𝑘

1. Sinking fund Annuity ( A ) = F { (1+𝑘)ⁿ−1} , where F = future value(accumulated sum)

Here F = 50 Lakh
k = 0.12
n=7
50∗0.12 50∗0.12
Hence A = (1+0.12)7 −1 = (2.21−1)
= 4.96 Lakh

Hence company should invest Rs. 4.96 Lakh at the end of each year for 7 years in order to
accumulate enough money to repay the debenture of Rs. 50 Lakh.

Procedure of Loan Amortization and Capital Recovery :

Loan Amortization
Loan amortization is a loan repayment schedule which is calculated before loan repayment
started. Amortization is used for long term loans like as mortgage, R&D expenses, purchase of
goodwill, amalgamation, VRS payment etc. Loan amortization schedule can be prepared with
the help of Capital recovery factor. Below illustration is given as example.
Suppose ABC company borrowed a loan for 3 years of Rs 1 Lakh @ 10%from a bank to buy
some machinery . If bank requires 3 equal en-of-year repayment , then the annual investment
can be calculated from below formula
100000 = A * PVFA 3,0.1
100000 = A * 2.487
A = Rs. 40209.00
By paying Rs. 40209 every year ABC can completely repay the loan with 10% interest .

Loan Amortization Schedule

___________________________________________________________________________
End of year Payment Interest Principal repayment Outstanding Balance
0 100000

1 40209 10000 30209 69791

2 40209 6979 33230 36561

3 40209 3656 36553* 0

*Round off value is taken

Capital Recovery
If someone made an investment today for a given period of time with a certain interest rate , he
may like to know the annual gain. Annuity of the investment made today for a specified time at
a given interest rate is known as capital recovery.
The reciprocal of the present value annuity factor is called the capital recovery factor (CRF)
 (1+𝑘)ⁿ −1
PVAn = A[ 𝑘(1+𝑘)ⁿ
] = A* PVIFA
1
A = PVAn * [ 𝑃𝑉𝐼𝐹𝐴]
The term within the bracket is called as CRF
Example :
Let us XYZ firm plan to invest Rs . 10000 today for a period of 4 years . If the interest rate is 10%
how much income per year required to recover full amount. This can be find out by the above
formula :

k = 0.1
n=4
PVAn = 10000
𝑘(1+𝑘)ⁿ 0.1 (1+0.1)⁴
A = PVAn [ (1+𝑘)ⁿ−1 ] = 10000 [ (1+0.1)4 −1 ] = Rs. 3155

2. Present value of annuity = 12000

Annuity amount for 10 years = 1800
n = 10
we have to find out rate of interest = k

12000 = 1800 (PVIFAk,10)

12000
Hence PVIFAk,10 = = 6.667
1800
From the table of present value factor of annuity we can note the following
a. Present value of annuity of Rs.1 equal to 6.71 at 8% rate of interest for 10 years.
b. Present value of annuity of Rs.1 equal to 6.418 at 9% rate of interest for 10 years.

Thus the rate of return lies between 8% to 9%.

By interpolation we can obtain the rate of return as follows :

6.71−6.667 0.043
k = 8 +[6.71−6.418 ] = 8 + 0.291 = 8 + 0.15 = 8.15 %