Sinking fund approach

The same approach used in the sinking-fund method may be applied by analyzing depreciation on the basis of reduction with time of future profits obtainable with a property. When this is done, it is necessary to use an interest rate equivalent to the annual rate of return expected from the use of the property. This method is known as the present-worth method and gives results similar to those obtained with the conventional sinking-fund approach. The sinking-fund and the present-worth methods are seldom used for depreciation cost accounting but are occasionally applied for purposes of comparing alternative investments. 

If the 450 million is discounted by 2% a year for the next 60 years for inflation, the value needed for decommissioning in 60 years will be approximately 1.5 billion. The annual contribution to a sinking fund to reach the 1.5 billion in 60 years at an interest rate of 6% will be 2.8 million per year, or only about 0.03 cent/kWh, the equivalent of two days worth of power sales from the plant. Thus, the sinking fund approach for a decommissioning fund has little impact on the cost of power from the plant. 

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