INVESTMENT OPPORTUNITY PRINCIPLES

§8. The Case oj Perpetual Returns

Next in simplicity is the type in which $100 of immedi-ate cost is incurred for the sake of a perpetual annuity of$5 a year. Let us suppose the individual possesses someswamp land in a primitive condition. He has a large rangeof choice as to the method of utilizing this land. He wantsto make the most of his opportunities. One option is toallow the land to remain a swamp. Others occur if, byclearing and draining it, it is converted into crop-yieldingland, the yield varying with the thoroughness with whichthe clearing and draining are accomplished. Let us sup-pose that, under the first option, he derives a perpetualnet income of $50 a year, and let us suppose that, at animmediate cost of $100 in his labor or in payment forthe labor of others for clearing and draining, he can se-cure an addition of $25 a year. That is, as between retain-ing these two options, the swamp undrained and drainingit partially, the latter involves a $100 decrease of immedi-ate income and thereafter an income of $75 a year, or anincrease of $25 a year. In other words, at the cost of$100 he will obtain a return of 25 per cent per annum inperpetuity.

Evidently, if the rate of interest in the market is 5per cent, or anything less than 25 per cent, it will payhim to make such an investment, borrowing at 5 percent if he wishes the $100 required for the improvement.Next suppose that another $100 invested in improvingthe swamp would yield crop returns of $90, or $15 morethan before. The investment of this second $100 yields15 per cent, and is therefore also a lucrative one, whenthe rate of interest is only 5 per cent. A third $100 mayincrease the annual crop still further, say by $10, netting

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