THE PURPOSE OF THE APPRAISAL 
Appraisals for the Purpose of Capitalization 
Capitalization. — The primary matter to receive consideration 
when a property is to be valued for the purpose of capitaliza- 
tion is its earning capacity. What are the net earnings, pres- 
ent and prospective? When this question can be satisfactorily 
answered the problem has been solved. Inquiry must therefore 
be made relating to the total annual outlay involved in con- 
ducting the business enterprise. Operating expense of every 
kind including an adequate annual replacement requirement and 
an amortization increment if the life of the enterprise is limited, 
must be weighed against the assured present and prospective 
income. The resulting net earnings capitalized at the interest 
rate, which an enterprise of the nature under consideration 
should yield, will indicate the upper limit of value for capitali- 
zation. 
When a public utility is under consideration the problem 
may be complicated by the fact that rates and therefore the 
earnings are subject to regulation and in consequence of the 
control and regulation exercised by the public through its public 
service commissions, any great precision in estimating the gross 
present and prospective earnings may be out of the question. 
This may prove embarrassing particularly in those cases where 
the actual investment of capital is small but the volume of 
current business is large. In all cases the actual properly in- 
vested capital will be a first approximation of value for capital- 
ization purposes and usually the lower limit of such value if the 
property is one in successful operation. 
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