FOREST FINANCE 



In place of this term, it is permissible to write: 

 S 



1. 0(y — x)° 

 provided that "x" and "y" do not exceed, say, 8% and provided that the per- 

 iod of calculation does not exceed 100 years. 



Mathematically, the substitution is incorrect; for practical purposes, 

 however, it is permissible within certain limits. 



If X equals 4.7% 



and y " 3% 



and n " 100 years, 

 the mistake made by the "short cut" equals 6.2%. 

 The mistake increases: 



(1) With the increase of the price percentage (x) and discount per- 

 centage (y). 



(2) With increasing discrepancy between price percentage (x) and dis- 

 count percentage (y) ; 



(3) With the increasing number of years (n). 



Generally, the mistake does not exceed 5%. An advantage of the "short 

 cut" is the larger scope it offers to financial imagination or to differences of 

 opinion relative to the rise of stumpage prices or relative to the proper rate 

 S SXl. 05° 



of discount. Thus, might be interpreted as or as 



1. 03" 1. 08° 



SXl. 04° SXl. 03° 



1. 07° 1. 06° 



"THE BASAL RATE OF INTEREST IN AN EQUATION MAY NOT REP- 

 RESENT THE DIVIDEND WHICH THE OWNER EXPECTS TO DERIVE 

 FROM HIS INVESTMENTS." 



In the cases just given, the investor will realize 8% if stumpage prices 

 rise at 5%; 7%, if they rise at 4%; 6%, if they rise at 3%; or only 3%, if the 

 stumpage prices do not rise at all. 



If the prices are increasing at the SAME rate at which the values are 

 discounted backward, the summary of the pre-values is (for annuities as well 

 as for intermittent rentals), nXR. 



l.op" 

 mth year: B 



2mtl> year: R 



Lop" 

 1. op2°> 



op*" 



Summary = nXR. 



Obviously, the summary of prevalues, in this case, is OO for indefinite 

 rentals. It is unreasonable to suppose, that prices will ALWAYS rise and 

 continue to rise. 



