calculation.

6. 6.

   A company plans to replace a piece of equipment for which they need $120,000 in 5 years. If they earn 4% interest on their sinking fund, what is their annual contribution?

   Hint

   Apply the sinking fund formula accurately.