Replacement cost is best defined as the cost of a comparable new item similar to the damaged item.

Replacement cost is best defined as the cost of a comparable new item similar to the damaged item.

• A. True
• B. False
• C. The actual cash value of the damaged item
• D. The depreciation-adjusted replacement cost

Answer: (A)

Replacement cost means the amount needed to replace a damaged item with a new one of like kind and quality. This captures the idea of obtaining a comparable new item, without subtracting depreciation. Therefore, saying replacement cost is the cost of a comparable new item similar to the damaged item is correct. The actual cash value would subtract depreciation from that amount, and depreciation-adjusted replacement cost still involves depreciation, which isn’t how standard replacement cost is defined.

Replacement cost means the amount needed to replace a damaged item with a new one of like kind and quality. This captures the idea of obtaining a comparable new item, without subtracting depreciation. Therefore, saying replacement cost is the cost of a comparable new item similar to the damaged item is correct. The actual cash value would subtract depreciation from that amount, and depreciation-adjusted replacement cost still involves depreciation, which isn’t how standard replacement cost is defined.