Question

An old building has been purchased by a person at cost of Rs. 30,000/- excluding the cost of land. What is the amount of annual sinking fund at 4 % interest assuming the future life of building as 20 years and scrap value of building as 10 % of cost of purchase?
1. Rs. 400.20
2. Rs. 200.70
3. Rs. 906.70
4. Rs. 890.70

Answer 1

Correct Answer - Option 3 : Rs. 906.70

Explanation: 

Sinking fund: 

A sinking fund is a fund containing money set aside or saved to pay off a debt or bond. 

Sinking fund = Purchased cost - 10% of the Purchased cost

Annual installment for sinking fund or Annual sinking fund = \(\frac{Si}{{(1+i)}^{n}-1}\) ,

Where, S = sinking fund, I = Rate of Interest, n = Usefull time 

Calculation:

Given:

Purchased cost = Rs. 30,000, n = 20 years, i = 4%

Sinking fund = Purchased cost - 10% of the Purchased cost

S = 30,000 - 10% of 30,000 = 27,000

Therefore, 

Annual sinking fund = \(\frac{27000\times 0.04}{{(1+0.04)}^{20}-1}\) = Rs. 906.7