It is anticipated that the building would require a thorough repair and renovation after 25 years at an estimated cost of Rs. on the amount deposited,Įxample 12.5 Finding the Amount of Sinking Fund:Ī person purchases a building at a cost of Rs. The amount set aside for sinking fund is deposited in bank to carry an interest. The formula for sinking fund is the reverse of the formula of the amount of Re. In case of a building, a sinking fund may be created to replace the building after expiry of its calculated life fully or for major rehabilitation and renovation work after a lapse of a definite period. 50,000/- to the landlord after 10 years.Īnnual sinking fund may be defined as the fund set aside annually (at the end of a year) out of the annual income from the capital invested which at the compound rate of interest will grow by the end of the term to replace the capital invested or for a major repair or replacing an important part after expiry of its life. What amount will have to be deposited by the tenants yearly in a bank, if the prevailing rate of interest was 12% for the recurring deposit? The amount of Re. The tenants ask the landlord to repair the house investing his fund and agree to pay the amount required for repairs without any obligation after 10 years. 1/- will be added at the end of the period.Ī tenanted house is required to be repaired at a cost of Ra. If the owner is satisfied and considers his capital would be fully safe-guarded, only then he would be interested to invest in such a venture.įor better management of fund in connection with repairs and restoration of buildings, calculations need be made to ascertain the probable interest that the capital could earn in a certain period, the present value of the sum to be invested at a deferred date, the amount to be set aside annually for replacement of a part for major repairs of building to be undertaken at a later date or at the end of its estimated life, the capital that could be invested on a property, the net income from which the value of the property could be capitalised. The owner would like to know if the redemption of the capital invested at a rate and at interest on capital would be possible in a specific time period. In cases of repairs and restoration of old buildings, economics of the cost involved and capital to be invested for the repair works arise.