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¢