378 Forestry Quarterly. 



+$1.05) (approx.). This figure is quite consistent with the 

 actual stumpage values current in the sales of this character. The 

 profit allowed on this basis would, however, be 82.5 per cent, 

 return on the invested capital. Obviously this is a case where 

 the investment method is practically valueless. 



Case 2. A railroad chance of 4OO,(X)0 M. B. M. to be handled 

 at the rate of 20,000,000 a year; expensive construction in- 

 volved, but otherwise cheap logging. 



Estimated cost of logging, $4.00 per M. 



Estimated cost of improvements and 



equipments (including interest) 3.00 per M. 



Total cost of operation, $7.00 per M. 



Stumpage, .50 per M . 



Profit, 1 . 50 per M . 



Value of logs, $9.00 per M. 



The stumpage and profit above given are determined by the 

 Forester's formula allowing 20 per cent, profit. ($.5o=$9.oo — 

 $7.00 — 20%X($7-00-f-$.5o). Checking this by the investment 

 method we find the following results : 



Average investment for improvements, $300,000 



Average investment for equipment, 80,000 



Working capital, 100,000 



Total average investment, $480,000 



$1.50 profit per M. on 20,000 equals $30,000 per annum, which 

 is 6\ per cent return on $480,000. In this case, then, the re- 

 sults of the Forester's formula are shown to be ridiculously low 

 when checked by the investment method. On the other hand, 

 a 15 per cent, profit on the investment would equal $3.60 per 

 M., or over 50 per cent, of the operating cost. This, however, 

 is so high a profit that the stumpage is more than wiped out, 

 indicating that in this present case the chance cannot be handled 

 at a reasonable profit. The case, however, is distinctly one 

 where an operating cost formula is of little or no value. 



Under certain conditions then, each formula is useless unless 

 checked by the other. When analyzed the reason for this is 

 that the prospective purchaser demands, and justly, assurance 

 of two things, first, that he will obtain a reasonable return on 

 his invested capital and second, that he has a reasonably wide 



