Interactive Glossary

BROWSE:

Replacement Cost:

A procedure for valuing an asset based on what it would cost to duplicate (or replace) the asset if it were acquired today. With current cost accounting, such costs may be determined either through the application of current prices to comparable assets or through the application of an inflation factor to the original cost. On the one hand, this approach to determining components of a rate base yields values that more closely match the economic value of assets during periods of high inflation. On the other hand, this approach enables investors to obtain higher cash flows than would have been the case if the original (historical) cost approach were used to determine the rate base (for rate of return regulation).

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