4. Physical decay, neglect.—Many assets, such as buildings and machinery, even tho kept in the best of repair, will in time reach a state where repairs will no longer suffice and the entire asset must be renewed. A horse is a striking example of this form of asset. His shoes may be replaced, but no repairs or renewals can stay the gradual breaking down of his physical powers. In time he must be replaced. Deprecia tion of this kind is called physical decay, or decrepi tude. It should be noted that depreciation because of age takes place whether the , asset is in use or not. Thus buildings, boilers, insulation, etc., may waste away more rapidly when standing idle than when they are in use, and it is common experience that all properties, even when kept in good repair, eventually reach a physical state where repairs and detail renew als are no longer sufficient, and the asset must be re placed entirely.
In refined methods of appraisal, account is taken of the value of an asset, as it really exists, and the value it would have if properly repaired. Even when a plant is kept in the best of repair, it has been shown that its value must steadily decrease. If, however, repairs and renewals are neglected, the value of the asset will necessarily fall below what it would be if kept in repair, and the amount it falls is called de ferred maintenance, or neglect.' Since deferred main tenance represents the amount that must be expended to restore the asset to normal condition, it is also a measure of the efficiency with which the plant has been managed, so far, at least, as its physical care is con cerned.
5. Inadequacy and obsolescence.—Sometimes an asset must be replaced even tho it is in the best of repair, because it is no longer adequate for the work at hand. Thus, a steam crane may become too small for a growing industry, tho it may still be in good con dition; or an engine may prove to be unable to drive a factory that has outgrown it, tho it may be as efficient as when it was installed. Such decreased value is known as inadequacy, or supersession, and, obviously, has no connection with wear and tear in the ordinary sense, nor is it connected with decrepitude, or decay thru old age.
An asset may become of less value because of the introduction of new methods or machines. This may occur when the asset in question is as good as new, so far as its power of production is concerned; yet the manufacturer cannot afford to be without the im proved apparatus. This phase of the problem of de
preciation is particularly noticeable in industries that are developing rapidly. During the early days of the growth of the electrical industry changes of this kind were many and rapid. The same difficulty was experienced in New England during the development of the textile industry. Such lessening of value is called obsolescence; it is one of the wasting losses which is often most difficult to foresee and make pro vision for. Special machinery is particularly liable to become obsolescent. A factory manager should exercise careful judgment in purchasing, therefore, in order that he may not be left, at some future time, with a useless machine on his hands.
In appraising public utilities or in settling the dif ferences of opinion between partners or stockholders and bondholders all of the above classes of wasting losses may be, and are, taken into account. It is not difficult to see, also, that sharp differences of opinion may arise between owners as to the exact disposition of these losses. But for the ordinary enterprise, where the owner is desirous of knowing only the total of such losses, it is usual to group them all under two heads, namely, depreciation and obsolescence—de preciation including wear and tear, decrepitude and neglect, and obsolescence including inadequacy also.
6. Relation between depreciation and repairs.—It will be clear that repairs and renewals tend to com pensate for wasting losses, but from the foregoing it is also clear that in most cases complete compensation for depreciation, by means of repairs, is not possible. In large plants, consisting of many units that wear out so quickly as to need frequent and complete re newals, such compensation is sometimes possible. For example, in pottery works, where the kilns must be frequently rebuilt, it is conceivable that if there are enough kilns the renewals may practically balance depreciation. In the case of large railways, where re newals and additions are constantly being made, it is often considered that depreciation is thus compensated for. But it is evident that in such cases there should be an obvious increase in the productive capacity of the plant to insure against gradual lessening of the assets. Even when a machine or building is kept in good repair there is necessarily, as already noted, a lessening of its productive power that cannot be stayed by repairs and renewals.