104 FOREST VALUATION 



behind them, and who do the least borrowing and maintain 

 operations in a region after others have ceased, reap large profits, 

 while the small investors, or firms attempting too much with 

 limited capital, are often bankrupted in the first stage of the 

 business. 



The investor must, therefore, distinguish sharply between the 

 commercial or specific trial balance, and the economic forecast 

 which accounts for time, includes interest on the investment as 

 a cost, and bases the value of assets not on cost but on income, 

 by the process of discount. Such a " balance " informs the owner 

 of his true economic status, thus enabling him to determine his 

 future policy whether to sell, purchase or continue to operate. 

 Economic, and not specific, profits are discussed in this chapter. 



121. The Rate of Interest in its Relation to Profits. In 

 securing an accurate statement or balance between past costs 

 and future income or capital value, the effect of the element of 

 time upon such relative values must be eliminated or equal- 

 ized ( u). This is done by employing the same rate of inter- 

 est ( 38), p per cent, on both sides of the equation. 



The total amount of compound interest is increased by em- 

 ploying a higher rate, while the same increase in the rate has 

 the opposite effect of lowering the present or discounted value 

 of assets. This effect is due in each case to increasing the 

 difference in value caused by the element of time. It follows 

 that an increase in the standard rate of interest, p per cent, 

 tends to obliterate the margin of profit on the credit side of the 

 balance, and replace it with a debit deficit or loss. In other 

 words, if the investor is satisfied with 3 per cent, and that rate 

 is used in computing values for the balance sheet, the statement 

 might indicate a profit, but if he uses 6 per cent as the necessary 

 basis of comparison with other investments, the resulting bal- 

 ance may indicate a loss, although the cash income and expenses 

 remain the same in either case. The change is wrought wholly 

 in discount or expectation value and in the accumulated "cost " 

 of compound interest. 



A rate of interest may be found for any given total of expense, 

 on the one hand, and of income, on the other, which will just bal- 



