Replacement Cost

Replacement cost represents the current expenditure necessary to obtain a comparable asset capable of delivering the same service potential as an existing asset that has been damaged, destroyed, or rendered obsolete. The focus is on restoring the asset’s functional utility rather than reproducing its exact form. In contrast to market value, which indicates the price an asset could fetch in the open market, replacement cost emphasizes the cost required to reestablish the asset’s operational capacity. Example: Suppose a manufacturing machine purchased five years ago is destroyed in a fire. If a new machine with equivalent output and efficiency costs ₹10 lakh today, then ₹10 lakh represents the replacement cost of that asset.