North Carolina Adjuster Practice Exam

How is actual cash value typically calculated?

1. Replacement cost plus total depreciation

2. Replacement cost minus total depreciation

3. Current market value plus depreciation

4. Current market value minus depreciation

The correct answer is: Replacement cost minus total depreciation

Actual cash value (ACV) is the method used to determine the value of property for insurance purposes, and it is often defined as the replacement cost of an asset less depreciation. This method acknowledges that while an item may cost a certain amount to replace, its actual value may be less due to factors like wear and tear, age, and condition. By subtracting total depreciation from the replacement cost, you arrive at the current worth of the item in its existing condition, rather than its full replacement cost. This approach is particularly useful for insurance claims, as it reflects the true value of the property at the time of loss or damage. In contrast, the other options either add depreciation to the replacement cost or center around current market value without properly adjusting for the asset's depreciation, which does not align with the accurate calculation of actual cash value.