INVESTMENT OPPORTUNITY PRINCIPLES

he barely gets a 4 per cent return. As we saw in the pre-ceding section, each successive investment opportunity ischosen as long as the rate of return over cost of that op-tion compared with the previous one is greater than therate of interest, and that use is rejected at which the rateof return over cost becomes less than the rate of interest.The intensiveness of his farming is thus determined by therate of interest. In our example, he will stop at the sev-enth $100 which barely returns the equivalent of therate of interest. We may say, then, that he chooses thatdegree of intensiveness at which the rate of return overcost is barely more than the rate of interest. This en-visages a series of possible income streams arrangedsuccessively in order of intensiveness of the cultivationrequired for each. By substituting successively one ofthese income streams for the preceding we incur morecost but obtain more return. The rate of the return overthe cost compared with the market rate of interest is ourguide as to how far to go in the series. We thus reach themarginal rate of return over cost.

§6. The Illustration of Cutting a Forest

To vary the illustration from intensive agriculture toforestry, let us apply the option selection idea to cutting aforest. Let us consider as the first option the cutting ofthe forest at the end of nine years, when the incomestream consists of the single-item, the production of 900cords of wood (or $900 if wood is $1 a cord). 3

The second option is holding the forest for another

’Inasmuch as we assume that the income from the forest is all toaccrue at one time—the time of cutting—instead of being distributedover a long period, the income stream becomes a single jet and mighthere better be called income item.

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