What is functional replacement cost?

Functional replacement cost is a method used to determine the value of a property or asset by considering its replacement cost with something of similar function or utility. This approach takes into account the cost of replacing the property with a new one that serves the same purpose, taking into consideration any technological advancements or changes in building codes and regulations.

Functional replacement cost is often used in insurance industry to determine the value of a property for insurance purposes. It is also used in appraisal and valuation of property to estimate the cost of replacing the asset in case of damage or destruction.

This method differs from other valuation methods such as market value or actual cash value, as it focuses on the functional utility of the property rather than its market price or depreciation. It provides a more accurate estimate of the cost of replacing the property with a similar one that serves the same purpose, taking into account any improvements or changes in technology.