Question

Cathy’s apartment was broken into and her two-year-old sound system was taken. Cathy had paid $1,400 for the system, but it will cost $1,800 to replace the unit. She has a homeowner's policy with $20,000 coverage for personal property, a $200 deductible, and actual-cash-value coverage. How much will Cathy receive from the insurance to cover this loss assuming the life expectancy of the system is ten years?

Answer 1

$1,240

Step-by-step explanation:

The actual cash value coverage will pay for the replacement cost of Cathy's sound system minus depreciation.

replacement cost = $1,800

expected useful life = 10 years

depreciation for 2 years = $1,800 x 2/10 = $360

sound system's net value = $1,800 - $360 = $1,440

Cathy will receive = net value of sound system - deductible = $1,440 - $200 = $1,240