A machine that costs Rs. 2 lacs has a 7-year useful life and a Rs. 30000 scrap value. How much (in lacs) do the business need to invest in a sinking fund generating 5% annually in order to be able to replace the machine once it has served its purpose? Assume that after 7 years, a new machine will cost Rs. 3 lacs.

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30161.35

33101.35

33161.35

33111.35

answer is C.

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Detailed Solution

Concept- Sinking Fund: If an annuity is not paid for n years, the comparable amount that could be paid at the conclusion of the nth year is equal to the amount of a particular conventional annuity.
M is the (future) amount of the annuity, and A is the amount of each instalment.
A series of equal payments provided at regular intervals with compound interest is known as an annuity.
The payment term of an annuity is the interval between two consecutive payment dates.
Each instalment of a single annuity is referred to as an instalment.
A new machine costs Rs. 3 lacs.
The old machine is worth Rs. 30,000 in scrap.
Consequently, the cost of a new machine after seven years is Rs. 300000 less Rs. 30000, or Rs. 270000.
If A is the annual contribution to the sinking fund, then M is equal to Rs. 270000 for the annuity amount.
Periods totaling 7 years.
R is equal to 5%, or 0.05.

Hence, option 3 is correct.

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