The municipality of Kirkfield borrowed $100 000 to build a recreation centre. The debt principal is to be repaid in eight years, and interest at 13.75% compounded annually is to be paid annually. To provide for the retirement of the debt, the municipal council set up a sinking fund into which equal payments are made at the time of the annual interest payments. Interest earned by the fund is 11.5% compounded annually.
a. What is the annual interest payment?
b. What is the size of the annual payment into the sinking fund?
c. What is the total annual cost of the debt?
d. Compute the book value of the debt after three years.
e. Compute the interest earned by the fund in Year 6.
f. Construct a sinking fund schedule showing the book value of the debt and totals. Verify your computations in parts (d) and (e) against the schedule.