Effect of Local Conditions
Many factors enter into the rate of depreciation. They may be classed roughly as “stable or normal” factors and “contingent” factors. It should be constantly borne in mind that in the present state of the actuarial development of the subject, general rates, i.e., rates which will apply without readjustment, cannot be determined. For the determination of individual rates local conditions are always the controlling factor. An illustration in point is given by Henry Floy,[28] showing the varying rates used by thirty-one different concerns for the depreciation of their rolling stock equipment. The methods vary in almost every case, comprising annual charges of an arbitrary amount, per cent of the original cost, cents per car mile, arbitrary deductions from income irregularly applied, per cent of gross earnings, per cent of present estimated values. Reduced to a common basis, the per cent methods show a range of expected life varying between ten and one hundred years. While it is improbable that had the determination of the depreciation rate for the different concerns been in the hands of the same expert, there would have resulted these bewildering variations in method, still it does bring out in strong relief the fact, well recognized by experts but so often lost sight of by those unacquainted with the technical phases of the problem, that local conditions are a controlling factor; and that until local conditions can be somewhat standardized there is no hope of establishing rates of depreciation which will be of general application.
Factors in Determining Depreciation Rate
In the determination of rates the factors to be taken into account are:
1. Normal operating conditions.
2. Normal load or normal intensity of operation.
3. Normal repairs policy.
4. Normal climatic conditions.
These constitute the most important stable or normal factors. Among the contingent elements, the most important are:
5. Probable misuse and neglect brought about by the demands of the trade, resulting in a change in the factor of normal intensity.