Which formula calculates Actual Cash Value (ACV)?

The formula for calculating Actual Cash Value (ACV) is Replacement Cost minus Accumulated Depreciation. This approach reflects the value of an asset after taking into account wear and tear, obsolescence, and other factors that diminish its value over time.

In practice, this method allows insurers to determine what the insured item is worth at the moment of a claim rather than its original purchase price or replacement cost. By subtracting accumulated depreciation from the replacement cost, the resulting figure provides a more accurate representation of the asset's current worth. This is especially important in insurance policies to ensure that policyholders are compensated fairly for their losses while also reflecting the reality that items lose value as they age and are used. This calculation helps maintain balance in the compensation process, ensuring it is neither overly generous nor punitive to the insurance company.