S D .U5 U..5. ^tap/h. &L k^CoJamax. ^■trjut'S^vn. Q >tu/W\M^jL (rvv VloX^vuxA. 3-WiIi, I'll .t is high, as in the case of excessive local interest rates, the profit margin may properly be increased. (See p. 41.) Classification of Investments. The following classification of fixed investments will serve as a general standard for the Forest Service. Not all of the items will be required in every appraisal, and fur- ther subdivisions may be desirable in the more intensive and detailed calculations. The classification should thus be adjusted to fit special conditions, while preserving the main headings and their arrangement. I. Investment — Logging. (1) Logging improvements— Stump to landing — First cost of — a. Chutes. b. Roads. c. Slides. d. Landing improvements, or e. Other structures used in skidding, hauling, or landing. (2) Logging equipment — Stump to landing — First cost of — a. Teams. 6. Sleds. c. Big wheels. d. Bummers or go-devils. e. Donkey engines or steam skidders. /. Overhead steam appliances. g. Steam or horse loaders. h. Woods tools, and i. Any other logging equipment or appliances. (3) Transportation improvements — Landing to mill, or mill to railroad shipping point — First cost of — a. Railroads, including — (a) Spurs and sidings. (6) Roundhouses, coal bunkers, tanks, and other permanent structures. 6. Flumes. c. Stream Improvements. d. Roads, or e. Other transportation improvements. (4) Transportation equipment — Landing to mill, or mill to shipping point — First cost of— a. Railroad rolling stock, track tools, etc. 6. Marine equipment, tugs, bateaux, etc., and driving tools. c. Teams, trucks and harness, sleighs, traction engines or other equipment, including hand tools, used in transporting timber from landing to mill, or mill to shipping point. APPRAISING STUMPAGE ON NATIONAL FORESTS. 15 I. Investment — Logging— Continued. (5) Wooda campa and other buildings, together with water system. (6) Camp equipment — a. Kitchen and mess equipment. 6. Bedding, heating equipment, and camp fittings. (7) Repair equipment — Carpenter, blacksmith and mac h ine shops, etc. II. Investment — Manufacturing: a. Site. 6. Pond and dam; other site improvements. c. Sawmill. (a) Building. (6) Equipment. (c) Power. (d) Lath mill, etc. d. Finishing plant. (a) Building. (&) Equipment. (c) Power. t. Dry kiln. /. Waste burner. g. Sheds, docks, platforms, pile bottoms. h. Office and miscellaneous buildings. t. Yard equipment. j. Light, fire protection, etc. Depreciation of Fixed Investments. Depreciation is the shrinkage in the value of fixed investments on account of reduced utility or worth. Loss of value may be due to ordinary wear and (ear, physical deterioration, or inadequacy for the current needs of an operation ; or to the exhaustion of available timber supplies. In theory depreciation is a certain amount paid out ol the proceeds of the business each year on the investment. The best concrete illus- tration is a sinking fund withdrawn from the proceeds of the business at regular intervals, deposited in a special account, and used to pay off bonds as they become due. In stumpage appraisals depreciation will be reckoned as if charged off and withdrawn from the business at the end of each year. It is a sum, prorated over every thousand feet of timber cut, which in the course of the operation pays back the reduc- tion in value of the fixed investments. Rate of Depreciation. The rate of depreciation varies widely with the nature of the investment and character of its use. It is controlled by different factors in the case of the two main classes of fixed investments, viz, improvements and equipment. Improvements are stationary structures which can be used only where they are built. They include all buildings except portable camps, wagon and skid roads, railroad grades, cuts and fills, bridges, splash dams, etc. The rate of depreciation of each structure or improvement depends primarily upon the amount of timber which it can profitably be used to log. Its life is fixed by the time required to log the stumpage available. If all of the tributary timber is taken out during a particular sale, the improvement will have no residual value. Other structures favorably located with reference to large supplies of timber, like sawmills and logging railroads, may have a very long life. Their rate of depreciation will be correspondingly slow. Equipment, on the other hand, can be moved from place to place. It includes tools, steam logging machinery, cables, railroad steel, teams, and rolling stock. Its depreciation depends primarily upon its resistance to wear and tear, or the length of its ordinary working life. Current industrial experience is the safest guide in calcn- 16 APPBAISING STTJMPAGE ON NATIONAL FOEESTS. lating the depreciation of equipment. The average working life of logging teams, for example, is commonly reckoned as 5 years. Steel rails are usually rated at a service of 20 years; but their depreciation during the first 10 years is at a much slower rate than during the second decade. This is on account of the market for second-hand rails which have been used but a few years. Donkey engines, on the other hand, have a very unstable value after any period of use, and must be depreciated more rapidly. The usual life of sawmill equipment is put at 20 years, but can be extended with higher charges for maintenance. Calculation of Depreciation. Depreciation is usually reckoned as an annual percentage of the total shrinkage in the value of the investment. This is frequently termed " straight line" depreciation. A donkey engine with a life of 8 years and no value at the end of that time is thus reckoned as depreciating 12$ per cent of its first cost every year. A logging chute which can be used three years and will have no value thereafter will necessarily be depreciated 33J per cent annually. A sawmill costing $30,000, to be run for 10 years and valued at $10,000 at the end of that period, will depreciate 10 per cent of the differ- ence annually, or $2,000. The standard method followed in Forest Sendee appraisals will be to determine: (1) The shrinkage in each item of investment from first cost to residual or wrecking value at the end of the operation, or whenever it goes out of use. (2) The annual depreciation — that is, the total shrinkage divided by the number of years in the operation. If an investment is in use but part of an operation, its depre- ciation is thus averaged for simplicity over the whole period instead of the years of actual service only. (3) The depreciation charge per thousand board feet log scale or other unit, found by dividing the annual depreciation by the yearly cut. Depreciation will always be prorated on log scale rather than mill tally. The same result is secured by dividing the total depreciation of the investment by the entire estimated cut. As indicated on page 20, a closer