Question

A machine costing ₹50,000 is to be replaced at the end of 10 years, when it will have a salvage value of ₹5000. In order to provide money at that time for a machine costing the same amount, a sinking fund is set up. If equal payments are placed in the fund at the end of each quarter and the fund earns 8% compounded quarterly, then what should each payment be?

[Given (1.02)⁴⁰ = 2.208]

Answer 1

The amount of sinking fund S at any time is given by

Where R = Periodic payment,

i = interest per period,

n = number of payments

S = Cost of machine – Salvage value

= 50,000-5000 = ₹45,000