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Question
Solve the following :
Some machinery is expected to cost 25% more over its present cost of ₹6,96,000 after 20 years. The scrap value of the machinery will realize ₹1,50,000. What amount should be set aside at the end of every year at 5% p.a. compound interest for 20 years to replace the machinery? [Given (1.05)20= 2.653]
Solution
Since, the machinery is expected to cost 25% more over its present cost i.e., 6,96,000,
∴ Expected value of machinery
= Present cost + 25% of present cost
= `6,96,000 + 25/100 xx 6,96,000`
= 6,96,000 + 1,74,000
= ₹8,70,000
After 20 years, scrap value of the machinery is ₹ 1,50,000.
∴ Accumulated value of machinery = Expected value of machinery – Scrap value of machinery
= 8,70,000 – 1,50,000
= ₹7,20,000
∴ A = ₹ 7,20,000
Also, r = 5% p.a., n = 20 years,
i = `"r"/(100) = (5)/(100)` = 0.05
Since, A = `"C"/"i"[(1 + "i")^"n"` - 1]
∴ 7,20,000 = `"C"/(0.05)[(1 + 0.05)^20 - 1]`
∴ 7,20,000 x 0.05 - C[(1.05)20 – 1]
∴ 36,000 = C (2.653 – 1)
∴ 36,000 = C x 1.653
∴ C = `(36,000)/(1.653)`
∴ C = ₹21,778.58
∴ Sum of ₹21,778.58 should be set aside at the end of each year.
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