"The method is by no means an exact one, and must necessarily lead to a very great divergence in opinions as to the 'going value,' in accordance with the assumptions on which it is based.... Its very logic is an element of danger, for if clearly presented from a biased standpoint to one previously unacquainted with its application, and if accepted without careful analyses it may lead to very unjust conclusions. If used, however, carefully and conscientiously with the desire to do justice to all concerned, it is a valuable method of estimating going value, and the only logical one with which the speaker is familiar."
In addition to the element of going or business value, Mr. Alvord considers the franchise value, and presents two methods for its determination:
First.—The physical value, depreciation, and going value are entirely neglected, and the entire valuation is fixed on the basis of its earning power throughout the remaining life of the franchise and its probable sale value.
The probable net revenue for each year of franchise life must be estimated and capitalized at a sum, which, if put at interest, would pay such yearly revenue and extinguish itself at the end of the franchise period. To this must be added the physical value of the plant at the end of the franchise period.
Second.—The cost of reproduction, depreciation, and present physical value are ascertained, and the going value computed. Then it is determined whether or not the net revenue is paying interest on a capitalized value greater than that indicated by the sum of the physical and business values. If such capitalized figure is less than this combined value, there is, of course, no franchise value; if it is more, there is a franchise value which should be determined by estimating, for the remaining years of the franchise, the excess income over and above that necessary to cancel all obligations (including interest on the physical and business values), and the reduction of these several sums to a basis of present worth.
A number of other articles and papers are listed in the Appendix. Many of these are of great value and are well worth careful perusal, but they offer no definite plan of valuation. Inasmuch as the general principles involved in the valuation of a water-works plant and a railroad plant are similar, it is advisable, in any exhaustive study of the subject, to review the articles descriptive of water-works valuation, and it is a matter of regret that greater consideration cannot be here given to some of the points raised by such engineers as George H. Benzenberg, Past-President, Am. Soc. C. E., Kenneth Allen, Arthur L. Adams, Emil Kuichling, Members, Am. Soc. C. E., and others in their various papers and discussions of this subject.
The Railway Age, the Railroad Gazette, the Railroad Age Gazette, and the Railway Age Gazette contain many editorials and articles on the valuation of railroad properties. These are written mainly from the standpoint of the railway official, and present many matters of interest which are worthy of study prior to undertaking a large appraisal. One series of articles in the Railway Age Gazette[[13]] is a most masterly argument, and it is to be regretted that the author has not disclosed his identity.
The Michigan valuation has been discussed in two papers by Mr. Charles Hansel, whose connection with the work, as a member of the Board of Review, gave him probably a more intimate knowledge of it than any one else, not connected with the actual working organization, who has undertaken to review the work. His first paper, published in 1901,[[14]] entitled, "What is the Value of a Railroad for Purposes of Taxation?" is a discussion of the work of Professors Cooley and Adams, written while the subject was fresh in his mind. His second paper, an able argument for a Government valuation, appeared in the North American Review in 1907. The one point to which special attention is drawn is Mr. Hansel's astonishing misconception of Professor Adams' plan of work. This misleading statement appears in the first paper and is reiterated in the second. It is of such a character that to pass it unchallenged would be doing great injustice to Professor Adams. He states Professor Adams' plan as follows: Capitalize net earnings and add to the present value of the physical appraisal as found by Professor Cooley.
"The result would be that in case the present value per mile as determined by Professor Cooley is found to be $15,000, and the net earnings by Professor Adams are found to be $1,000, this capitalized at 5 per cent. would equal $20,000, and added to the present value would make $35,000, which would be the sum upon which taxes were to be levied. In other words, if the company actually earns $1,000 it increases its value for purposes of taxation 20 times that amount. If, however, instead of having a net earning of $1,000 it spends that sum in improving the property, it has only increased its taxable property by $1,000."
This statement is not only inaccurate, but involves the other error of assuming that the appraisal figure was to be used for taxation. It was not. It was merely information to aid the legislature in framing new taxation laws. The chief error, however, is in assuming that Professor Adams added the value of the property, as determined by a capitalization of net earnings (which per se is a well-recognized method of valuation), to the value of the physical property. This error probably is due to the flood of criticism which at the time was aimed at any form of non-physical valuation.