Texas All Lines Adjuster Practice Test

How is actual cash value (ACV) calculated?

1. Current market value + replacement cost

2. Replacement cost + annual depreciation

3. Replacement cost - accumulated depreciation

4. Current market value - total depreciation

The correct answer is: Replacement cost - accumulated depreciation

The correct method for calculating actual cash value (ACV) is through the formula where replacement cost is subtracted by accumulated depreciation. This approach effectively reflects the true value of an asset in its current state, factoring in wear and tear over time. Replacement cost signifies what it would cost to replace the item with a new one of similar kind and quality, while accumulated depreciation accounts for the decrease in value due to factors like age and condition. The resulting value provides an accurate representation of what the asset is worth at the time of loss, accounting for both its cost to replace and its depreciation due to use. In contrast, other options incorporate incorrect components or formulas that do not align with the standard calculation for ACV. For instance, adding current market value or total depreciation alters the fundamental aspect of calculating the value left after accounting for depreciation. Therefore, the subtraction method aligns best with industry standards and common practices in insurance assessments.