An asset costs $80,000 and has an expected economic life of four years with no residual value. If depreciation is allowed for tax purposes over four years using the straight-line method, the allowable depreciation would be $20,000 each year. If the rate of tax on profits is 25%, the annual reduction in tax from the capital allowance is $20,000 x 25% = $5,000 for four years. Note I have assumed that you have a knowledge of depreciation and methods of providing for depreciation from Financial Accounting 1. If not, please self-study. Your examination will only cover straight-line method and reducing balance method.