In a recent article in this Journal, Professors Vancil and Weil argued that provisions for depreciation based on the replacement cost of assets will be sufficient to maintain the firm’s physical capacity, provided the proceeds from reinvestment are taken into account. They call income reported on the basis of such depreciation “distributable income.”

Vancil and Weil are able to support this conclusion in their one-machine example only because they do not include in distributable income the reinvestment income from their replacement fund. But on what grounds should income from the machine be distributable and income from the replacement fund not be distributable?

And how meaningful is the concept of distributable income? “An important characteristic of distributable income from operations is that it is sustainable,” say Vancil and Weil. “If the world does not change, the company can maintain its physical capacity next year and have the same amount of distributable income that it had this year.” But the world does change. Products and preferences for products change. Production techniques change. For a number of reasons a firm may choose not to maintain physical capacity, or find it possible to maintain physical capacity more cheaply than before.

Whatever else may be said about distributable income, it is hypothetical or, as Paul Rosenfield has termed it, “subjunctive.” Its amount represents assumptions about the form of replacement for present assets, the apportionment of an investment in new plant between “maintaining former capacity” and “new investment,” and prospective service lives and scrap values.