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Actual Cash Value (ACV) is computed by subtracting depreciation from the replacement cost. The depreciation is usually calculated by establishing a useful life of the item and determining what percentage of that life remains. This percentage times the replacement cost gives the ACV.
As an example: a man purchased a television set for $2,000 five years ago and it was destroyed in a hurricane. His insurance company says that all televisions have a useful life of 10 years. A similar television today costs $2,500. The destroyed television had 50% (5 years) of its life remaining. The ACV equals $2,500 (replacement cost) times 50% (useful life remaining) or $1,250.
This concept is different from the book value used by accountants in financial statements or for tax purposes. Accountants use the purchase price and subtract the accumulated depreciation in order to value the item on a balance sheet. ACV uses the current replacement cost of a new item.
Insurance policies may be purchased utilizing several different valuation methods. These include: Replacement Cost Value (RCV), Fixed Value (Guaranteed Replacement Cost) and Actual Cash Value (ACV). Some policies will use different valuation methods depending upon the item. For example, the building may be insured at Replacement Cost Value, the most of the contents insured at Actual Cash Value and a few specific items at a Fixed Value (antiques). Policies may also include co-insurance clause or deductibles provisions which will impact the actual cash paid out by the insurance company.
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