The correct answer is: B. Rate of interest cannot be exactly determined.
The sinking fund method of depreciation is a method of accounting for the depreciation of an asset by setting aside a certain amount of money each year to replace the asset when it reaches the end of its useful life. The amount of money set aside each year is based on the estimated useful life of the asset and the rate of interest that can be earned on the money.
The sinking fund method is seldom used in the industry because the rate of interest that can be earned on the money is difficult to determine. The rate of interest can change over time, and it is difficult to predict what the rate of interest will be in the future. This makes it difficult to determine the amount of money that should be set aside each year to replace the asset.
The other options are incorrect because:
- Option A is incorrect because the sinking fund method can be used in an unstable economy. The amount of money that is set aside each year will be adjusted to reflect the changes in the economy.
- Option C is incorrect because the initial depreciation is not necessarily high. The initial depreciation is based on the estimated useful life of the asset and the rate of interest that can be earned on the money.
- Option D is incorrect because the initial depreciation is not necessarily low. The initial depreciation is based on the estimated useful life of the asset and the rate of interest that can be earned on the money.