Imágenes de páginas
PDF
EPUB

reserved for renewals is used for that purpose. It must be remembered that, to make this comparison possible, it is necessary to assume that all of the reserves invested in plant were for needed extensions and that, if the reserves had not been used for this purpose, money would have had to be obtained in some other way. Moreover, it can be assumed that operating expenses and taxes are proportional to the size of the plant and, in consequence, need not be introduced with the other figures presented in this study. Reserves for renewals must be first taken from gross income and stockholders can obtain 8 per cent on the money invested by them in the property.

Table IV, page 156, shows the gross income which must be obtained from the public when the reserves are invested in plant and when they are invested in outside securities.

Column 3 shows the gross income required when reserves for renewals are invested in plant, and column 7 when the reserves are invested in outside securities. It will be seen that, although somewhat greater in the first few years, in later years the amount required to be paid by the public to create this gross income is considerably less when the reserves are invested in needed extensions of plant than is the case when these extensions are paid for by stockholders' money upon which the full rate of return must be paid.

110. Reserves for depreciation. It will be noted that throughout this chapter the reserves set aside each year to make good the losses in the capital invested in perishable property have been spoken of as "reserves for renewals." This term is not that usually used. These reserves are commonly called "reserves for depreciation," and will be so designated hereafter in the present work. The expression "reserves for renewals" has been used to avoid the ambiguity which at present exists in the use

[blocks in formation]

9th

10th

11th

12th

21,435 8,000 29,435 235,795 18,701 17,149 35,850
23,579 8,000 31,579 259,374 20,571
25,937 8,800 34,737 285,311 22,628 20,750 | 43,378
28,531 9,680 38,211 313,842 24,890 22,825 47,715

18,864 39,435

of the word "depreciation." Reserves thus set aside are for the purpose of amortizing the loss of the investment in property of limited life. As far as reserves for depreciation are concerned, there is no question involved of the physical condition of the unit at any intermediate date in its well defined life. A unit may deteriorate in efficiency or it may deteriorate in such a way as to require greater expenditures for maintenance, but, as will be shown in the next chapter, such "deterioration" may affect the life of the unit but can affect in no other way the reserves for renewals which must equal the wearing value of that unit at the end of its life only.

The term, "reserves for renewals," conveys this impression more clearly to most minds than "reserves for depreciation," for two reasons, — first, depreciation has to be figured in cases of valuation for a date intermediate in the life of the plant, hence there is always a question whether or not reserves for depreciation, i.e., reserves for renewals at the end of life, are a measure of the loss of value at an intermediate date; and, second, whether "depreciation" and "deterioration" should not be made synonymous terms.

These two questions will be discussed at length in succeeding chapters, but what we have been concerned with up to the present time has been the "reserves" required for renewals, usually called "reserves for depreciation," which reserves, so far as they are made carefully and intelligently along the lines which have been suggested above, have nothing to do with deterioration but simply insure the undertaking and the public of a continuation of the operation of the undertaking with best service at the least possible expense.

[blocks in formation]

112. Continuation of undertaking.

113. Interest of public in operation of public utility.

114. Interest of public in depreciation reserves.

115. Maintenance and depreciation reserves.

116. Importance of "life" in a determination of depreciation.

117. Life of a plant unit.

118. Physical life.

119. Factors affecting life of plant.

120. Inefficiency.

121. Wear and tear of plant.

122. Obsolescence.

123. Inadequacy

124. Inadequacy

125. Inadequacy

Definition.

Changes in financial policy.
Engineering economy.

126. Inadequacy Unexpected development.

127. Operation of factors affecting useful life of plant units. 128. Probable life of various plant elements.

129. Limited tenure of holding.

111. Life of plant. Before entering upon a discussion of the loss in value of a plant on account of age, which is the problem of depreciation in a valuation, it will be necessary to consider the question of the determination of the life of each unit in the plant as well as the composite life of the plant as a whole. The life of each unit and of the whole plant must be known in order to make proper depreciation reserves, i.e., reserves for renewals, and the same figure is needed for use in connection with a figure showing "age" when the loss of value must be determined in an appraisal.

The life in these two cases should be the same but, clearly, there is a possibility of a somewhat greater degree of accuracy when life is determined at the time of an

appraisal, for the reason that many units are nearer the ends of their lives so that a shorter forecast into the future is necessary.

112. Continuation of undertaking. One or two fundamental considerations must be appreciated before it is possible to discuss the subject of the life of a plant as it must be determined by the engineer. The first and possibly the most important is a definite recognition of the fact that, in the case of most valuations, an appraisal is made of a continuing service. The present undertaking, or possibly its successor, will continue to give service to the public for many years in the future, using the same plant or the same plant renewed when portions have become unserviceable. A valuation per se imposes no limit to the life of the undertaking.

At first sight this consideration seems to be unnecessary but, as a matter of fact, the lack of a full appreciation of this point has been, in most valuations, the source of much controversy. There is a tendency for all men to feel that apparatus and plant which has been for some time in use is❝second-hand" and that, being-second hand, such apparatus and plant, even though it may have been in use but a short time, must be of greatly reduced value. Plant units, in the intermediate years of their lives, would unquestionably bring much lower prices if they had to be removed from the plant of the undertaking and sold. This loss in value would arise not only from the expense incident to their removal but from the smaller market which exists for a partly worn article. But, at the time of an appraisal at an intermediate time in the life of most units, there is no question but that the units will be retained in the plant throughout their serviceable life, whatever that life may have been determined to be. The units are partially worn but are not second-hand in the ordinary acceptance of that term. This is equally

« AnteriorContinuar »