Page 105 - RISK Management IC86 Ebook
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depending upon the present value of income it produces.
It is used when the property is rented or peculiarly
designed and the income/profit position of the firm would
be directly affected by its destruction.
l Reproduction cost - This is the cost of reproducing the
existing property exactly at the current prices. This
measure may produce an unrealistic value as the materials
or methods of construction employed twenty years back
may be outdated.
l New replacement cost - This is the cost of replacing
the property with new property that is not exactly the
same but reasonably meets current specifications. The
basic problem here is that the business firm would get a
new building for an old one.
l New replacement cost less physical depreciation and
obsolescence - This method subtracts some allowance
from new replacement cost, for physical depreciation,
economic obsolescence or both. The reasoning behind
the concept is that the business will gain if a property is
replaced with a new property. The main difficulty is
measuring physical depreciation and economic
obsolescence.
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