Depreciation

Costs assets lose value over lifetime (for example, new car loses value quickly) physical deterioration, obsolescence ⇒ loss of value part of ongoing operating costs we allocate a portion of lifetime loss value to annual operating costs yearly depreciation charge — uniform over lifetime, nice for Accounting purposes

for example purchase price = 40k estimated salvage value = 10k economic life = 5 years yearly depreciation cost = (FC - SV)/n = 6k basically the capital cost, lose 30k of value over 5 years

We define the capital cost:

$$CC=\frac{FC-SV}{n}$$

as on average, how much does it cost us to own this equipment, where $n$ is the number of years we own the equipment.