Measurement of Obsolescence of Capital Goods

Abstract

RT HE principal objective of this paper will be the suggestion of methods by which obsolescence, exclusive (in so far as it is possible) of all other categories of depreciation, may be measured.2 Following general comments on the nature of a procedure for calculating obsolescence, there will be statements about the means of measurement of several different cases of obsolescence. Next, there will be comments on determination of the time when an improvement will displace installed equipment. No especial attention will be given the general economic issues of technological unemployment; wage, income, and output matters; demand characteristics of the product or products; or differences in the opportunities of competitors. The paper will be devoted, therefore, to measurements of obsolescence of a piece of equipment, particularly a single firm's equipment, or, at the most, of capital goods of a single industry. Because the concepts of depreciation and obsolescence of capital goods are subject to a variety of interpretations, definitions of them are needed. Depreciation of capital goods, therefore, is arbitrarily defined as the decline, anticipated or unanticipated, in their value for any reason. Obsolescence is defined similarly as the decline, anticipated or unanticipated, in the value of capital goods because of the economies or profitability of technological changes, a secular decrease in the demand for the products produced with the assets, or governmental policy. The succeeding algebraic expressions, however, present means of measuring what