Final answer:
The Actual Cash Value payable under an insurance policy for a residence with a replacement cost of $10,000 and 25% depreciation is $7,500. This represents the replacement cost minus the depreciation.
Step-by-step explanation:
If we look at how insurance operates, we know that insurance companies collect premiums to cover the cost of losses that occur among those they insure. If we have a group of 100 drivers, some will have small damages, some will have medium damages, and some will have large damages.
The company must collect enough in premiums to cover these costs. In our hypothetical scenario, each of the 100 drivers pays a $1,860 premium to collectively build up a fund of $186,000.
Returning to the original question about the insured's residence, we must calculate the Actual Cash Value (ACV). The replacement cost of the loss is given as $10,000 and depreciation is 25%. The Actual Cash Value (ACV) is calculated as the replacement cost minus depreciation.
So, the calculation would be $10,000 (replacement cost) minus $2,500 (which is 25% of $10,000) to arrive at an actual cash value of $7,500.
Therefore, the amount payable under the ACV policy would be $7,500. This represents the depreciated value of the lost or damaged property.