Actual Value Definition: Everything You Need to Know
When an asset needs to be replaced with an asset of equal value due to theft or other damages, the term actual cash value (ACV), or market value, will be used.3 min read
2. What Is Actual Cash Value?
3. What Is Perceived Value?
The actual value definition is important in the insurance industry. When an asset needs to be replaced with an asset of equal value due to theft or other damages, the term actual cash value (ACV), or market value, will be used. These terms are used to describe the value of the asset that was lost. Actual cash value is also used as a tool in determining the replacement cost of an asset in the event of a loss. The method is used in both home and car insurance industries when valuing an insured client's property.
What Is Depreciation?
Depreciation refers to the decrease in value of an asset over a period of time, stemming from the date the product was originally purchased. Depreciation occurs from age, wear and tear, and changes in market conditions. Actual cash value is equal to the replacement value, minus any depreciation.
When importing goods, guidelines are used to declare the value of the goods. This value is used as a basis for calculating customs duty and taxes to be paid. There are multiple methods for determining the value of an imported good. One way is to base the value on a similar good that shares the same physical features and quality.
Manufacturing or service providers must take into account the expense of making a particular good or the cost of service when calculating the actual value. In the market, the cost of service or selling price of a product will most likely be higher than its actual value. This occurs so that the company can make a profit.
For example, a buyer purchases a new vehicle valued at $10,000 and insures the vehicle with full coverage insurance. Within a matter of just a few days, the insured is involved in an accident and the vehicle is ruled as a total loss. Most likely, the insurer will pay the insured the full face value of the vehicle. The insurer will do this because it knows that little time had lapsed and depreciation was very minimal.
On the other hand, if the vehicle was purchased 5 years ago, the insurer would take into account that the vehicle had depreciated in value. Not only was the vehicle older now, but the vehicle had also most likely increased in mileage along with normal wear and tear. The insurer would then determine the amount to be paid by using the ACV method.
What Is Actual Cash Value?
Actual cash value always considers depreciation, while replacement cost is the actual cost of an item in the current market. Most homeowners policies include a replacement cost, while most cars are typically insured for actual cash value.
To ensure there is not a “gap” in insurance coverage on items, such as classic vehicles, jewelry, guns, artwork, and antiques, it is wise to purchase additional coverage. Valuables such as these are often covered but it is not uncommon for there to be limitations in the policy that don't reflect the items' true value. The additional coverage or a standalone policy may involve having the items appraised, which then allows for them to be assigned a value. It may require additional work for the owner but it ensures maximum coverage.
What Is Perceived Value?
Perceived value is the worth a customer assigns to a particular product or service. A consumer's perception will most likely differ from a manufacturer's in terms of perceived value. This is likely because consumers will perceive the value of the product or service based on its ability to fulfill a need or provide gratification, while a manufacturer will look at the actual cost of supplying the product or providing the service.
A brand's value and awareness will often affect a consumer's perceived value; however, the brand perception will not affect the actual value. For illustration, Proctor and Gamble has manufactured toothpaste for many years. Over time, the perceived value of its products has increased, which has allowed the corporation to price its toothpaste for a tremendous markup. While the brand awareness and brand perception does not affect the actual cost to manufacture the toothpaste, it does affect the perceived value.
Retail clothing items that have high perception values include:
- Abercrombie & Fitch
- Victoria Secret
- Michael Kors
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