THE THEORY OF INTEREST

vestment opportunity is not contrary to ordinary ideas.It includes them. Every time a person considers whathe calls an opportunity to invest, he weighs in his mindthe differences in his expected income—the expected fu-ture additions against the more immediate subtractions.Even when the investment is not made in installmentsout of savings from current income, but is made in onelump sum, it must not be forgotten that this lump suminvested merely represents the sacrifice of some alterna-tive income stream.

The rate of return over cost is not, of course, to beconfused with the rate of interest which it helps to de-termine, any more than the rate of impatience is to beso confused.

§4. The Principle of Return over Cost

Now let us restate the forestry-farming-mining com-parison in the land example of the preceding chapter interms of the rate of return over cost.

If the actual market rate of interest is 4 per cent, aperson using the land for farming, or thinking of so do-ing, would find forestry preferable. The change fromfarming to forestry would cost certain sacrifices of incomein the first four years, as specified in Table 6, but wouldreturn certain net additions thereafter. The rate of returnover cost which would be realized by choosing the for-estry rather than the farming use is 4.2 per cent. Hewould be realizing 4.2 per cent, which is more than themarket rate, 4 per cent.

If, however, the market rate of interest were 4.5 percent, it would not pay to change from farming to forestry;for to do so would return only 4.2 per cent as comparedwith 4.5 per cent which he could get in the loan market.

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