What the replacement value calculator does
The replacement value of an asset is the amount it would cost to acquire an equivalent asset at today's prices. This calculator estimates that figure from an asset's original (historical) purchase cost by adjusting it with a price index, so a machine, building, inventory item, or piece of equipment bought years ago can be restated at its current replacement cost.
Replacement value is widely used for setting insurance cover, current-cost accounting, asset revaluation, and as the numerator in Tobin's Q. It answers a simple question: if you had to buy this asset again now, what would it cost?
How to use it
Enter three numbers: the original cost you paid for the asset, the price index at the time of purchase, and the current price index. Use the same published index series for both dates (for example, a Producer Price Index for the asset's category). The calculator returns the estimated replacement value, the dollar increase over the original cost, and the percentage increase.
The formula explained
Replacement value scales the original cost by the ratio of the current price index to the index at the time of purchase:
$$RV = C_0 \times \dfrac{I_1}{I_0}$$where RV is the replacement value, C_0 is the original cost, I_0 is the price index when the asset was bought, and I_1 is the current price index. The dollar increase and percentage increase follow directly:
$$\Delta = RV - C_0 \qquad P = \left(\dfrac{I_1}{I_0} - 1\right) \times 100\%$$Worked example
Suppose a company bought a machine for $50,000 when the relevant price index was 120. The index now stands at 180. The replacement value is 50,000 x (180 / 120) = 50,000 x 1.5 = $75,000. That is a cost increase of $25,000, a 50% rise over the original price. To insure the machine at full replacement value, the company should cover $75,000 rather than the $50,000 it originally paid.
Frequently asked questions
Which price index should I use? Use a published index that tracks the asset's category over the period, such as a Producer Price Index (PPI) for equipment, the Consumer Price Index (CPI) for general goods, or a construction cost index for buildings. Apply the same series to both the purchase date and today.
How does replacement value differ from book value or market value? Book value is historical cost minus accumulated depreciation; market value is what a willing buyer would pay; replacement value is what it would cost to obtain an equivalent new asset at current prices.
Does the result include depreciation? No. This estimates the gross cost of an equivalent new asset. To get the depreciated replacement cost (also called actual cash value), subtract the asset's accumulated depreciation from the replacement value.
