Replacement Cost Definition

An item’s replacement cost is the cost to replace the item at current market prices. If the exact make or model of item is not available, then replacement cost assumes a substantively equivalent item is suitable. When the item under consideration is particularly expensive or subject to depreciation, the age or condition of the item being replaced will usually be considered to discount the replacement cost. In other words, the replacement cost of a ten-year-old washing machine won’t be the purchase price of a new washing machine. Replacement cost often becomes important during insurance settlement.