Sarah Kavenna\'s luxurious home in Georgetown, a neighborhood in Washington, DC,

Question

Sarah Kavenna's luxurious home in Georgetown, a neighborhood in Washington, DC, was recently gutted in a fire. Her living and dining rooms were destroyed completely, and the damaged personal property had a replacement price of $45,000. The average age of the damaged personal property was 4 years, and its useful life was estimated to be 18 years. What is the maximum amount the insurance company would pay Sarah, assuming that it reimburses losses on an actual cash-value basis? Round the answer to the nearest cent.

Explanation / Answer

In ACTUAL CASH VALUE BASIS (AVC)calculation of amount of insurance paid by insurance company is done by subtracting depreciation from replacement cost. the depreciation is calculated by expected life of item and determining what percentage of life remains.

ACV=R (E-C)/E

here R=replacement cost

E=expected life of item

c=current life of item

ACV=R(E-C)/E

ACV=45000×(18-4)/18

        =$35000

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