significance. It is the reward to the promoter, the man who initiated the undertaking with the expectation of a return greater than that which would be paid him in the form of a salary, or than the usual return upon money invested in better established or less hazardous enterprises.

It must be definitely recognized that the cost of promotion is a very practical matter and that, without the expectation of such reward and the right to receive it in case of the success of the enterprise, it would be impossible to obtain the required funds or men of sufficient ability or skill to undertake such work. But the present question is whether such reward can be made properly a portion of the replacement cost of the plant.

Looking at this question from the practical side, it is customary in a large majority of the cases of the initiation of new enterprises to give to the promoters and to those providing the funds shares of common stock as a bonus or reward. In such cases, the common stock represents no money actually invested in the plant but enables the holders of such stock to participate in any surplus earnings over and above fixed charges and a reasonable return upon the preferred stock. The propriety of this method of financing need not be discussed. The method is a usual one and indicates the fact that there is nothing in the transaction affecting the replacement cost of the property, except in so far as the receipt of the common shares may decrease the losses which might obtain in the sale of securities, as those buying bonds or stock, with which a block of common stock is associated, might be willing to pay a higher price than for a bond without the speculative features presented by the common stock.

It would seem, therefore, that, as no money is usually directly paid for the promotion of the undertaking, there

was no reason whatever for including this factor as an element tending to enhance the replacement cost of the property.

The above line of reasoning may appear to be contrary to some of the decisions of state commissions on this subject. But a careful reading of all the cases where this subject is discussed seems to show that what these decisions call "promoter's profit" or "cost of promotion" is more nearly covered by the overhead charge of cost of organization.

47. Sale of securities. - This item is intended to include the discounts or losses which an undertaking might incur in order to sell its stocks or bonds, together with such expenses as may be incurred by underwriting an issue of the securities of an undertaking to insure the disposition of its securities.

In considering this item it is again necessary to call attention to the fact that it is the replacement cost of the plant as of the present time that is to be determined. It is not what the capitalization of an enterprise should have been to have constructed the plant but what amount of money would have to be spent at the time of the appraisal to rebuild it.

It is probable that money could not be raised sufficient to construct the supposititious new plant except by an offer of securities below par. But such a discount is equivalent to a higher rate of interest, and this interest enters into the replacement cost only during the construction period. As has been already stated the rate upon which interest during construction must be based is that which would have to be paid for money for the replacing plant, such a rate including any losses which occur in the sale of securities.

It will be seen, therefore, that losses in the sale of securities are already fully cared for under the head of interest

during construction and that to include such an item as a specific portion of the replacement cost would be a duplication.

48. Contractor's profit. Discussion as to the treatment of contractor's profits has appeared in two forms; first, as to whether the overhead charges considered above would hold in case a portion or the whole of a plant had been built by a contractor rather than by the undertaking; and the second, as to whether, if the plant had been built by the undertaking it would not be entitled to the profit, so called, which is usually paid to a contractor for his work.

The answers to both of these questions is apparent. The answer to the first is that the unit costs and overhead charges, above derived, are representative of what it would cost an undertaking to acquire a property identical with that already in existence. Whether the existing plant was constructed by a contractor or not is immaterial. And second, replacement cost is the sum of money which would have to be expended to replace the existing plant and is based upon fair present costs of labor and material. The contractor's profit, so called, is really not a profit, if the fair market prices of labor and material are used, but a sum sufficient to reimburse the contractor for his own time and skill and for the expenses which he has incurred in building up an organization capable of carrying out the work, in acquiring the tools needed in the work, in caring for the contingencies inherent in the work and obtaining the credit or means required to meet the expenses incurred between payments for his work. All of these items are properly and fairly cared for in the unit costs obtained as above described and by the overhead charges.

49. Overhead charges. Method of application. — It will be assumed, in the discussion contained in this sec

tion, that definite percentages have been obtained to cover with accuracy the five items of cost which have been described above as properly represented by overhead charges. It is important that these percentages should be applied to the costs of the several plant elements as obtained by multiplying the number of units of each element found in the plant by the unit costs, in such a way as to obtain properly the replacement cost. Before studying this question in detail, a general consideration is necessary as to whether one or all of these overhead charges should be presented as independent items in the valuation, or should be added directly to the cost of the elements as derived by the use of unit costs so as to make one cost for each of the elements. Thus, if the replacement cost of an element is found to be $100,000.00, using unit costs alone, and one of the overhead charges, let us say engineering, is found to be ten per cent of such cost, the question is whether the replacement cost of the element shall be presented as $110,000.00 or as $100,000.00. In the latter case it would be necessary to make engineering a special item of the inventory and, as far as this item alone is concerned in such a case as is cited, given a value of $10,000.

The necessity for this consideration is twofold; first, as affecting the question of depreciation; and second, as to whether the application of the percentages for overhead charges shall be compounded.

Relative to the first of these considerations, it must be appreciated that, after the replacement cost has been found, it will be necessary to find another figure to show by how much the value of each element has been reduced by the time that each element has been, on the average, in service. This depreciation value is obtained from figures based upon the replacement cost of the element and upon the relation of the years of service to the years

of probable usefulness of the element. If the amounts represented by the overhead charges are made a portion of the replacement cost of the element, then the expenses, which they represent, are made to depreciate with the element. If they are made separate items, then they can be cared for in any manner that seems proper, independently of the elements to which they may be applied.

This question might be made the subject of an extended discussion, particularly with regard to one or more of the overhead charges. No attempt will be made to present the various arguments which may be made as to what method should be employed.' It will be stated, more or less arbitrarily, that each overhead charge should be presented as an individual item exactly as if it were in itself an independent element of the plant. Thus, organization, engineering, and legal expenses, although obtained by an application of percentages to the costs of certain elements, will not be made a portion of the cost of those elements, but the sum of the amounts, derived by the application of these percentages to the several elements affected, will be presented as a definite sum for engineering, another for organization, and others for the other overhead charges. Clearly, such a method of valuation will not affect, in any way, the total replacement cost, but it will affect the replacement cost, as presented, of the individual elements.

This method is unquestionably proper for the reason that, although the expenses incurred under the heads of engineering, and organization, may include a certain amount of supervision which will have to be reincurred when the plant is replaced, still the cost of the supervision that will have to be reincurred is relatively so small as to be entirely negligible. It is difficult to see how legal expense will be reincurred when units become 1 See In re Met. St. Ry. Co. - N. Y. P. S. C., 1st Dist., Vol. III, p. 155.