The replacement cost method is a valuation approach that estimates the cost to replace an asset with a new one of similar kind and quality, adjusting for physical depreciation. This method is particularly useful in determining the value of tangible assets and can be employed when market data is scarce. By focusing on the cost required to recreate the asset rather than its current market value, this method provides a practical perspective on asset valuation, especially in contexts where fair market value assessments are difficult to obtain.
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