All fixed assets such as machinery, building, furniture etc. gradually diminish in value as they get older and becomes worn out by constant use in business.

The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.

Key Point

• If the rate of depreciation is r (as a decimal) per year and the present value of the asset is V, then the depreciated value, A, at the end of t years is given by
  A = V(1 - r)t

While a type of credit called personal contract purchase is perhaps the most popular option, the likes of leasing and hire purchase have been around for a while. Hire purchase is an arrangement for buying something, where the buyer makes an initial down payment and pays the balance plus interest in installments.