Sinking funds involve:

• A. Investing discretionary cash flows for growth
• B. Investments where you put in a fixed amount each year to pay debts or replace an asset
• C. A method to finance working capital deficits
• D. A plan to issue new shares

Answer: (B)

Sinking funds are about setting aside a fixed amount over time to meet a future obligation, such as repaying debt or replacing a capital asset. This matches the idea of contributing a fixed sum each year to pay debts or replace an asset, ensuring the funds are available when needed. For example, a company might accumulate money to redeem bonds at maturity. The other options describe uses like investing discretionary cash for growth, financing shortfalls in working capital, or issuing new shares—none of which involve earmarking regular deposits to retire debt or replace assets.