What term describes the reduction in value of capital equipment as it wears out?

The term that describes the reduction in value of capital equipment as it wears out is depreciation. This concept accounts for the decrease in the monetary value of an asset over time due to factors like wear and tear, obsolescence, or age.

In economics, depreciation is crucial for businesses as it helps them allocate the cost of a capital asset over its useful life, thus accurately reflecting the asset's value on financial statements. This is essential when businesses plan for future replacements and assess their operating costs.

Other terms provided in the choices refer to different financial concepts. Appreciation signifies an increase in the value of an asset over time, often in relation to real estate or investments. Inflation describes the general rise in prices across an economy, affecting purchasing power but not directly related to the wear of capital assets. Amortization pertains to the gradual repayment of a loan or the gradual write-off of an intangible asset over time, which does not directly address the physical wear of capital equipment.