Under this method, not only the original cost of the asset bur also
the amount of interest on the investment is taken into account while computing depreciation. The idea of considering interest is that if the investment is made in any other asset instead of the relevant fixed asset, it . would have earned a certain rate of interest. To calculate the amount of depreciation, annuity factor is used. Annuity factor can be found out from the annuity table or by using formula. Amount of depreciation is computed as follows:
Amount of depreciation = (Annuity factor) x (original cost of the asset.)
