STUMPAGE VALUES 185 



or profits must be converted into annual dividends earned on 

 invested capital. 



The capital upon which this income is earned is the entire 

 amount of fixed and working capital employed in the business, 

 including that which is borrowed. It is of no significance that 

 working capital is turned over several times in a season, as is 

 done in railroad logging, except as it increases the total net 

 income which is the product of the profit per thousand feet 

 multiplied by the year's output. This income is not the product 

 solely of the working capital, but of the total investment. 



Interest on borrowed capital is paid out of this net income, 

 and it is immaterial whether the capital entitled to share in 

 the income is taken as the entire investment, or as the portion 

 owned by the proprietors, excepting that the latter are entitled 

 to a larger rate of profit in proportion to the lessening of their per 

 cent of total capital and corresponding increase of risk (32). 

 In stumpage appraisals it is advisable to compute the profit on 

 the total investment, thus eliminating the purely personal ele- 

 ment as to what proportion of the capital is borrowed. 



It must be self-evident that interest is not a "cost" in stump- 

 age appraisals, but it may be so regarded without harm, pro- 

 vided it is not added to operating costs in Methods A, B and C 

 ( I 77)> an d is subtracted from income allowed by the investment 

 method. To permit profits to be earned on income represented 

 by interest on owner's capital, results in serious inflation of 

 profits and resultant heavy losses in stumpage values (42). 



The main difficulty in computing profits in the form of a 

 return on the average annual investment arises from the ele- 

 ment of depreciation, and its effect in reducing the capital 

 invested year by year. 



It is possible to earn annually about the same net surplus, 

 available for depreciation and profits. To base the amount 

 of these profits upon the maximum investment, which occurs 

 normally in the first or earlier years, results in a steadily in- 

 creased rate of profit on the capital remaining invested in sub- 

 sequent years, and an average rate considerably greater than 

 intended, with corresponding loss in stumpage value. 



