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    Sinking Fund: Good or Bad

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    I think a sinking fund is a good idea. It places funds to the side gradual just in case an investment doesn't work out. We would all like for our investments to work out but unfortunately they don't. It may not be an attractive feature because when we invest our money we would like to think we are going to make money. It's kind of like a savings account in a way. The money is put there gradually so that is builds overtime, and is there just in case we need it.

    Explain why you think a sinking fund is or is not a good idea. Thank you

    © BrainMass Inc. brainmass.com September 29, 2022, 1:08 pm ad1c9bdddf
    https://brainmass.com/business/finance/sinking-fund-good-bad-577534

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    Sinking Fund
    Sinking fund is not a good idea as it costs to our money as it does not provide a significant return to the investors. The return from the sinking fund is limited around to a bank term deposit rate and the interest earned on this fund is also taxable, which causes a decline in the value of investment (Rattiner, 2008). The sinking fund generates fewer earnings and out of this a major part goes in the form of tax, which makes sinking fund a bad idea.
    Similarly, the money in the sinking fund is subject to inflation as it accumulates the money, so an increase in inflation rate causes a decline in the value of sinking fund. For example, the increase in the scope of the work creates for the find owner as he/she has to pay higher maintenance costs due to inflation (Brigham & Houston, 2009). Another cost, which exhibit the sinking fund as a bad idea, is associated opportunity cost. It is because the firm or the investors put a part of money in this fund, which is usually used for the emergency needs. But at the same time, the investor or firm may face a decline in their ability to increase their return by investing this amount in another investment opportunity.
    At the same time, the slow economy or the unpredictability of the market can also cause the under performance of the investment made in the sinking fund. The effective management of the sinking fund is essential due to long-term purpose, so a loss may be occur for the businesses in case of lack of management of the sinking fund properly. Similarly, the value of sinking fund is included in the share valuation and less return on it may cause a decline in the value of shareholders (Bollefer & Bernstein, 2009).

    References
    Bollefer, S.F. & Bernstein, J. (2009) Shareholders' Agreements: A Tax and Legal Guide. Canada. CCH Canadian Limited.
    Brigham, E.F. & Houston, J.F. (2009) Fundamentals of Financial Management. USA: Cengage Learning.
    Rattiner, J.H. (2008) Financial Planning Answer Book. USA: CCH.

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