The work, if large, should be standardized. Everything to be reported should have a form for the purpose. These should be as concise as possible, calling attention to the essential information, but not in too much detail. Unit prices should be established after proper consideration.
Reproduction Value.—In ascertaining the reproduction value, the aim should be to obtain prices for which the material could be purchased and the work let to responsible parties at the date of the valuation. Real estate and depreciation are probably the two items in which there will be the largest differences in opinion as to values, and both should be determined by the personal examination of experts, following some prearranged system. One founded on the Somers system might do for the land, and certain percentages of depreciation per year, varying for the three conditions of good, fair and poor, for the structures and equipment, but the results in any case should be examined and passed upon by some one person so as to eliminate the individual equation as far as possible.
It is when the figures thus reached are before him that the Engineer finds himself confronted with many perplexing problems. To what items should percentages be added, and in what amounts? A small change in such items often makes a large difference in the total. There is not much trouble about general expenses, legal expenses, engineering, etc., as these are undoubtedly proper items to be added, and the amounts of the percentages are not difficult to determine from sufficient study of the property. Opinions on such matters will not vary greatly, but there is a difference with regard to such items as leasehold interests, solidification, contingencies, interest and taxes during construction, commissions and discounts on securities, working capital, value of the good will, and considering the property as a "going concern," about which opinions will differ much more widely.
Leases from the company are like any other book asset. Leases to the company should be considered as the land is considered. What is the present value of the leasehold interest for the remainder of the term for which the rental is fixed?
Present Value.—In ascertaining the present value, it would seem that something should be allowed for solidification, the amount depending on the manner in which the work was built, its age, the likelihood of damage by the elements, etc. Possibly a percentage of appreciation on the value of the earthwork and masonry would be the fairest manner in which to consider it. Due care must be taken, however, to give proper credit to good work and not put a premium on inferior construction.
A percentage should be allowed for contingencies in all cases, but this is not necessarily the same for every piece of property. The estimate is made on a completed piece of work, consequently, if done with proper care, this item should not be as large as if the estimate were made for work to be constructed; but there are many things, not seen by the estimating engineer or disclosed by available records, which must be covered by this item, such as buildings bought with the land and afterward destroyed, damages paid for reasons not now apparent, difficulties encountered in excavating wet or hard material, amounts spent in dredging, in artificial and difficult foundations, losses during construction on account of strikes, washouts, etc. These are perfectly legitimate charges, and are likely to have occurred, and proper allowance should be made for them.
It would seem that interest and taxes during construction is a legitimate charge, and therefore, in the cost of reproduction, sufficient amounts should be added to cover it. Care should be taken to make the time long enough, as engineers are often too sanguine as to the length of time necessary to complete a certain piece of work. It is true that a part of a railroad, for instance, may be completed and opened for operation, but the net revenue derived would be very different from that of the completed road with its terminals and connections.
A new corporation can rarely market its securities at par, not only on account of the chances taken by the investor, but also because, being human, he likes to think he is buying at a bargain, getting something a little below its value; consequently, inducements vary from a small discount on bonds to a share or two of stock thrown in. To what extent a reasonable discount is a proper charge against construction may be considered an open question. It might seem fair that a certain fixed percentage be allowed in valuations, to determine capital for commissions and necessary discounts, varying according to the amount of the securities. This need not cover the whole amount of the discount, but only that portion which experience would consider essential in marketing unquestioned securities.
Consideration of the items working capital, good will, etc., may not properly belong to the Engineer, but rather to the Statistician, except as the former hears of such items being used as an argument against the necessity for a valuation of the physical property of a corporation. It is often asked, for instance, how can a value be placed on the property of the Pennsylvania Railroad Company, with its great commercial position, its magnificent terminals, and its splendid organization, all the result of the expenditure of much time and money? It is certainly a difficult problem, but the Pennsylvania Railroad is one of the greatest properties in America, possibly in the world, and because the proper valuation of this property is surrounded with difficulties it does not follow that the valuation of the properties of all other public service corporations are equally troublesome. The very difficulty of the task shows the importance of having firm ground for the first step. Having that, it may not be as hard as imagined to take others.
Thus it is seen that there are many perplexing questions for the Engineer to consider, and many details for him to work out, in doing which Mr. Riggs' paper will materially help. Above all, the Engineer must aim to be impartial; he must arrive at such a point of view as to see both sides with equal distinctness, and judge fairly and justly, trying to determine some well-defined laws and formulas which will serve as a basis in ascertaining the values desired.