126 VALUATION, DEPRECIATION AND THE RATE-BASE
compensation which the owner may expect for establishing and
managing the utility and also as to whether, in every case, the
value of the service rendered has really justified the enterprise.
There is much uncertainty, in other words, in relation to the
earnings in excess of interest on the investment that will be
permitted by the public service commissions, and, when value
depends largely upon prospective business, there may be uncer-
tainty, too, relating to the forecast of earnings on which the
estimates of profits are based.
Fifth Step — Determination of Profits. — The fifth step in-
volves a comparison of the cost of operation with the antici-
pated gross income. The excess of the income over cost of
operation represents the profits of the business. The profits
may be actual or they may be prospective. The profits both
current and prospective in excess of interest on the investment,
when capitalized, create an increment of value in excess of
the investment. This increment of value may, according to
circumstances, be apportioned to “franchise,” ‘going value,”
““ good-will,” “ patent right,” or any other classification of value
that may seem appropriate.
Real Estate Value. — The valuation of real estate may acquire
special consideration. But here, as in the case of other revenue-
producing property, the real test of value is the amount of the
revenue which the property will produce. What is the rental
value of the property? This is the question to be answered.
The appraiser will direct his inquiry to the gross income, imme-
diate or prospective, which is dependable. He will ascertain the
taxes and probable assessments for improvements to which the
property is liable, and he will determine from these various
items the net revenue which the property will produce. This
net revenue, immediate and prospective including appreciation,
will then determine the value.
When the right of eminent domain is exercised to acquire
real estate for some special purpose due consideration must be
given to its serviceability for the intended use. This subject is
further considered in Chapter X.
