Numerical Problems on sinking Funds

By

Ankit Thakur

Assistant Professor

(Civil Engineering)

Example 1. A building in an A class city is let out @ Rs. 5000 PM .( per

month) The total outgoings of the property is estimated to be 15% of the
gross income, calculate the capitalized value of the property if the present
rate interest is 6% and life of the property is 50 Years.

Solution: Gross rent = 5000*12 = Rs 60000 P.A (per year)

Outgoings = 15% of gross rent

=60000*15/100 = Rs 9000 P.A Net Rent

= 60000-9000 = Rs 51000

Since the life expectancy is quite lengthy therefore, the income is considered to
be perpetual (identifying long time) hence

Y.P = 1/R = 16.67

Capitalized value = 51000*1/0.06

= Rs 850000

In case sinking fund allowance is also to be accounted for

Sc = (R/[(1 + R)n – 1]

= 0.06/[(1+0.06)50-1]

= 0.0034 Y.P = 1/ (R + Sc)

 = 1/ (0.06+0.0034) = 15.77

Capitalized value = 51000*15.77

= Rs 804270.

Example: 2 a) The Present estimate of a building is Rs 200000. it is 20 yrs

old and maintained in a good condition. The life of the structure is assumed
to be 80 yrs. Work out the present value of the building for acquisition. b)
With the present value of the building calculate the standard rent, the rate
of interest may be assumed 6%.

Solution: a) The depreciated value of the building is:

D= P*((100- rd)/100)n

Where, D= Depreciate value P = Rs 200000 (i.e Cost of a present Market Rate)

rd= 1 (assumed) – fixed percentage of depreciation

Where r stands for rate and d for depreciation

n=20 Therefore, D=163581.0

b) Annual rent @ 6% = 163581*6/100

= 9815.0

Rent per Month or Standard Rent = 9815/12 = Rs 818.

Note: The value of rd may be taken as 1 for building having life 80 yrs.

Example 3. An RCC framed structure building having estimated future life

80 yrs, fetches a gross annual rent of Rs 2220 per month. Work out its
capitalized value on the basis of 6% net yield. The rate of compound
interest for sinking fund may be taken 4%. The land Plot of above building
measures 1400 sqm and cost of land may be taken to be Rs. 120 per sqm.
The other Outgoing are:

i) Repair and maintenance 1/12th of the gross income.

ii) Municipal taxes and Property tax – 25% of gross income.
iii) Management and Miscellaneous charges – 7% of gross income
 iv) The Plinth area of the building is 800 sqm and plinth area rate of
the above type of building may be taken

Solution:

Gross income per year = 2220*12 =Rs 26640.

Outgoing Per Annum:

i) Repair and Maintenance 1/12 of Gross income = 26640/12

= Rs 2220

ii) Municipal taxes and property tax @ 25% = 26640*25/100

=Rs 6660

iii) Management and Miscellaneous charges @ 7%

= 26640*7/100
= Rs 1864
Sinking fund Coeff. (Sc)=R/((1+R)n-1)
= 0.04/((1+0.04)80-1)
= 0.0018
iv) Sinking Fund Req to accumulate the cost of the building (which is at
the rate of Rs 150 / sqm of plinth area
= 800*150=Rs 120000 in 80 years @ 4% interest

= 120000*0.0018= Rs 216.0

Total Out going per annum = Rs 10960.8

Net annual Return = 26640-10960.8

= Rs 15679.20

Capitalised value of the Building = Net income * YP

= 15679.20*100/6

= 261320 Cost of land @ Rs 120 per Sqm (1400*120)

= Rs 168000.0 Total = Rs 429320.0

Total value of whole property = Rs 429320