ELEMENTS WHICH REDUCE VALUE 
woven with the depreciation question, as ordinarily handled, 
that no attempt will be made to restrict the discussion to depre- 
ciation. Information bearing upon amortization and the re- 
placement requirement will here be found intermingled with 
the general discussion of the depreciation question. 
Assumptions Made in the Discussion. — The general presen- 
tation of the problems involved in determining what should be 
the fair earnings of a public utility will be simplified by assuming 
that the actual useful life or term of service of each of its parts 
will conform with the probable life term predicted for these 
parts. This is not in reality the case. In the preliminary 
presentation of the subject, however, this assumption has been 
strictly adhered to. How the departure of the actual term of 
usefulness from the probable term will affect the computation 
of the annual replacement requirement will be considered later. 
It has been found convenient to use an interest rate of 6 per 
cent throughout this volume for purposes of illustration and 
this rate is to be understood when no other rate is mentioned. 
Hypothetical Case; 20 Year Life, 10 Years Old. — Take the 
case of a plant, all parts of which have a life of 20 years, all 
constructed at one time and owned by a prudent owner who sets 
apart at 6 per cent interest, as an amortization fund, each year 
$0.027185 for every dollar invested therein. If the plant is one 
which will actually net 6 per cent on the invested capital, then 
the apparent excess of the annual earnings, over expenses, should 
be $6 + $2.72 = $8.72 continuously during the life of the plant, 
and the owner, in estimating the price at which he can sell it 
without loss at the end of any period, as, for example, at the end 
of 10 years, would figure as follows (for each $100 of original 
investment): 
Investment (original).......... +... $100.00 
In the amortization fund: being the amount of a 10-year an- 
nuity of $2.7185 at 6 per cent interest................... _ 35.83 
Remaining value. ....... cersanessrnsseee. $64.17 
A prospective purchaser would figure that the plant should 
be worth at least as much as the present value of $8.72 per 
8¢