Therefore, 171,005 + 0.2597x = x; hence, x = $231,000. This result is based on the assumption that the starting plant earned no interest during the construction period. If an allowance for lost interest during construction has been made and added to the capital account already being included in the physical appraisement of $1,000,000, then this must be charged back against the going value found above. This is clearly evident, because the calculations to determine going value date from the beginning of the construction period, and the lost interest during construction, therefore, is provided for in the result. Most appraisers allow an item for lost interest amounting to the legal rate of interest running for half the construction period, which, in the illustration under discussion, would be $90,000; deducting this sum, if previously included, gives $141,000 as the going value.
There seems to be no good reason for allowing lost interest during construction as an item in the physical valuation of a property, any more than for allowing all of the lost interest, up to the time when the property begins to yield a return equal to the rate of interest. It is one of the problems in finance, and is much better treated as an element in the going value, as shown in the above illustration.
One of the most difficult factors on which to agree in computations of this nature is the element of time required for the hypothetical starting plant to acquire the business. Were it not for this uncertainty, going value could be computed with mathematical precision by the method suggested.
In determining the physical valuation on the basis of cost of reproduction, such items as cost of taking up and replacing street paving over the pipe lines, cost incurred by reason of sewers and drains encountered, interference due to electric wires and conduits, interference of traffic, and other metropolitan conditions which add greatly to the cost of construction, must be allowed. Wherever such metropolitan conditions exist, there must also be present a corresponding necessity for the use of water under pressure. People use water because of necessity or convenience, and not on account of any feeling of obligation or loyalty to the water company.
TABLE 14.—Computation of Going Concern Value, Based on Reasonable Rates.
| Year, dating from beginning of construction. | Legitimate profits of the going plant. | Hydrant, rental taken over by starting plant. | Domestic revenue of starting plant. | Interest on the starting plant. | Operation, maintenance, taxes, and depreciation on starting plant. | Total difference in anticipated profits of the two plants. | Present worth factor. | Present worth of the excess of anticipated profits of the going plant. | |
|---|---|---|---|---|---|---|---|---|---|
| Construction period. | 1st | $60,000 + 0.06x | 0 | If the physical validation contains an item for lost interest during construction, the same amount must be credited to the starting plant as interest earned. | 0 | $60,000 + 0.06x | 95.2 | $57,120 + 0.0571x | |
| 2d | 60,000 + 0.06x | 0 | 0 | 60,000 + 0.06x | 90.7 | 54,420 + 0.0544x | |||
| 3d | 60,000 + 0.06x | $20,000 | $20,000 | $30,000 | 50,000 + 0.06x | 86.4 | 43,200 + 0.0518x | ||
| Business | 4th | 60,000 + 0.06x | 40,000 | 55,000 | 50,000 | 15,000 + 0.06x | 82.3 | 12,345 + 0.0494x | |
| development | 5th | 60,000 + 0.06x | 40,000 | 80,000 | 65,000 | 5,000 + 0.06x | 78.4 | 3,920 + 0.0470x | |
| period. | 6th | 60,000 + 0.06x | 40,000 | 90,000 + 0.06x | 70,000 | 0 | 74.7 | ||
Total going value = 17,005 + 0.2597x
x = $231,000
If highly developed metropolitan conditions are present, new business will be acquired in the hypothetical starting plant much more rapidly than where such conditions are yet to be developed. For this reason the problem cannot be based on the early growth of the same plant, and, there being no exact duplicate of conditions in existence elsewhere, the estimate of time required for the business development period is purely speculative, and must be assumed with great care and judgment, else injustice may be done to one party or the other in the resulting going value.
It is interesting to note that, in the Michigan appraisal, the allowance of a percentage for contingencies was bitterly contested by the railroads as improper. Probably every appraiser who has been connected with rate cases has seen this same item strenuously insisted on by the corporations.