Question

How much would a homeowner receive with actualâ cash-value coverage and replacement cost coverage for aâ three-year old sofa destroyed by aâ fire? The sofa would cost $1,200 to replaceâ today, whereas it cost $942 three yearsâ ago, and it has an estimated life of six years.
With actualâ cash-value coverage, the amount the owner would receive for the sofa would be ?

Answer 1

Answer:

$729

Explanation:

We can calculate the actual cost value by first multiplying the purchase value by the depreciation rate and after that deducting that amount from the replacement cost.

DATA

Replacement value = $1,200

Purchase value = $942

Depreciation rate  = 3 years/6 years = 0.5

Solution

Acutal cost value = Replacement value - ( Purchase value x Depreciation rate)

Acutal cost value = $1200 - ($942 x 0.5)

Acutal cost value = $729