Question

A machine purchased at cost of 225000 has productive lifr of 6 yrs after which its scarp value is estimated to be nil. Assuming that costs aee expected to go up by 35% obrr the nxt 6 years. How much depreciation should annually be set aside out of profita so as to provide enough money to replace the assests after 6 years? The amount set aside annually can be invested at 14% p.a compound interest.

Answer 1

Machine purchase cost = 225000/-

Scrap value = nil

Life =-6 years

After 6 years the asset should be replaced.

Cost after 6 years = (225000)(1+0.35) = 303750

Amount to be available after 6 years=303750

If we deposit 1200/- per year amount available after 6 years would be

$1200(1.14)^5+1200(1.14)^4+1200(1.14)^3+...+1200(1.14)^0</p><p>=11003.81$

Hence for 303750 amount to be set aside per year

=$\frac{303750}{11003.81} (1200) = 33125$