The cost of construction of a new building according to present market rate is Rs. 80,000/- having a life of 70 years. But if the building is 15 years old determine the depreciated  amount which should be deducted from the cost of the new building at 6% compound interest.

Solution.

In this case the depreciation is assured to be annual sinking fund plus the interest of the accumulated sinking fund.

Sinking fund Co-efficient for 70 years,

Ic = i/(1+i)n – 1

= 0.06/(1+0.06)70 – 1

= 0.0010

An amount of Rs. 1 /- per annum in ‘n’ years

= (1+i)n – 1 / 0.06

= 23.26

Therefore, an amount of Rs. 1 /- after 15 years

= (1+ 0.06)15 – 1 / 0.06

= 23.26

Therefore, Raw of depreciation is 15 years

= 0.001 x 23.26

= 0.02326 or 2.326 %

Total depreciation is 15 years on Rs. 80,000 /-

= 8000 x (2.326/100)

= Rs. 1860.80

Therefore Rs. 1860.8 should be deducted due to depreciation from the cost of the new building.