• Sinking Fund Method: The use of compound interest is involved in the sinking-fund method. It is assumed that the basic purpose of depreciation allowances is to accumulate a sufficient fund to provide for the recovery of the original capital invested in the property.

    Annual depreciation amount (\(D\)) is calculated from: \[D = (V-V_s)\left[ \frac{i}{(1+i)^n-1} \right]\] This amount \(D\) is nothing but the annuity to generate a future worth of \((V-V_s)\).

    Book value at the end of year \(a\) is calculated from: \[V_a = V-D\left[\frac{(1+i)^a-1}{i} \right]\]