1 86 FOREST VALUATION 



By the use of either of the formulae given in Article 175, Method 

 D (P 3 , P 4 ), a fixed rate of profit may be found, which will apply 

 to the residual capital actually invested annually. This is 

 accomplished through the increasing payments for depreciation. 

 The sum of interest and depreciation, or Z, calls for equal income 

 annually. This conforms with the financial conditions which can 

 normally be secured in lumbering. To the owners, it makes 

 very little actual difference whether their annual income is 

 termed dividends or depreciation. They expect to allow the 

 larger portion of their capital to remain invested throughout 

 the life of the enterprise, and this result is accomplished by 

 increasing depreciation from small beginnings. Apparently, 

 there is no valid objection to the adoption of this method of 

 determining the average per cent of profit to be allowed on 

 invested capital. 



Should the method of allowing equal annual amounts for 

 depreciation be adopted ( 175, Method B) the average amount 

 of capital invested during the prospective life of the enterprise 

 must be determined. The investment for each year is taken 

 at the beginning of the year. The average for the period is then 

 equal to the residual or final investment (W) plus one-half the 

 total depreciation, plus one-half the annual depreciation. For 

 an investment of $20,000, with a residual value of $10,000, over 

 a period of five years, the values at the beginning of each year are 



First year $20,000 



Second year 18,000 



Third year 16,000 



Fourth year 14,000 



Fifth year 12,000 



Average investment $16,000 



which equals 



Residual investment $10,000 



One-half total depreciation 5,ooo 



One-half annual depreciation 1,000 



Average investment $16,000 



