Current Literature. 79 



M 



S=- (L4-Mf) 



I. op 



in which S equals the stumpage vahie; M equals the sale value 



of the manufactured product; i.op represents the rate per cent. 



profit on each thousand board feet ; L equals the logging costs ; 



and Mf equals the sawmill costs. 



The principle of profit on operating co.sts, on which the for- 

 mula is based, is not sound economicall}', since profits should be 

 based on the amount of capital invested in the business. The 

 reasons for this are many and cannot be discussed here in detail. 



The author has' been led astray in handling his stumpage 

 values after they have been determined by the erroneous con- 

 ception of the proper method of determining profit. He says 

 "if several years are required to complete the logging operation, 

 however, this formula should also include the interest on the 

 money invested in stumpage, and the stumpage value in such an 

 event would be found by deducting the interest at a fair bor- 

 rowing rate, say 6 per cent., for the average length of time in- 

 vested." In other words, after finding what an operator can 

 afford to pay for stumpage to-day, he discounts that value if 

 the buyer does not wish to cut the timber until some future time. 

 It is evident that if a purchaser did not choose to utilize his 

 stumpage, say for 20 years, that the seller, according to the 

 above reckoning, might not only have to give his stumpage away 

 but also present the recipient with a good sum of money besides. 

 In actual sales we know that this is untrue and that the man who 

 buys timber to cut 10 or 20 years hence has to pay just as much 

 to the seller as does the man who expects to cut it within a year — 

 since the present value is the same in either case. This erroneous 

 method of handling interest is due to the attempt to calculate 

 profits on the basis of operating costs instead of investment. 

 The buyer should get interest on his investment in stumpage 

 and if he makes a good buy he does so through the increase in 

 the value of his stumpage, if in no other way. 



During the early years of an operation which carries a heavy 

 investment in plant and stumpage, the amount of money on 

 which interest and profit may be secured often is so great that 

 for the first few years little or no profit can be actually made. 

 As the investment is reduced — the stumpage also gradually ris- 

 ing in value — the returns are sufficiently great to permit a gracki- 



