What is the difference between actual cash value and replacement cost?

The distinction between actual cash value and replacement cost is foundational in insurance terminology. Actual cash value (ACV) is calculated by taking the replacement cost of an item and subtracting depreciation, which accounts for age and wear and tear. This means that if a policyholder suffers a loss, the payout based on actual cash value will reflect the item's current worth rather than what it would cost to replace it brand new.

On the other hand, replacement cost refers to the amount it would take to replace a damaged item with a new one of similar kind and quality, without deducting for depreciation. Option C correctly captures this relationship by highlighting that actual cash value is determined by deducting the depreciation from the replacement cost. This distinction is crucial for insured individuals to understand how compensation works in the event of a claim.