A machine costs a company Rs 525000 and its effective life is estimated to be 20 years. A sinking fund is created for replacing the machine at the end of its lifetime when its scrap realizes a sum of RS 25000 only. Calculate what amount should be provided every year out of profits for the sinking fund if it accumulates an interest of 5% per annum.
Answer & explanation
Correct answer: option 2
The correct answer is option (2) : 15121.27
Using FVAF tables
$A=RS_{\overline{n}/i}, $ we get
$500000= RS_{\overline{20}/0.05}$
$500000= R×33.0660$
$∴R=\frac{500000}{33.0660}=15121.27$