SINKING FUND EXPLAINED
The time frame for a sinking fund usually relates to specifically identified property expenditures (e.g. roof, boiler plant, lift etc.) and the anticipated useful life of the item that will need to be replaced. In terms of estimating the longer-term expenditures that need to be covered by the fund at different points in the future, the investor/property manager needs to assess the short, medium and long-term maintenance works and implied capital expenditures that will be needed in order to secure that the property remains in a good state of repair. In a multi-unit residential development with many owners, the sinking fund contribution is typically paid by property owners as part of their service charge fee. It is good practice to set up a separate interest bearing bank account for this fund in contrast to the contributions for the service charges that can be deposited in a current account. The typical question that arises when setting up a sinking fund is the amount A that needs to be deposited annually in order to accumulate by its termination time the capital amount that will be needed to cover the anticipated capital expenditure. This amount is given by the formula: A = F*r / [(1+r)n -1] (1) Where The other question that may arise when considering a sinking fund is its future value F at the end of its time frame, that is, after n periods, given an annual deposit of A and interest rate r. This future value is given by the formula: F = A * [(1+r)n -1] / r (2) We can estimate this amount using formula 1 where F=100,000, r=5%, and n=10 A =100,000 * 0.05 / [(1+0.05)10 -1] = 7,950
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