Question

how much would you receive with actual cash-value coverage for a four-year-old sofa destroyed by fire? the sofa would cost $850 to replace today, whereas it cost $800 four years ago and had an estimated life of 8 years.

Answer 1

The actual cash-value coverage for a four-year-old sofa destroyed by fire is $700. Calculations include deduction of depreciation from the original cost and adjustment for today's replacement cost.

Step-by-step explanation:

The amount you would receive with actual cash-value coverage for a four-year-old sofa destroyed by fire is $700. The actual cash value is calculated by subtracting depreciation from the replacement cost today. Since the sofa cost $800 four years ago and it has an estimated life of 8 years, the annual depreciation is $100 ($800/8 years). Over 4 years, the sofa would have depreciated by $400 ($100/year × 4 years), meaning its actual cash value before the fire would be $400 ($800 original cost - $400 depreciation).

Considering the replacement cost today is $850, we have to adjust the actual cash value for the increased cost, which would add back the $300 difference ($850 replacement cost - $800 original cost). Thus, the actual cash value is $700 ($400 pre-fire value + $300 increased replacement cost).