Alpha Transport Company buys a vehicle for GH¢265,000. The value of the vehicle depreciates on a reducing balance basis at 17% per annum. The company plans to replace this vehicle in 5 years’ time and they expect the price of a new vehicle to increase annually by 12%.
Required:
i) Calculate the book value of the vehicle in five years’ time. (3 marks)
View Solution
ii) Determine the amount of money needed in the sinking fund for the company to be able to afford a new vehicle in five years’ time. (3 marks)
View Solution
Therefore, the balance of the sinking fund must be greater than the cost of a new vehicle in 5 years’ time less the money from the sale of the old vehicle:
467,020.55-104,384.58
=GH¢362,635.97
iii) Calculate the required monthly deposits if the sinking fund earns an interest rate of 11% per annum compounded monthly. (3 marks)
View Solution
Required monthly payment into the sinking fund:
FV=362,635.97; i=0.11/12 = 0.00917; n=5X12=60
Thus the company must deposit GH¢4,560 each month.