INTRODUCTION AND GENERAL NOTES I:
be. At the same time with due regard to the share in the
general prosperity to which the owner of the utility is entitled,
he should be allowed to earn more than ordinary interest on his
investment and a capitalization of any such excess earnings
when these are fairly assured will furnish him with a basis for
approximating the sum of all intangible values of whatever
nature.
Amortization and Depreciation. — A clear distinction should
be made between the amortization of capital that is invested in
any enterprise and provision for depreciation or the replace-
ment of perishable elements. The sinking fund for the retire-
ment of bonds, or other debt, should not, in other words, be
confounded with the fund usually referred to as the “ deprecia-
tion ”’ fund which is intended to meet the replacement require-
ments as they arise.
Valuation for Purchase or Sale. — In appraising for a sale,
various matters are to be taken into account which are of minor
importance when rates are to be fixed. If the accrued de-
preciation has actually been allowed in the earnings and has
been permitted to accumulate in a fund, and if the accumulated
fund properly represents the accrued depreciation, and is a
part of the property to be transferred, then the appraisal in-
cluding this fund should be in substantial agreement with the
legitimate investment. If, on the other hand, there is no de-
preciation fund, if the earned and collected adequate depre-
ciation allowance in excess of the expenditures therefrom for
replacements has been absorbed for other purposes by the
owner, then a purchaser would make the depreciated value or
the legitimate investment less depreciation his starting point in
determining the amount which a plant is worth, because in
purchasing the property he assumes an obligation to replace
perishable parts as they go out of use. If the plan is followed
of allowing earnings which will meet all replacement require-
ments together with interest on the full investment, without
deduction for depreciation, then a purchaser in view of the
assured return will make the legitimately invested capital
i)
