The correct answer is: C. reducing balances depreciation
In reducing balances depreciation, the annual depreciation amount is calculated as a percentage of the reducing balance of the asset. This means that the depreciation amount is higher in the early years of the asset’s life and lower in the later years. As the rate of interest increases, the present value of the future depreciation amounts decreases. This means that the annual depreciation amount required to achieve the same total depreciation over the asset’s life also decreases.
In sinking fund depreciation, the annual depreciation amount is calculated as a percentage of the original cost of the asset. This means that the depreciation amount is the same each year. As the rate of interest increases, the present value of the future depreciation amounts increases. This means that the annual depreciation amount required to achieve the same total depreciation over the asset’s life also increases.
In straight line depreciation, the annual depreciation amount is calculated as a constant amount over the asset’s life. This means that the depreciation amount is the same each year. The rate of interest does not affect the annual depreciation amount in straight line depreciation.
Therefore, the annual instalment towards depreciation reduces as rate of interest increases with reducing balances depreciation.