Actual Cash Value

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

Example:

NBV= $1000
Depreciation Rate= 10%

Depreciation= $1000 * 10%

Depreciation= $100