8o FOREST VALUATION 



terioration of the forest, the cost price is evidently the capital in- 

 vested, and the rate of interest made by this forest is : 



yearly net income 



pf = — ^1 r~r X 100 



cost value of forest 



If the man bought the forest at $250,000 and receives $10,000 per 

 year net income, he evidently makes 4%. 



If this same man paid $250,000 ten years ago and has "put 

 back" $50,000 to develop a better road system then evidently the for- 

 est costs him more nearly $300,000 and the $10,000 income is about 

 3% on the cost value of the property. Similarly, if instead of get- 

 ting $10,000 net income he has saved with a view to improving the 

 growing stock on the property and has secured only $5,000 per year 

 net income, the $5,000 reduction of cut is an investment and in- 

 creases the cost value. 



Again, the forest may be part of an old estate or it may have 

 been bought twenty years ago at a "bargain" so that the present 

 cost value is not clear and certainly not equal to the present sale 

 value of the property. In this case the income is not referred to the 

 cost value but to the sale value. 



With properties which are not common objects of sale like state 

 forests, national forests, etc., the value of the property itself is 

 based on the very income made from it together with an assumed 

 interest rate. The forest producing $10,000 per year net income 

 would be valued by capitalizing the $10,000 at, say, 3%, and the 



10,000 



capital value would be or $333,000. 



■03 



If this capitalization is now accepted it may serve as a measure 

 to find the forest per cent for future years. For the present, how- 

 ever, this value of the forest must be regarded as arbitrary, for it 

 would have been just as fair to use two or four as the per cent of 

 capitalization, and for the present, therefore, the per cent or interest 

 rate which this forest makes can not be determined for lack of ac- 

 ceptable basis, the value of the property on which the $10,000 were 

 made. 



In determining the rate of interest made by any property pro- 

 ducing regular yearly income there enters the notion or custom of 

 "watering stock." In the above case, for instance, the owner would 

 at once set a much higher sale value in place of the 250,000 cost 

 value and in this way bring down not the income but the apparent 

 rate of interest. Practically all state forests of Germany never cost 



