dotamasta

Economic depreciation is the decrease in the value of an investment over a period. For example, assume that a person buys a calculator for $10 and after one year the value of the calculator falls to $9. This decrease in value ($1) is economic depreciation.

On the other hand, she could’ve invested these $10 somewhere else and earned interest (let’s say @ 20%). The increase in the value of her asset ($2) is referred to as the forgone interest and also forms part of the opportunity cost.

By investing in the calculator, the company is worse off by $3.

Implied rental rate = economic depreciation + interest forgone.

P.S: Is forgone spelt foregone?