Question

A farm machine cost ₦300000 with a salvage value of ₦50000 at the end of its life for 10 years. If money is worth 6% annually, use sinking fund method and determine the annual depreciation of the asset

Answer 1

The annual depreciation using the sinking fund method can be calculated using the formula:

Annual Depreciation = (Cost of Asset - Salvage Value) / Present Worth Factor

Where:
Cost of Asset = ₦300000
Salvage Value = ₦50000
Annual Interest Rate = 6%
Number of Years = 10

First, calculate the Present Worth Factor using the sinking fund formula:

Present Worth Factor = (1 - (1 + i)^-n) / i
= (1 - (1 + 0.06)^-10) / 0.06
= (1 - (1.06)^-10) / 0.06
= (1 - 0.558394) / 0.06
= 0.441606 / 0.06
= 7.36

Now, calculate the Annual Depreciation:

Annual Depreciation = (₦300000 - ₦50000) / 7.36
= ₦250000 / 7.36
= ₦34021.74

Therefore, the annual depreciation of the farm machine using the sinking fund method is ₦34021.74.