Appreciation (Value) - Explained
What is Appreciation in Value?
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Table of ContentsWhat is Appreciate in Value?How does Appreciation Work? Understanding the Difference between Appreciation and DepreciationIllustration of a Capital AppreciationIllustration of Currency Appreciation
What is Appreciate in Value?
Appreciation refers to an increase in value of an asset over time.
Appreciation occurs due to different reasons, including an increase in demand or fluctuation and growth of interest rates. In accounting, appreciation refers to an upward movement of a company's asset value in their accounting books.
Appreciation is the opposite of depreciation.
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How does Appreciation Work?
Appreciation reflects an increase in the value of assets like estate properties, government bonds, and national currency. An increase in the monetary value of a company's share is known as capital appreciation, and it is mostly a by-product of the increased performance of that firm. At the point of appreciation, asset owners do not immediately receive the increase, as it only becomes visible when he or she revalues the properties at a higher price. The profit realized from selling an asset which has increased in value is called a capital gain. On the other side, when the value of a country's currency increases, it is called currency appreciation. An example would be when the Euro was worth $1.17 in 1999 and later increased to $1.60 in nine years. In this case, we can say that the Euro appreciated against the USD in 2008, while the USD depreciated in that same year. However, using the current exchange rate of $1.10 per Euro, we can say that the USD appreciated against the Euro, while the Euro depreciated before the USD.
Understanding the Difference between Appreciation and Depreciation
Assets are given to appreciation and depreciation. While some might appreciate, others are entirely doomed to depreciate. An example would be a normal car worth $50000. Over time, the worth of the car would reduce to almost $30000, especially when newer models are created. Properties like stocks or financial assets, on the other hand, are kept with the hope of appreciating. In general fashion, electronics and other physical items lose value over time.
Illustration of a Capital Appreciation
Assume that an investor purchased a real estate property for $500,000 and gave it out for rental at $25,000 per year. After a period of ten years, industrialization increased in that area, and many big names decided to find settle in the region. Now, the cost of houses has increased by over 110% during this period, and so has rent. In this case, we can say that the investor gains an extra $27,500 from rent (new cost becomes $52,500) annually. In a case where he or she decides to sell that property off, assuming that the building is not worth more than the 110% increase, then hed gain $550,000 (new price becomes $1,050,000) before tax. In this case, we can say that the return has increased in terms of rent and cost; thus, this property has appreciated.
Illustration of Currency Appreciation
In 1981, the Chinese Yuan appreciated against the U.S. dollar till it reached its peak at 8.28 yuan per dollar in 2005. Even with this increase, the USD was well valued, and as such more investors were producing goods at a cheaper cost. Sales were also strong and competitive around the world due to the cheap labor and production cost. However, in the later period of 2005, the Yuan increased by another 33% against the USD.