Question

An insured's roof cost $4,000 when installed 5 years ago. It has been damaged by hail and must be replaced. The new roof will cost $6,000 at today’s prices. If the roof has been depreciating at $200 per year and the insured’s policy is written on the actual cash value(ACV), how much will the policy pay toward the insured's new roof?

Answer 1

Answer:

ACV=$4,500

Step-by-step explanation:

We have that the actual cash value (ACV) is defined as:

$ACV=\dfrac{R\times(E-C)}{E}$

Where:

$ACV =$ actual cash value

$R =$ replacement cost or purchase price of the item

$E =$ expected life of the item

$C =$ current life of the item

Then we have R=$6,000, C=5years, and to find the expected life of the item we can use the depreciating of the roof, then if the roof is depreciating $200 each year we just need to divide $4,000 by $200 to find the expected life of the roof:

$\dfrac{4,000}{200}=20$

Then the espected life of the roof is 20 years, with this result we have all the data, then:

$ACV=\dfrac{\ 6,000\times (20-5)}{20}=\dfrac{\ 6,000\times (15)}{20}=\dfrac{\ 90,000}{20}=\ 4,500$

Then the ACV is $4,500