THE PURPOSE OF THE APPRAISAL
Appraisals for the Purpose of Capitalization
Capitalization. — The primary matter to receive consideration
when a property is to be valued for the purpose of capitaliza-
tion is its earning capacity. What are the net earnings, pres-
ent and prospective? When this question can be satisfactorily
answered the problem has been solved. Inquiry must therefore
be made relating to the total annual outlay involved in con-
ducting the business enterprise. Operating expense of every
kind including an adequate annual replacement requirement and
an amortization increment if the life of the enterprise is limited,
must be weighed against the assured present and prospective
income. The resulting net earnings capitalized at the interest
rate, which an enterprise of the nature under consideration
should yield, will indicate the upper limit of value for capitali-
zation.
When a public utility is under consideration the problem
may be complicated by the fact that rates and therefore the
earnings are subject to regulation and in consequence of the
control and regulation exercised by the public through its public
service commissions, any great precision in estimating the gross
present and prospective earnings may be out of the question.
This may prove embarrassing particularly in those cases where
the actual investment of capital is small but the volume of
current business is large. In all cases the actual properly in-
vested capital will be a first approximation of value for capital-
ization purposes and usually the lower limit of such value if the
property is one in successful operation.
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