ELEMENTS WHICH REDUCE VALUE )
It is noteworthy in the assumed case of a plant which has
attained full growth and is made up of numerous parts that,
when the replacement requirement is computed from the begin-
ning by the compound interest method, the amount in the re-
placement fund should theoretically vary between comparatively
narrow limits; at 6 per cent interest from 31 to 40 per cent for
life terms ranging from 5 to 40 years. But in reality there can
never be absolute agreement between the actual useful life and
the probable life of all parts of the plant. The formule noted
in this chapter are not therefore strictly applicable. They are
nevertheless valuable in illustrating a principle.
Application of Earnings to Replacement and Amortization. —
The demands upon the replacement fund usually begin long
before the end of the probable life term is reached and may be
quite irregular in amount. The non-existence of a replacement
fund in the full amount indicated by mathematical and theo-
retical consideration does not, therefore, prove that the defi-
ciency has been distributed as profit, nor yet that there has been
any waiver of the right to have the earnings cover a fair replace-
ment increment.
Furthermore, if the earned annual replacement increment be
treated as amortization of capital and be immediately applied
for this purpose, it will thereby be removed from all further
consideration. The interest on any increment thus applied is
not available to retire more capital. Treated as an annuity
and remaining in the business, interest may be compounded so
long as the fund is held for its intended purpose, that is, for
retirement of capital at the end of the useful life of the item
which is being retired. Interest ceases to accumulate the mo-
ment the fund is applied to retire the investment in whole or
in part. Consequently, if a uniform annual amortization incre-
ment bearing interest compounded annually be determined from
amortization tables based on the probable life of a new article
and if it be covered by the earnings from year to year, even
though the amortization increment as earned be reinvested in
the property, it cannot rightfully be classed as a repayment of
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