ELEMENTS WHICH REDUCE VALUE J
Determination of the Replacement Requirement. — It is pos-
sible, by such analysis, when a plant is growing at a fixed rate
and has attained an age exceeding the life of its perishable
parts, to prescribe a rule for determining the replacement re-
quirement; but it must be remembered that a rule thus deter-
mined can be strictly correct only for the impossible hypothetical
case of service in exact conformity with the assumed probable
life, and that for practical application a rule thus determined
may require some modification as explained in Chapter VI.
For each group of parts having the same length of life, there
is to be determined: first, the average annual capital invested,
using, however, replacement cost instead of the actual invest-
ment; and second, the full number of times that the age of the
plant is greater than the useful life of the particular group of
parts under consideration. The replacement requirement (for
the hypothetical case, in which actual service conforms through-
out with the assumed probable life) is then ascertained by
multiplication.
A pipe line may again serve as an illustration: Suppose it is
desired to know the replacement requirement for a pipe line 300
miles long, which has been extended 2 miles each year, the age
of the oldest portion of which, therefore, is 1 50 years.
The life of the pipe being taken at 40 years, the full number
of times this is contained in 150 years is three. The annual
replacement requirement will be three times two, or 6 miles of
pipe.
The 6 miles of pipe requiring replacement were constructed
40 years ago, and the conditions under which this was done
may have been materially at variance with those prevailing at
the time of their replacement. Consequently, in the deter-
mination of the replacement requirement, expressed in dollars
instead of in miles of pipe, the replacement cost of the system
and not the original cost of capital invested should be taken
into account. Expressed as a percentage of the total length of
pipe in service, or of the total cost of replacing the entire pipe
line, this would be 2 per cent.
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