Definition of Replacement cost:
Replacement cost is a term referring to the amount of money a business must currently spend to replace an essential asset like a real estate property, an investment security, a lien, or another item, with one of the same or higher value. Sometimes referred to as a "replacement value," a replacement cost may fluctuate, depending on factors such as the market value of components used to reconstruct or repurchase the asset and the expenses involved in preparing assets for use. Insurance companies routinely use replacement costs to determine the value of an insured item. Replacement costs are likewise ritually used by accountants, who rely on depreciation to expense the cost of an asset over its useful life. The practice of calculating a replacement cost is known as "replacement valuation.".
Current cost of replacing an existing asset or property with the same quality of construction and operational utility, without taking depreciation into account. Replacement cost is usually higher that the items book value. Also called replacement value.
Current cash outlay necessary to duplicate an item.
Replacing an asset can be an expensive decision, and companies analyze the net present value (NPV) of the future cash inflows and outflows to make purchasing decisions. Once an asset is purchased, the company determines a useful life for the asset and depreciates the asset's cost over the useful life.
The current cost of a replacement for a particular item, especially as opposed to its original cost.
How to use Replacement cost in a sentence?
- The copier is the accounting department finally made its last copy, so the replacement cost had to be determined before shopping for a new one could begin.
- The replacement cost of the item was really high and it made me worry that we would lose a lot of money.
- The cost to replace an asset can change, depending on variations in the market value of components used to reconstruct or repurchase the asset and other costs needed to get the asset ready for use.
- Companies look at the net present value and depreciation costs when deciding which assets need to be replaced and whether the cost is worth the expense.
- You need to know what any replacement cost would be for your equipment and hope to keep using the old ones as long as possible.
- The replacement cost is an amount that a company pays to replace an essential asset that is priced at the same or equal value.
Meaning of Replacement cost & Replacement cost Definition