Actual Cash Value is a method to value an insured property. It is calculated by deducting depreciation from the replacement cost.
ACV= Replacement Cost-Depreciation
Replacement Cost: "Current market price of a particular product or property". For example, a building was priced at $50000 5 years ago and currently it is priced at $55000. Hence, the replacement cost is $55000.
Depreciation: Decrease in value of property due to its use or obsolescence.
There are two methods to calculate depreciation.
Straightline Method- Purchase price of asset - Scrap value (Recoverable value) / Expected useful life of the asset (How long an asset can benefit the company)
2- Reducing Balance Method- In this method a fixed percentage of depreciation is taken and charged to the Net Book Value (NBV= Purchase Price of Asset-Accumulated
Depreciation or Combined Previous Depreciation) of the asset.
Depreciation=Net Book Value (NBV) * Depreciation Rate