inventory valuation method whereby the cost of sale of the item is based on the cost to replace it rather than on historical cost. For example, an item costing $10 with a replacement cost of $12 is sold for $20. Under NIFO, gross profit is $8 ($20 minus $12). This method is not GAAP. However, during inflationary periods a company may want to price ahead of inflation by establishing its selling price on a replacement-cost basis and would thus use NIFO as a basis for pricing.