POSSIBLE PROCEDURES IN FIXING RATES z 
under the Unlimited Life Method of procedure will be the 
amount of the investment without deduction of depreciation, 
and the replacement requirements, until definitely ascertained by 
experience, will be approximated from the estimated cost of 
effecting the replacements, with due consideration of the age 
and expectancy and the probable life new of the individual parts 
of which the property is made up. 
Sinking Fund Method Illustrated. — Some of the principles 
that govern the establishment of rates may be made clear by 
the use of an illustration. An electric generator with a 20-year 
life will serve the purpose. Assume, in the absence of any 
accepted method of procedure, that remaining value is deter- 
mined by deducting from cost the accrued depreciation esti- 
mated by compound interest sinking fund methods. Suppose the 
generator to be a part of a light and power system and suppose, 
further, that it has reached the last year of its useful life and will 
have no scrap value. A purchaser will value the generator, if 
he estimates interest on a 6 per cent per annum basis, at about 
8.23 per cent of its original value and this js all that he will pay 
for the same. He takes upon himself, when he buys the light 
and power plant, an obligation to replace the generator with a 
new one at the end of another year. He must then renew the 
investment represented by this article. The obligation which 
he voluntarily takes upon himself at the time of his purchase to 
replace the generator in a year is 91.77 per cent of the cost of a 
new generator. At the end of the life of the generator, he will 
have received in his earnings the last increment of the original 
investment in the generator, or 8.23 per cent of its cost, and he 
will meet his obligation to continue in business by acquiring a 
new generator and thereby renewing the full original investment 
in this particular appliance. 
It makes no difference whether there is only one generator, 
or whether there are 20 in use. The principle is always the 
same. Moreover in such a simple case as that of 20 generators 
of all possible ages, each with a useful life of exactly 20 years, 
the accrued obligation to replace these generators when worn 
16%