No appraiser would be justified in placing a "going concern" value, in excess of original cost, on a new property, nor would he be justified in placing such a value on a property 3 years old, or 10 years old, unless the net earnings were such as to indicate that the property had a business or commercial value in excess of the physical property value.
It would seem reasonable to say that this difference between the physical value and the value based on earnings represents the "good will," "established business," or "going value," and all the other non-physical elements of value.
To take a specific example: it would be impossible to separate the different elements of intangible value of the Michigan Central Railroad, and say that a certain sum of money represented "good will," another sum "established business," still another sum the "franchise value," and still another sum the "going concern."
The "going concern value" of the Michigan Central Railroad is exactly analogous to the going concern value of the hypothetical water-works cited by Mr. Alvord. Instead of having water pipes connected with buildings along the mains, and considerable sums invested in appliances for using the water, there are manufacturing plants located along the railroad, connected with it by side-tracks built by the industry, and depending on the transportation facilities of the road for their connections with their customers, the very life of the manufacturing plant dependent on its connection with the road. This is "connected good will" of the same kind as described by Mr. Alvord. Yet, to fix a value on it by the method described by him involves going into the realm of conjecture and speculation to a degree that could never be sustained.
Difficulties as great would be encountered in an effort to separate and set up any other elements which go to make up the intangible value, and any figure thus determined would be absolutely incapable of proof.
The Courts say that the value must be the "fair value of the property being used," all the conditions being taken into account (169 U. S., 466).
It can be readily seen that the physical present value is not always—indeed, is not often—the "fair value." The "fair value" may be more, or less, than the present value of the physical property. It would seem to be reasonable to interpret the Court's meaning of the term "fair value" to be the value as a business or commercial property, taking into account the actual investment existing in the property, together with any favorable conditions which would enable it to earn, on rates which were fair and reasonable to the consumer, an income in excess of a usual rate of interest on the actual investment, or any unfavorable ones which under the same rates would reduce its earnings to less than usual interest. If such an interpretation be allowable, it would appear to be correct practice to use a "fair value" made up of two elements: a physical value, representing the investment, and a non-physical value, representing all the elements which affect that investment to give it favorable or unfavorable financial returns. Is it not, then, proper to conclude that the non-physical or intangible value, composed of all these various elements of value, can only be determined absolutely by a study of the earnings and operating expenses? Is not this clearly what the Court had in mind in the Nebraska Rate Case?
Much of the argument on the subject of "going" values and other kindred elements of value consists of statements of theory and generalities, and may be said to be merely argument to support the theory that there is an intangible element of value. If work of valuation is to be of any real benefit, must it not give a definite result? Must not this result be based on absolute facts?
In securing the present value of any physical property the fixed and certain facts are:
The inventory of property owned.—This is absolute.