Question

A machine costs a company Rs. 52,000 and its effective life is estimated to be 12 years. A sinking fund is created for replacing the machine by a new model at the end of its life time, when its scrap realizes a sum of Rs. 5,000 only. The price of new model is estimated to be 25% higher than the price of the present one. Find what amount should be set aside at the end of each year, out of the profits, for the sinking fund, if it accumulates at 10% effective.

Answer 1

Amount to be set aside every year = Rs. 606.85.

Step-by-step explanation:

Given: A machine costs Rs. 52,000 with an estimated life of 12 years. A sinking fund is created for replacing it by a model at 25% higher cost after 12 years with a scrap value realize of  Rs. 5,000.

Find: What amount should be set aside every year if the sinking fund investment accumulate at 10% compound interest p.a.?

Solution:  

Machine cost = Rs. 52,000

A  = 52,000 + 25% - 5000

  = 65,000 - 5000

  = 60,000

i = 0.01 (10%)

n = 12 years.

Sinking fund formula is:

A = a ( ( 1+i ) ^ n - 1 / i )

Substituting the values in the formula, we get:

60,000 = a ( 1+ 0.01)^12 - 1/0.01)

60,000 / = a (1.1268  - 100)

60,000 / 98.87 = a

a = Rs. 606.85.