1604 VALUATION, DEPRECIATION AND THE RATE-BASE 
other way; the probability that there were losses in the early 
years should not be overlooked. 
The various methods of procedure have had their origin in 
the various plans that have been adopted for making provision 
for amortization of capital and the replacement or renewal of 
discarded articles. When the distinction between amortization 
and the replacement requirements is disregarded, such methods 
of procedure as the Straight Line Method and Equal Annual 
Payment Method are the result. When amortization is treated 
as a matter apart, such methods as the Sinking Fund Method 
and the Unlimited Life Method are the natural outcome. 
The Sinking Fund Method. — The ¢ Sinking Fund Method ” 
of making appraisals and of determining necessary earnings is a 
method under which the annual allowance for replacements is 
uniform in amount. This replacement allowance (frequently 
referred to as depreciation) is the annuity which, together with 
compound interest at the rate of the net earnings of the prop- 
erty, will during the probable life of an article amount to its 
replacement cost. The replacement, it is assumed, is to be 
accomplished at the end of the probable life of that article. There 
is no repayment of capital. The investment remains undimin- 
ished. This is, therefore, a 100 per cent valuation method.* 
The amount which goes into the replacement fund does not 
retire capital. It generally remains in the business and may be 
assumed to earn the same amount as any other capital used in 
the business. Nevertheless, it is held by some authorities that 
this fund should be treated as though invested in absolutely safe 
securities and that, therefore, the interest rate introduced into 
the calculation should be about 4 per cent. But whether the 
fund be invested in outside securities or in the business, it is a 
fund which should be separately accounted for. Its earnings are 
earnings of the business and make the amount which must be 
collected from the rate-payer correspondingly less. When the 
fund remains in the business, it should be charged with the 
regular interest rate of return and this amount of the earnings 
* Trans. Am. Soc. C. E., Vol. LXXV, p. 828.