what is a replacement cost 
replacement cost is a term referring to the amount of money a business must currently spend to replace an asset like a fixture a machine a vehicle or an equipment at current market prices 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 the practice of calculating a replacement cost is known as replacement valuation 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 investopedia daniel fishelunderstanding replacement costsas part of the process of determining what asset is in need of replacement and what the value of the asset is companies use a process called net present value to make a decision about an expensive asset purchase companies first decide on a discount rate which is an assumption about a minimum rate of return on any company investment a business then considers the cash outflow for the purchase and the cash inflows generated based on the increased productivity of using a new and more productive asset the cash inflows and outflow are adjusted to present value using the discount rate and if the net total of all present values is a positive amount the company makes the purchase the cost to replace an asset can change depending on variations in the market value of the asset and other costs needed to get the asset ready for use special considerations