April 1, 1919.] 



THE INDIA RUBBER WORLD 



355 



enterprise depends so much upon the climatic factors, the sudden 

 appearance of disease, pests, etc., none of which at the present 

 time seem^ particularly dangerous, but which in so many planting 

 enterprises have wrecked them, that we cannot say it is com- 

 pletely under control. Hence, there is a risk for which compen- 

 sation can be made only by an increase in rate of interest de- 

 manded by the investor. A fair rate of interest should be: for 

 the owner— the interest rate which he estimates he could get in 

 new investments, with the same risk incurred ; for the buyer — 

 the interest rate which he desires to make on this particular in- 

 vestment, considering the risk involved. The writer's personal 

 opinion is thai 20 or 25 per cent is a fair rate of interest to use 

 in the calculations for the value of rubber estates, but this will 

 no doubt meet the adverse criticism of optimistic planters who 

 are not buying. 



The fourth item, or the "method of calculating the value of 

 the property, after the above estimates of cost, yield, price of 

 the product, and interest rate have been fixed," is the one of most 

 importance to us in any attempt to standardize the evaluation. 



The writer believes that a method to be correct must cause the 

 values of the property to vary in correct ratio with the following 

 estimates which form the basis for the evaluation : 



(1) Time required to bring the area into full bearing. 



(2) The amount of money which must be expended per acre 

 to bring the estate into full bearing. 



(3) The time at which this money must be expended. 



(4) Profit on production per year until estate is in full bearing. 



(5) The wait necessary before profits will pay the desired 

 rate of interest. 



(6) Profit on production per year when the estate is in full 

 bearing. 



(7) The age at w'hich we should consider a tree must be re- 

 placed. 



(These items are, of course, all future estimates — not past 

 expenditures.) 



In other words, the calculated value of the properly should 

 have a mathematically correct relation to the estimated profits. 

 There may occur instances, however, where, due to some ex- 

 ternal reason, the value of a property itself will be all out of pro- 

 portion to the profits obtained, yet even in such a case it is neces- 

 sary to know its value as a profit-earner before its extraordinary 

 value can be estimated. 



The seventh item — the age at which the tree must be replaced, 

 or its economic death — is a very debatable question. The writer 

 believes that generally this will occur in the neighborhood of 

 from 60 to 70 years of age — that is, that the risk involved justi- 

 fies the investor in considering that his income from the trees 

 will cease to be profitable by that time unless the trees are re- 

 placed. This can be lengthened to 100 years, however, without 

 any appreciable difference in result. 



Tliat the realization of this need for standardization is not 

 original with the writer is evidenced by the fact that several at- 

 tempts have been made to develop a system for the calculation. 

 One of these, by a Ceylon and India V. A., has been tried out 

 quite extensively by the writer, and was at one time considered 

 by him to be a solution of the problem, but in the light of fur- 

 ther investigation he regrets that he cannot recommend it. While 

 it appears to give fairly good results for properties which are 

 already paying a profit, it is not applicable to properties not yet 

 in the producing stage. 



A system, to be applicable, must include the features of farm 

 valuation, in that after the yield starts there is an annual "crop," 

 which in time becomes fairly uniform; and the feature of forest 

 valuation in that there is considerable wait before yield starts, 

 and that profits or "returns" are hence delayed : also, that the 

 income will not continue indefinitely, but probably only a matter 

 of fifty to sixty years. 



Another matter which should be considered is the potential 

 value of unplanted areas suitable for rubber planting. For in- 



stance, many large planters are paying— and have paid for some 

 years — rental on a large unplanted area, a good proportion of 

 which is suitable fur rubber cultivation. Due to its location it 

 can be easily and efficiently managed in conjunction with the 

 present planted area. Its inclusion within the property bound- 

 aries is a valuable asset and increases the value of the property 

 as a whole. Consequently, in an evaluation of the property the 

 potential value of this unplanted area should be included. 



An adaptation of Schlich's formulae in common use in the 

 evaluation of forests and forest lands can be made applicable to 

 the rubber-planting industry. The principles upon which these 

 formulae are based are as follows : 



(1) The present value of the entire property is equal to the 

 sum of the present value of the planted area, plus the potential 

 value of the unplanted area. 



(2) The present value of the planted area is equal to the estimate 

 mated income value of the area when in full bearing, calculated at 

 the desired rate of interest, less the total value of all estimated ex- 

 penditures to be made in order to bring the area up to that state, 

 calculated at the legal rate of interest, and this difference dis- 

 counted to the present time at the desired rate of interest ; plus 

 the sum of the present values of all estimated profits to be made, 

 until the area is in full bearing, calculated at the desired rate of 

 interest. 



(3) The potential value of the unplanted area is equal to the 

 result of the number of acres suitable for rubber planting, multi- 

 plied by the potential value of one such acre. 



(4) The potential value of an unplanted acre of rubber land 

 is equal to the estimated income value of one acre when planted 

 and in full bearing, calculated at the desired rate of interest, less 

 the total value of all estimated expenditures to be made in order 

 to bring the area up to that state calculated at the desired rate of 

 interest, and this difference discounted to the present time at the 

 desired rate of interest; plus the sum of the present values of all 

 estimated profits to be made until the acre is in full bearing, 

 calculated at the desired rate of interest. 



The mathematical development of these formulae is a detail 

 in which the writer assumes that the reader is not interested 

 at present, but which can be found in Schlich's "Manual of 

 Forest Valuation" and in Roth's "Forest Valuation." Sulifice 

 it to say that in these formulae can be included every variable 

 mentioned in the previous paragraphs, and that it appears to 

 the writer that the resultant calculated value of the property 

 will bear a mathematically correct relation to the estimated exl- 

 penditures and income. 



In order to develop this theorizing into the form of concrete 

 workable formulae, let us make the following assumptions : 



(1) Consider a property which contains both planted and 

 unplanted areas ; 



(2) Consider that the age of the planted area is five years,; 



(3) That profits can be obtained from a planted area dur- 

 ing the sixth year of its life ; 



(4) That a plantation comes into full bearing at about IS 

 years of age, and that the yield then continues to be compara- 

 tively uniform ; 



(5) That the economic life of the tree is ended at about 65 

 years of age, or 50 years after it is in full bearing. , 



Then allow these basic assumptions to be represented in the 

 formulae as follows : 1 



E=interest desired by the investor or evaluator; 



e=interest at which money to be used for development can be 

 procured ; 



N=number of unplanted acres available for planting; 



F„ P=, P3, P„ P5, P„, P„ Ps and P„= estimated net profits from 

 total planted area for the first, second, third, fourth, fifth, sixth, 

 seventh, eighth and ninth years of profits, respectively; 



Pe= estimated annual net profits which start on the tenth 

 year of profits (when the plantation comes into full bearing) a:'..! 

 continues through the economic life of the trees; 



