What is the formula for determining actual cash value (ACV)?

The formula for determining actual cash value (ACV) is based on the concept of replacing an item and considering its age and wear. The correct formulation is today's replacement cost minus depreciation.

This means that to evaluate the ACV, one first identifies how much it would cost to replace the item today at current prices, then subtracts any depreciation that reflects the loss of value due to factors such as age, condition, and wear and tear. This method gives a fair representation of the item's worth in the event of a loss, as it acknowledges that items decrease in value over time.

Understanding this concept is crucial in the realm of property and casualty insurance, as ACV is often used to settle claims for damaged or lost property. The other options present alternatives that do not accurately reflect how ACV is calculated. For instance, adding depreciation, adjusting original costs for inflation, or combining current market value with depreciation would not yield a true measure of the item's current worth.