Question

How much would you receive with actual cash-value coverage for a four-year-old sofa destroyed by fire? The sofa would cost $840 to replace today, whereas it cost $800 four years ago and had an estimated life of 8 years. Your Answer:

Answer 1

The solution is as follows:

Actual Cash Value (ACV) is computed by subtracting depreciation from replacement cos The depreciation is usually calculated by establishing a useful life of item determining what percentage of that life remains. This percentoge multiplied by the replacement cost equals the ACV. So, you purchased a sofa for $800 four years ago and it was destroyed by fire. The sofa had an estimated life of 8 years. A similor sofa would today costs $840. The destroyed sofa had 50% of its life remaining ie. 4 years. The Acv equals $840 (replacement cost) times 50% (useful life remaining ) or$ 420. Therefore, the Actual Cash-Value =4840x50% = $ 420 :. You will receive $420 as actual cash-value coverage.