THE THEORY OF INTEREST

figure above the standard income which constituted thefirst option.

A third option is gradually to go out of business bybuying less rugs than are sold, or none at all. In this casethe realized income at first is very large, as it is relievedof the burden of purchases; but it declines gradually tozero.

Intermediate among these three options there are, ofcourse, endless other options. The merchant thus has avery flexible income stream.

If the expenses and receipts for each rug bought andsold are the same, whichever option is chosen, and if thetime of turnover is also the same, it will follow that allof the options possess the same present value and differonly in desirability. We should then be dealing with whatwe have called modifications of the income streamthrough buying and selling. The reason for placing op-tional employments of capital on a different footing frombuying and selling is that the optional employments donot all possess the same present value. In actual fact,the rug merchant, and merchants in general, would notfind that all the optional methods of proportioning salesand purchases of merchandise possessed equal presentvalues. For one thing, if the rug merchant attempted toenlarge his business too fast he would find that his time ofturnover would be lengthened, and if he reduced it toofast he would find that his selling expenses per unit ofmerchandise would be increased. There is, for each mer-chant, at any time, one particular line of business policywhich is the best, namely, that which will yield him theincome stream having the maximum present value. Since,therefore, the various methods of renewing one’s capitalusually yield income streams differing in present value,

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