POSSIBLE PROCEDURES IN FIXING RATES 325
should be added to the fund and will not be available for dis-
tribution as profit.
To illustrate — if the investment is $1,000,000 and out of
surplus earnings $100,000 are invested in betterments, the total
investment becomes $1,100,000 of which $100,000 is due to the
replacement fund. If the net earnings are 6 per cent or in the
aggregate $66,000 per annum, only $60,000 of this will be avail-
able for distribution to the owners and the other $6000 must be
added to the replacement fund.
Equal Annual Payment Method. — The “ Equal Annual Pay-
ment Method,” as described in the report of the American
Society of Civil Engineers’ Special Committee on Valuation,
presented to the Annual Meeting of January 21, 1914, refers to
a method which makes the annual depreciation, or amortization
increment an amount increasing, from year to year according
to a definite law. The annual depreciation is estimated by
sinking fund methods. It is equal to the annuity which will
retire the remaining value in the remnant of the original prob-
able life term and, when added to the interest on the remaining
value (uniformity of interest rates being assumed), the sum will
be uniform from year to year throughout the probable life term.
When depreciation allowances computed by this method are
actually earned, they are considered as refunds of invested capi-
tal. The remaining investment in that case decreases as the
earned depreciation decreased by expenditures for replacements
accrues. Depreciation earnings may be regarded as being thus
applied to retire capital, but this method of estimating what
should be earned from year to year is undesirable, because it
involves frequent, elaborate and cumbersome re-estimates of
remaining value, requiring the service of experts, while as
usually applied, it is identical in results with the Sinking Fund
Method, which has the advantage of simplicity.
The Straight Line Method. — The Straight Line Method ”
of estimating the annual depreciation or the annual amortiza-
tion installment is that method which makes the annual amorti-
zation of capital uniform throughout the probable life of an
is
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