Question

An old building has been purchased by a person at a cost of Rs. 30000 excluding the cost of the land. Calculate the amount of annual sinking fund at 4% interest assuming the future life of the building as 20 years and the scrap value of the building as 10% of the cost of purchase.
1. Rs. 555.25
2. Rs. 1028.37
3. Rs. 907.20
4. Rs. 1500

Answer 1

Correct Answer - Option 3 : Rs. 907.20

Concept:

Sinking fund:

(i) It is a fund that is built up for the sole purpose of replacement or reconstruction of the property when it loses its utility at the end of its useful life. The fund is regularly deposited in a bank or with an insurance agency so that on the expiry of the period utility of the building, a sufficient amount is available for its replacement. It is given as,

\(\text{Annual installment of sinking fund}, S_c = \frac{SR}{(1 + R)^n - 1}\)

Where,

S = Total amount of Sinking fund accumulated at the end of utility period = Purchase cost - Scrap value

R = rate of interest and n = utility period

Calculation:

Given,

Purchase cost = Rs. 30000, R = 4%,

n = 20 years, Scrap value = 10% of purchase cost,

∵ We know that, S = Purchase cost - Scrap value

⇒ S = 30000 - 0.1 × 30000

∴ S = Rs. 27000

∵ We know that, \(\text{Annual installment of sinking fund}, S_c = \frac{SR}{(1 + R)^n - 1}\) 

⇒ \( S_c = \frac{27000\times 0.04}{(1 + 0.04)^{20} - 1}\)

∴ S_c = Rs. 906.70