A machine purchased at a cost of Rs. 10,000 has a useful life of two years. The amount which is to be set aside annually as a sinking fund at the rate of 10% compound interest will be:

A machine purchased at a cost of Rs. 10,000 has a useful life of two years. The amount which is to be set aside annually as a sinking fund at the rate of 10% compound interest will be:

Right Answer is:

Rs. 1,000/0.21

SOLUTION

‘The Sinking-Fund method is a technique for asset’s depreciation in which the firm sets aside 2 money amount to invest annually so that money, plus the interest earned in the fund, will be enough to replace the asset at the end of its useful life. The formula of the sinking-fund method is

$A = F\left[ {\frac{i}{{{{(1 + i)}^n} – 1}}} \right]$

 

Where

A = Fixed monetary amount that is deposited into the sinking-fund
i = Rate of interest = 10% = 0.1
n = Number of Interest Period = 2
F = future value sum of money = 10000

$A = 1000\left[ {\frac{{0.1}}{{{{(1 + 0.1)}^2} – 1}}} \right]$

 

= Rs. 1,000/0.21