132 VALUATION, DEPRECIATION AND THE RATE-BASE
Although it may be superfluous, one more illustration of this
principle will be given: Let it be supposed that the owner
borrows money from a bank at 6 per cent per annum to build a
steamboat, and that he earns 6 per cent plus the amortization
increment of 2.72 per cent.
Of the $8.72 to his credit at the end of each year’s business
for every $100 of capital invested, he pays the bank $2.72 on
account of principal and so much of the remaining $6 as may
be necessary to meet the interest then due. This will be all
of the $6 the first year, and a decreasing amount thereafter
until the end of the 20-year period, when his steamboat is re-
tired. He then finds that he has paid back to the bank on
account of the borrowed capital twenty annuity increments of
$2.72, amounting to $54.40, and that there is still due to the
bank $45.50. He also finds that the various amounts remaining
in his hands from year to year, $0.16 at the end of the second
year, $0.34 at the end of the third year, $o.52 at the end of the
fourth year, and so on, together with interest thereon at 6 per
cent, when computed for the 20-year period, will amount to the
$45.50, the balance due at the bank. The owner finds he has
earned nothing. He has invested no money of his own and has
received no return, which is as it should be in this hypothetical
case. The rates, however, throughout the entire 20 years were
fixed on the principle that 6 per cent per annum should always
be allowed on 100 per cent of the capital invested, together with
the amortization annuity, but without any deduction for depre-
ciation. They could not have been fixed lower without entailing
loss to the owner.
Unlimited Life. — The value of a revenue-producing property
when the earnings thereof include an amortization annuity
has already been discussed. It remains to consider the case of
a property which, in addition to the accepted reasonable rate
of interest (net), is without limit as to its time of serviceability,
earning the estimated annual replacement requirement deter-
mined by some formula, as above explained, instead of the
annuity computed from amortization tables.
