5384 MISC. PUBLICATION 218, U. 8. DEPT. OF AGRICULTURE 
in its proper place among such factors. In the earlier discussions 
(pt. 7), opinion, evidence, and theory have been presented bearing 
upon this matter. 
It may be assumed that the timber owner will generally be guided 
by the desire to make the maximum profit or suffer the minimum loss. 
Setting aside, for the moment, the possibility of management for con- 
tinuous production, the decision whether to cut now or at some future 
time will depend upon whether the future yield is expected to be greater 
or less than the sum of the present realizable yield plus all carrying 
charges to such future date. As a general proposition, all carrying 
charges are alike in their effect upon the policy of the timber owner. 
It is the total of the carrying charges which, in relation to the present 
realizable value and the value to be realized at some future time, 
determine whether timber should be cut now or later. In this total, 
the several items are of relative importance simply in proportion to 
their respective amounts. Among the important carrying charges, 
interest ordinarily stands first. Then comes taxation. Other items, 
such as protection and admininistration, are generally of distinctly 
minor importance. Data already presented (p. 262), from a good sam- 
ple of timber properties in Oregon and Washington, show interest as 64 
percent of the total carrying charges, taxes as 32 percent, and all other 
carrying charges as 4 percent. It should be clearly understood that, 
as a carrying charge affecting cutting policy, interest is not the interest 
which must be paid for borrowed capital, nor even the interest on the 
investment which the owner has made in the property; it is the total 
interest which might be earned on the present realizable value. The 
interest rate used here, as in other parts of this report, is 3 percent, an 
approximation to the tax- free, risk-free rate. It is assumed that risk, 
which is so often allowed for in business calculations by an addition to 
the interest rate, will be taken care of by reducing the estimated net 
returns from the enterprise to a risk-free basis. 
This analysis may be clarified by a simple mathematical example. 
Suppose the owner estimates that , by immediate destructive cutting, a 
given forest might yield a present return of $100,000. By postponing 
the exploitation to a future date, say 10 years hence: the owner will 
sacrifice (1) interest, compounded annually on $100, 000 for 10 years, 
say at 3 percent, being $34,392; (2) taxes, perhaps at the rate of 1.5 
percent a year on the value of $100,000, ameunting with interest at 3 
percent in 10 years to $17,196; and (8) other carrying charges of, say, 
$500 per year, which amount, likewise with interest, to $5,732 at the 
time of future cutting. If the owner believes that the value to be 
realized by cutting 10. years hence will be more than $157,320 ($100,- 
000 + $34, 392+$17, 19685, 732), he will decide to postpone cutting. 
If the expected value is less than $157,320, he will decide to cut. If 
the assessed va ue, and consequently the taxes, increased as the value 
of the property increased, as required under a correct application of the 
property tax, the tax charge would be $21,317 rather than $17,196. 
In this case, the value at the end of the period must be more than 
$161,441 in order to justify postponing the cut. 
The several carrying charges may be expressed as percentages of the 
value of the forest from year to year. Thus, suppose interest is 3 
percent, taxes 1.5 percent, and all other carrying charges 0.5 percent, 
total, 5 percent. Then if it is expected that the realizable value will 
increase from year to year at a rate greater than 5 percent, it will be 
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