ITEM NO. ITEM TABLE 46 Extract from an evaluation in 1924 of the property of a privately owned water company, illustrating the method of estimating the annual depreciation allowance and the accrued depreciation Contribution at end of year, interest compounded annually at 4 per cent Amount Four per cent of accrued depreciation (see bottom Column 10) Based on assumed remaining life of 5 years. Note that in columns 6 and 7 the individual rates are exclusive of the annual interest accretion, which is shown in total amount at the foot of the column. In column 14, however, the accretion is included for the year under consideration. The depreciation will increase progressively thereafter Total annual allowance including accretions. thus resulting, shown in column 13 is taken from annuity tables similar to tables 43 and 44 herein and to the diagrams shown in figure 19. The amount of the annual depreciation allowance shown in column 14 is then the product of the net reproduction cost shown in column 11 times the rate shown in column 13. TABLE 47 Cost, depreciation allowance and net value of a structure having a 10-year life By straight-line method At the foot of column 14 is given the resulting total annual depreciation allowance amounting to $13,130 or 2.42 per cent of the net or depreciated (not the gross) reproduction cost. This amount -$13,130 is comparable with the amount shown at the foot of column 7 ($13,250) thus checking the substantial accuracy of the computations. To make clear the effect of the declining value of the individual structure with lapse of life, the cost and the remaining value are figured below for a structure having an estimated life of ten years, in table 47, on the basis of straight-line method of computation; TABLE 48 Cost, depreciation allowance and net value of a structure having a 10-year life By sinking fund method (4 per cent rate) and in table 48, on the sinking fund method. It is to be borne in mind, however, that the annual betterments and extensions largely offset this declining value, as will be shown hereinafter in the discussion of accrued depreciation. Practically it is found in many water works that the ordinary annual betterments (excluding the periodic plant reinforcements and extensions at intervals of twelve to fifteen years) just about offset the annual loss by depreciation, the amount of each being roughly slightly less than 10 per cent of gross annual revenue. Equal annual payment or compound interest method. For information regarding the so-called "equal annual payment or compound interest method" of accounting depreciation the reader is referred to the Report of the American Society of Civil Engineers Committee upon "Principles and methods for the valuation of railroad property and other public utilities" (Transactions, vol. 81, 1917, p. 1463). Other methods of accounting depreciation have been used, but have not been so widely used as to make their discussion of importance here. Effect of good future records. It is recognized that gradually, with the accumulation of reliable data, by water works and regulatory commissions, of the facts concerning abandonments and renewals in such properties from year to year, the figures obtained by the sinking fund or other annuity method of determining fair annual depreciation allowance will probably give way to a direct application of percentage allowance upon cost of the individual structures or groups of structures. Meanwhile and in any event, the results obtained by the application of annuity methods, must be reviewed and modified as necessary in the light of the results of careful inspection of the structures; consideration of past and probable future experience with them; the actual records of depreciation of water works structures, such as those cited herein and others of like nature, based upon past experience, as expressed in per cent of cost, per cent of gross annual revenue, and cents per capita per annum. In its final analysis the determination of the fair annual depreciation and the accrued depreciation allowance upon any water works property, involves seasoned judgment in the field of water works construction, and particularly of water works operation and maintenance. It is well to bear in mind, too, that the courts are tending more and more toward the results of usual experience with structures in the water works field, modified by the past and probable future of the works, the structures of which are under consideration, rather |