The Value and Depreciation of Existing Facilities: The Case of Reservoirs

The value of an asset is determined by the net economic value of its production over time. This value is summarized by the net present value of all present and future production. Change in asset value, depreciation or appreciation, results from both changes in the economic value of each unit of production and the asset's physical productivity. A theory of depreciation expressing this approach is derived from first principles of engineering economics. The asset's initial fabrication cost is not directly relevant to determining its net economic value once the asset exists. The theory is illustrated for the case of water resource reservoirs “The simple [depreciation] methods., which still prevail generally in business, are analogous to the naive type of economic thought for which the only determinant of price is cost and fails to consider the equally important role played by demand.” Harold Hotelling, 1925[8].