1. **State the problem:** Eva purchased a machine for 300000. We want to find which depreciation method (straight-line at 20% or reducing-balance at 30%) leads to the highest combined profits in the first two years. 2. **Recall depreciation formulas:** - Straight-line depreciation per year: $$\text{Depreciation} = \text{Cost} \times \text{Rate}$$ - Reducing-balance depreciation per year: $$\text{Depreciation}_n = \text{Book value at start of year}_n \times \text{Rate}$$ 3. **Calculate depreciation and book values for straight-line:** - Annual depreciation = $$300000 \times 0.20 = 60000$$ - Book value after 1 year = $$300000 - 60000 = 240000$$ - Book value after 2 years = $$240000 - 60000 = 180000$$ - Total depreciation in 2 years = $$60000 \times 2 = 120000$$ 4. **Calculate depreciation and book values for reducing-balance:** - Year 1 depreciation = $$300000 \times 0.30 = 90000$$ - Book value after 1 year = $$300000 - 90000 = 210000$$ - Year 2 depreciation = $$210000 \times 0.30 = 63000$$ - Book value after 2 years = $$210000 - 63000 = 147000$$ - Total depreciation in 2 years = $$90000 + 63000 = 153000$$ 5. **Compare total depreciation:** - Straight-line total depreciation = 120000 - Reducing-balance total depreciation = 153000 6. **Interpretation:** - Higher depreciation reduces profit. - Reducing-balance method has higher depreciation in first two years, so profits are lower. - Straight-line method leads to higher combined profits in the first two years. **Final answer:** The straight-line basis will lead to the highest combined profits in the first two years.