It would appear that there are a few matters in regard to which the writer did not succeed in making his views entirely clear; consequently, a few words on these items may not be amiss.
Overhead Charges Versus Unit Values.—The point raised by Mr. Higgins, that the determination of any percentage figures to be applied to cover overhead charges must be carefully considered in connection with the unit prices that have been adopted and applied to the items of the physical inventory, is well taken. On all valuation work with which the writer has been connected the various local conditions were taken into account, and, for each item a figure was used which, it was believed, would fairly represent such price as would be named by a contractor for the work under the existing conditions. Therefore, all elements of hazard to contractors, and contractors' profits, have been included in the unit price, leaving to be treated under overhead charges only those elements of cost which the corporation under investigation would be compelled to bear.
The determination of a proper set of unit prices for a valuation involves a very careful study of prices and local conditions, so that it would appear to be impossible to establish any fixed rule which would be generally applicable to all appraisals. If the unit prices adopted be the cost to a contractor, then the overhead charges must be made large enough to cover the contractor's hazard and profit. Every appraisal should be accompanied with a report or statement, showing clearly what has been done in this matter.
Items to be Inventoried.—In reference to the items to be inventoried, the construction placed on one sentence by Mr. Newton is entirely foreign to the meaning which the writer intended to convey. Mr. Newton's statement of his own views is entirely in harmony with those of the writer.
Discount.—Messrs. Henry C. Adams and W. H. Williams have both discussed discount, and both take exception to the conclusions of the writer. This would appear to be a subject on which there is disagreement in all professions. Very able and experienced railway managers and accountants will be found on both sides. Since the paper was written, the writer has been engaged on the appraisal of a comparatively new property which was defendant in a condemnation suit. In this case, 20-year bonds were issued in 1905, and sold at an average discount of 15 per cent. The discount has been treated as an interest charge on the books of the company, and was being written off from year to year. The question arose: Should the discount balance (approximately three-quarters of the discount) be added to the physical value and paid by the parties acquiring the property; or should the loss be sustained by the owner? The treatment of the account on the books of the company was in exact accord with the writer's first contention, but a careful study of the case in hand led to the conclusion that equity demanded inclusion of the unamortized discount in this case. Had the condemnation taken place in 1925, after all the discount item had been charged against operation, no part of this amount would appear to be proper in an appraisal. This case is cited as being the only one which has come up in the writer's practice in which he has been inclined to recognize the propriety of including the item. The writer is not yet convinced that his first conclusion was in error.
Professor Adams suggests several different claims made as to the discount item. If any one of them be adopted, has suitable agreement been advanced for treating the item as a capital charge? Clearly, the amount of money involved in the discount item is not paid by the company until the maturity of the bond. It is not invested in the physical property of the company until it is paid. If written off from year to year and charged against operation, or treated as a deduction from earnings or from surplus, it would hardly seem proper to include it in capital at the end of the period. The writer is open to conviction, but he has not yet been convinced of his error on this point. Happily, this is an item, the amount of which may be exactly determined from the books of any company under investigation; so that, whatever the final determination may be as to the propriety of its inclusion in an appraisal, the amount to be treated is not a matter of estimate.
One Value Versus Several Values.—The writer has called forth discussion on this point from several members, and, in view of some of the discussion, he believes that a few sentences may tend to clarify his views:
(1) An appraisal should be in complete detail, and should show fully, not only all schedules of physical property and of unit costs and depreciation percentages on which physical values are based, but should completely detail all schedules based on an examination of the books.
(2) The final summary should include every element of value which enters into the property, and which should enter into the "fair value" or "true value" of the property, if valued for any purpose whatsoever.
(3) An assessed value for taxation purposes should not necessarily include all the items in the engineering valuation; but an assessment can be made with absolute fairness if all the facts are at hand and in such form that non-taxable items are separable.