High School

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The calculation for determining Actual Cash Value of property is:
A) Depreciation minus functional replacement cost
B) Replacement cost minus depreciation
C) Market value minus premiums paid
D) Replacement cost minus premiums paid

Answer :

The Actual Cash Value (ACV) of property is a common term in the insurance industry, particularly in property insurance policies, such as homeowners, renters, or business insurance. The concept of ACV is used to determine the amount of money an insurance company will pay to the policyholder if the property is damaged or lost.

To calculate the Actual Cash Value, we use the following formula:

ACV = Replacement Cost - Depreciation

In this context:

  1. Replacement Cost: This is the cost to replace the damaged property with a new item of similar kind and quality at today's prices.

  2. Depreciation: This accounts for the decrease in value of the property over time due to wear and tear, age, and obsolescence.

So, the correct answer to the question is:

B) Replacement cost minus depreciation

This calculation is necessary because it reflects the current value of the property, taking into account its condition and age, not just the cost to replace it. In practice, this helps insurance companies and policyholders understand the true value of the property at the time of a loss, ensuring fair compensation.

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