Depreciation for an installation consisting of a number of components subject to wear and tear

Total depreciation for a period of time is determined as the user cost of capital, i.e. the annuity equivalent to the chain of all payments needed to maintain the productive capacity of the plant under consideration over an unbounded horizon. The calculations are based on the assumption of a given constant rate of utilization considered as normal and on the respective optimal maintenance and replacement policy. The part of depreciation that is imputed to a specific output is determined as the change in the present value of the above-mentioned payments that results from the introduction of the output as an increment to normal utilization during the periods in which it is produced. The method proposed, along with the determination of optimal replacement times, is illustrated by a numerical example.