Depreciated Replacement Cost
Depreciated replacement cost of an asset is the current cost to replace the asset less accumulated depreciation. It is the cost company spends to acquire the current replacement asset and deduct the accumulated depreciation to reflects with the current asset condition. It is simply the replacement cost less depreciation which already deduct from current asset.
Replacement Cost is the amount of money that company needs to spend to purchase the asset to replace the current one. The replacement asset must have the same or higher value. The market price is the best place to consider as it reflects the recent value. The cost can be various due to market value, asset specification, and other customization. The replacement asset will have the same or higher future economic benefit. The new asset will have a full future economy while the current one contains only partial future benefit (NBV) as it has depreciated over time.
Depreciated Replacement Cost Formula
|DRC = Market Value – Accumulated Depreciation|
- Market Value: the market price of the replacement asset.
- Accumulated depreciation: the total depreciation expense which needs to deduct from a new asset to ensure its future benefit is the same as the current asset. New acquired assets will have a full economic benefit, so we need to deduct the accumulated depreciation to deduct its future economic benefit to the same level.
Depreciated Replacement Cost Example
Company currently owns a Truck with a net book value of $ 40,000 as it has been depreciating by 60% since the purchase date. The cost of the truck is $ 100,000 with $ 60,000 of accumulated depreciation. Management asks the accountant to calculate the depreciated replacement cost of this Truck.
The accountant has contacted suppliers, the current market price of the same truck is $ 120,000, the price increase due to high demand.
Depreciated Replacement Cost = 120,000 – (120,000*60%) = $ 48,000
We have to deduct 60% from the market price as the current truck is already depreciated for 60%. The current net book value is only 40% of the original price. Without depreciated percentage, we can calculate comparing the year of depreciated over the total useful life.