Simple SA has just purchased a roasting/salting machine to produce roasted walnuts. The finance director asks for your advice on how the company should calculate the depreciation on this machine.

Details are as follows:

Cost of machine ........ SF800,000

Residual value ........ SF104,000

Estimated life ......... 4 years

Annual profits ....... SF2,000,000

Annual turnover from machine . SF850,000

Required:

(a) Calculate the annual depreciation charge using the straight-line method and the reducing balance method. Assume that an annual rate of 40% is applicable for the reducing balance method.

(b) Comment upon the validity of each method, taking into account the type of business and the effect each method has on annual profits. Are there any other methods which would be more applicable?