Let’s say you have some assets. Most likely, the value of your asset is going to change over time. If we assume that it’s true, two things can happen. Your value may increase or decrease over time. For example, if you have a piece of land or some real estate, you’d generally expect its value to grow over time. Contrary to that, if you have a car or computer, you’d expect its value to go down over time.
In the first case, when the value is increasing, we call it appreciation; in the second case, when the value is decreasing, we call it depreciation. Our appreciation calculator is an easy-to-use tool that can help you estimate the value of just about anything in the future.
How to Calculate Future Value?
Before we go on, we’d like to explain why we are using approximation instead of just saying the calculator can help you determine the future value. Well, we don’t even need to dive deep into economics, as one can simply use common sense. The future always carries some level of uncertainty and some level of risk.
Factors that shape the value of assets and goods may change over time, sometimes even drastically. In practical terms, it is best to take your calculations as a good approximation rather than something set in stone. The precision of such approximations may vary from case to case. For example, the further you go into the future with your calculation, you will less likely need to put in your result.
Now when that’s out of the way, let’s check the math behind all this. It may be even simpler than you might have expected. Here is our formula:
FV – this is our final value, i.e. the future worth of our assets
IV – it is our initial value
AR – this is our appreciation rate
n – it’s our period, i.e. the number of years/months in the future.
Now let’s put that in use with some numbers. Let’s assume we have an asset that is worth $1,000 today (this is our initial value). We want to know what the future value of this asset is in two years if the appreciation rate is 6%. Well, our “n” is 2, and our AR is 0.06 (6 divided by 100). Putting all this into the formula gives us the following:
This means after two years, at this rate, our asset will be worth $1,123.60.
How to Calculate the Appreciation Rate?
We can use this formula if we want to find the appreciation rate needed for our asset to be worth X amount of dollars in the future. Let’s use the previous example. We want to know what should be the rate of appreciation for our asset to be worth $1,123.60 after two years.
The appreciation rate should be 0.06, or we can multiply that by 100 to get 6%.
How to Use the Appreciation Calculator?
While this manual calculation may be simple enough, it is much more practical to use the appreciation calculator, especially when working with big numbers.
Let’s say we have a piece of land worth $10,000 and let’s assume the appreciation rate of 10%. How much will our piece of land be worth after three years?
We put our parameters in the calculator and we get the result of $13,310. This means that after three years, our land will be worth $13,310 if, of course, the appreciation rate stays constant. In other words, the value of our land increased by $3,310 during this period.
You may notice that appreciation works the same as compounding interest. After every year, the value of our land increased at a given rate. We can take a look at annualized appreciation as well. In this case, we assumed that we had three compounding periods, one for each year.
We get our result by dividing the net difference in value by the number of compounding periods. In this case, 3,310 divided by 3 equals 1,103.33. This means we had a $1,103.33 increase in value on average.
Depreciation Example
Let’s quickly see what would happen if we had a decrease in value. We can also use this calculator to get an approximation of the future value in the case of depreciation. Let’s assume we have the same numbers as before, but instead of a piece of land, now it is a car.
We expect the value of a car to diminish over time, so all we have to do is use a minus rate. In this case, it is 10%. The calculator gives us the result of 7,290. This means that our car will be worth $7,290 after three years at the depreciation rate of 10%.
What about annualized appreciation? Well, since we had a decrease in value in this example, we’ll get a negative number. Don’t get confused by this. Whenever we get a negative appreciation as our result, it actually means we have depreciation. For this example, we have a net difference in the value of -2,710.
We subtract the final value of 7,290 from the initial value of 10,000 to get it. The result tells us that our asset will lose $2,710 in value. Once again, we can divide this net difference by 3 (number of years) to get -903.33. This means we lost $903.33 in value on average.
Conclusion
Consider all the details while calculating the future value of your assets. It is not just entering the numbers, as the type of asset does make a difference. As we saw, if we expect our assets to grow in value, we put a positive appreciation rate in the calculator. If we expect our assets to reduce in value, then it is a negative appreciation rate.
Also, bear in mind that we live in a dynamic world where things are changing fast. The market value of your asset doesn’t necessarily follow the future value. It may be higher or lower at any point in time. Again, it depends on what asset is in question. Play with the calculator. It can be funny. Good luck!