Issue 4Recently, Fahari purchased a new tractor. However, after the conference and considerations on smart farming, the directors have realised that they need to consider upgrading the new tractor in the next five years. The CFO would like you to explain the concept of establishing a sinking fund and perform some calculations that will be useful in the decision of whether to proceed. Five years from today, the tractor will be sold at its scrap value. The amount received from the sale will be used to add to the savings achieved through the sinking fund. The CFO has provided you with the following additional details:The new tractor was purchased for R1 500 000 two weeks ago but will only be delivered onsite today. Therefore, depreciation charges will only start today. The price of the tractor today is still R1 500 000.· Depreciation will be charged at 22%pa using the reducing balance method· The new model currently costs R1 700 000, and the cost price is expected to grow by 18% pa compound interest.
a) Explain the concept of a sinking fund.
b) Calculate the scrap value of the tractor in 5 years time.
c) Calculate the cost of the new tractor in 5 years time and hence the value that the sinking fund must attain.
d) Calculate the equal monthly payments which will start in 1 month time and finish in 5 years time. Interest is 14.4% compounded monthly