The baseline cost for any component is its Current Replacement Cost, and to avoid unnecessary complexity, only current replacement costs should be conveyed during transactions with BRG. Future component replacement expense forecasts are automatically calculated from a single assumed inflation rate which is universally applied to all years and all components. The inflation rate assumption is clearly disclosed within BRG reserve studies.
Current Replacement Cost (CRC) is also known as Current Value (CV) and the inflated future expense is also known as Future Value (FV). CV and FV are economist terms, and the formulas for converting between CV and FV are presented below.
Future Value = Current Value * Annual Inflation Raten
Current Value = Future Value / Annual Inflation Raten
Where n = number of years (current year equals zero)
Where ‘Annual Inflation Rate’ = 1 + % (i.e. 2.5% = 1.025)
Example: given 2.5% inflation rate, 2014 current year, and $1,000 current replacement cost.
- 2015 inflated cost = (FV2015) = $1,000 * 1.0251 = $1,025
- 2023 inflated cost = (FV2023) = $1,000 * 1.0259 = $1,249