Capital Appreciation Meaning Example How To Calculate

Capital Appreciation Meaning

How to Calculate Capital Appreciation?

Capital Appreciation = Current Value – Purchase Price

Here, the current value means the current market value of the asset. The same will be the current market price at which one can sell the asset.

TThe purchase price, also known as the acquisition price, is the cost incurredCost IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more to purchase a particular asset.One may calculate it by reducing the asset’s purchase price from its current value.

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Example

Mr. John purchased land in California. He bought the land in January 2016 for $2,00,000. Now, the price of the land has increased and will reach about $2,25,000 in 2020.

Solution

Calculation of Capital Appreciation: –

= $2,25,000 – $2,00,000= $25,000

Causes

Strong economic growth may also result in appreciation, especially for assets such as stocks.Lower interest rates lead to an infusion of money in the market and create a possibility of appreciation.It may occur for assets such as a company’s stock because it outperforms other competitors.In the case of the real estate sector, capital appreciation may be a result of developments taking place in the nearby arena.

Capital Appreciation vs. Capital Returns

Capital appreciation means the increase in the market value of the assets. It reflects the gain one could make by selling the asset at the current value at a particular period. The calculated gain is purely hypothetical since the actual sale does not occur.

On the other hand, capital return means the profits earned by a person on the sale of an asset. It can be calculated by reducing the asset’s purchase price from its sale value. In the case of capital return, the gain calculates as an actual gain since the sale is carried out. Therefore, there is no scope for changes in the future.

Advantages

This concept helps a person know the current profitabilityProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more that may arise if sold the asset. Based on such calculations and expected future prices, a person may decide whether to hold or sell such an asset for maximum profits.

Disadvantages

It only indicates the profits earned if they sold the asset. Only when disposing of the asset; will one know the real profits.

Conclusion

The concept of capital appreciation is beneficial in the case of some assets, such as real estate and investments. The same reflects the appreciation in the asset’s value and gives the investor of assets a fair idea about its current profitability.