ence has been sufficient to show the probable number of years that it can remain in service. But, figures that have been published as to the life of a telephone switchboard, for example, are worthless as they now stand. If wear and tear alone were considered, the probable life of a telephone switchboard, as properly and usually maintained, would be twenty to thirty years. Most competent telephone experts would agree in such a figure. Nevertheless, a life of seven or twelve years has been frequently given, showing that experts have taken inadequacy or obsolescence as the controlling factor in limiting the serviceable life of the switchboard. In view of the absence of definite information as to what was the controlling factor in arriving at the figures, intended to show the years of useful life of plant elements and their salvage values, found in papers and reports on this subject, such figures for a new and special case must be considered as of little or no value.

129. Limited tenure of holding. An undertaking, which has a limited franchise or right given it to operate, may have no agreement as to the disposition of its plant nor of its business at the end of its tenure of holding. Those who have invested their money in the undertaking will expect to obtain not only a proper yearly return upon their investment during the period that the business is in operation but to recover the principal invested in the undertaking at the expiration of the franchise. Such cases in this country are probably extremely rare. In such a case as there is a limited tenure of holding, the life of the property as a whole is defined and the number of years specified must be considered with those above described in determining the basis for amortization of the cost of property.

1 See Wis. R. R. Com. Rpts., Vol. IV, p. 9.

Also Institution of Post Office Engineers, April 4, 1910.

As a factor affecting the depreciated value of a plant, cases of limited tenure of holding are too rare to give it further consideration. When such a condition is presented, there will be found, usually, some agreement as to the disposition of the plant and the business, so that this factor, being a rare and special one, must be considered on the merits of each particular case as it arises.

131. Physical condition not a direct measure of loss of value. 132. Determination of age.

133. Mean "life" and mean "age."

134. Determination of loss of value a problem in accountancy.

135. Shall loss in value due to age be figured by straight line or sinking

fund method?

136. Return to undertaking based upon fair value of property.

137. Loss in value of plant arising from age.

138. Loss in value of property consisting of plant and reserves.

139. Justice of the rule as to use of straight line or sinking fund method. 140. "Pseudo" mean age.

141. Loss in value of property when all reserves have been held invested in outside securities.

142. Loss in value of property consisting of plant, built partly with reserves, and of reserves.

143. General consideration of loss in value due to age.

144. Question as to necessity of reserves sufficient to maintain value of original investment.

130. Definition.

Depreciation may be defined as "the loss, arising from years of service, in the value of the investment in perishable property."

Depreciation is a measure of the loss in value of the investment in perishable property arising from the time that such property has been in service, as related to the total number of years of serviceability. It is possible to ascertain with a fair degree of accuracy the time that each unit of the plant has been in service, that is to say its "age," and for experts to predict with more or less certainty the length of time that each unit can be expected to be retained in service. The sum of this last figure and the age gives the serviceable "life" of the unit.

Each unit of plant, therefore, at the time of an appraisal

can be figured as having a certain number of years of remaining usefulness out of a total life of an estimated number of years. At the end of the period of serviceability of a unit, there will be little or nothing of value in the unit to represent the capital originally invested in it. This loss of capital value invested in plant units of limited life is similar to the loss of capital invested in an undertaking with a limited franchise. Sound financiering demands that the loss in capital value, thus brought about by years of service, should be made good by reserves for depreciation obtained in a manner already fully described in the preceding chapters.

131. Physical condition not a direct measure of loss of value. Depreciation has been defined as the loss in value of an investment in perishable property arising from the years that such property has been in service.

Objections to this definition have been raised on the ground that depreciation is made, thereby, to depend entirely upon financial considerations and that such a treatment would be purely theoretical in that proper regard was not given to the physical condition of the plant at the precise time of the appraisal. It is argued that, if this definition is accepted, it would make the loss in value dependent upon the same considerations as have been shown to be the basis upon which the yearly reserves for depreciation are to be figured; for, if the case of a single plant unit is taken, the reserves are designed simply to have in hand the wearing value of the unit at the end of its life. It is argued that the increment to the reserves for depreciation which is set aside from income any given year, is in no way a measure of any loss in value of the physical unit during that year, but rather, a tax upon the income of the undertaking in one year of a series of intermediate years, designed to meet a future condition which will demand new capital to replace the unit when it

becomes unserviceable. It is argued, further, that the plant unit "deteriorates" year by year and that this "deterioration" is the true measure of the "depreciation" in the value of the unit during the intermediate years of its life, and, being a physical condition of the plant, can in no way be measured by the purely financial considerations upon which the reserves for depreciation necessarily · must be based.

Such a line of reasoning is absolutely faulty. Any attempt to reconcile "deterioration" with "depreciation," at any intermediate period in the life of the plant of an undertaking, is not only unnecessary but futile. The error in any such attempt arises from a failure on the part of the expert, who attempts to assign a definite loss in value to a plant unit arising from its partial deterioration, to recognize the fact that, if it can be proved that a plant unit can and should be retained in the service of the public for a definite number of years, in other words if definite agreement has been reached as to its serviceable life, the physical "deterioration" of the unit, at any time during its life, can be a matter affecting its intrinsic value in no way whatever. Physical deterioration may enter as an important factor in affecting the serviceable life of the unit but it can affect its value in that way only indirectly, through its effect in a lessened number of years of serviceability.

When it has been recognized that physical deterioration affects life and, as a consequence, loss in value indirectly, it will be apparent that, if the years that a unit can and will be retained in service have been determined, the undertaking has an investment in a property of a definitely limited life. The value of the investment diminishes year by year, during each year of the term of years that it is represented by perishable physical property.