a. Idowu ltd has just purchased a machine at a cost of #8million. The effective life of the machine is estimated to be 8years. A sinking fund is to be created for replacing the machine by a new model at the end of its Iife time when its scrap realizes nil. Machine price is assumed to increase in line with inflation rate. The annual Inflation rate is assumed to be 14% Calculate what amount should be set aside every year out of profit for the sinking fund if it accumulates at 24% interest rate per annum. Show the Sinking fund Schedule.

b. Suppose you are considering two investments: one pays 10% Simple interest per annum and one that pays 10% Compound lnterest per annum, which would you choose and why?

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Answer a The amount to be set aside every year out of profit for the sinking fund is calculated usin... View the full answer