calculation may be used where the rate of depre- ciation varies from year to year, but for ordinary appraisals " straight line" deprecia- tion is sufficient. Determination of Residual or Wrecking Value. Residual or wrecking value is an uncertain factor. It should be used only where such a value will unquestionably exist at the end of the operation or sale contract. If no additional timber can be handled by the plant, it is obvious that a wrecking value only will remain. Railroads which will become common carriers with permanent traffic other than timber form the only exception to this rule. Railroad investments under such conditions can usually be regarded as not depreciating but as having a residual value equivalent to their first cost. Where Other Timber is Available. Where additional bodies of stumpage are available, a residual value should be cred- ited to the fixed investments. It will ordinarily be the sum of (1) a proportion of the total depreciation similar to that which the remaining timber bears to the entire original stand, and (2) the wrecking value at the end of the operating life of the plant. To illustrate: A mill is to be built costing $35,000 and capable of 15 years' operation at an annual capacity of 20,000,000 feet. The estimated value of the site and scrap value of equip- ment is $5,000, making the total depreciation $30,000. A proposed sale of 160,000,000 feet will supply it to capacity for eight years. (1) If 140,000,000 feet of additional timber is available, or 7 years' cut, the residual 140 value of the mill at the expiration of the sale will be ^X$30,000+$5,000, or $19,000; and its depreciation in 8 years $16,000, or $2,000 annually. APPRAISING STUMPAGE ON NATIONAL FORESTS. 17 (2) If the available timber totals but 80,000,000 feet, or 4 years' additional cut, the 80 residual value will be ^77. X$30,000+$5,000, or .$15,000; and its depreciation in 8 years $20,000, or $2,500 annually. The same process is applicable to investments in a railroad spur, wagon road, splash dam, or any other single logging improvement. In lieu of a mathematical valuation, a business appraisal may be placed upon the plant at the expiration of the sale, "based upon the probable conditions controlling its future operation or value in place. Amounts of Timber upon which Investments should be Depreciated. As far as practicable, it is the policy of the Forest Service to base depreciation upon the full operating life of the structure or equipment as fixed by normal industrial standards. Many timber sales are made for short periods which represent but a part of the efficient life of the mill, railroad, or other improvements. Future sales to such plants can not be guaranteed. The operator must protect himself in competition with other bidders for remaining blocks of stumpage tributary to his improvements. It is, however, the policy of the Forest Service to reserve from sale additional bodies of timber tributary to plants constructed in connection with short-term contracts until the initial chance is cut out. As far as practicable such reservations will be sufficient to insure the plant a normal operating life. Where additional National Forest timber is available, whether specifically reserved by the terms of sale or not, it should bear a proportionate part of the total depreciation of the plant. Inclusion of Private Timber in Reckoning Depreciation. Private timber which it is reasonable to believe the operator will handle and so located as to be most logically and economically logged by the same set of improve- ments should also carry its proportionate part of the total depreciation. This will hold whether the operation is chiefly in private timber, the purchase of small tracts of Government stumpage being a secondary feature, or whether a National Forest sale forms its principal supply and small quantities of private timber are available which it is reasonable to suppose the operator can secure. The bearing of private stumpage upon the depreciation of investments must therefore be carefully weighed. Depreciation in Sales to New Plants. If new mills or other improvements are to be constructed, a reasonable life in accord- ance with prevailing industrial standards will be allowed where sufficient Government timber, or private timber which there is reasonable likelihood of obtaining, is avail- able. The total depreciation of improvements which can be used in logging and manufacturing such additional timber will be distributed over the entire amount of stumpage thus roughly blocked out to obtain the depreciation charge per thousand board feet. Relation of Depreciation to Residual Value. Extension of the depreciation over additional stumpage, aside from that on the sale area, is equivalent to calculating a residual value at the end of the first operation. In addition to the wrecking or scrap value of the plant at the end of its operating life, this residual value is a proportion of the total depreciation similar to that which the remaining available timber bears to the entire original stand. The determination of residual value thus has an important bearing upon depreciation. Investment and Depreciation in Sales to Existing Plants. In sales to existing plants all improvements and equipment which will be used in the operation should be given a fair valuation. This applies fully as much to existing mills or partially used improvements as to new investments. In many cases an estab- lished operator with mills or improvements logically placed for exploiting the chance 60813—14 2 18 APPRAISING STUMPAGE ON NATIONAL FORESTS. is a probable bidder. The fixed investment in such appraisals should be a valuation of existing improvements, with such additions as may be required for extensions or repairs. This conforms with the practice of allowing a residual value in sales to new plants which will command additional bodies of stumpage. In fact, the residual value of the established plant, with any further investments necessary, should be the basis of such appraisals. Valuation of Existing Improvements. The residual value of existing improvements is their sale value whenever obtainable. Otherwise, their first cost may be estimated and an operating life as fixed by industrial requirements and the amount of available timber. The wrecking value of any im- provements at the end of the operation should be considered as in sales to new plants. From the estimated first cost, operating life, and wrecking value a fair annual depre- ciation can be readily obtained. Short-cut methods of determining the residual value of existing plants, such as taking one-half or two-thirds of their first cost, may be used when justified by recognized practice. One-half the first cost of secondhand mills and other improvements in serviceable condition is usually a fair assumption, since it represents their average value throughout the total period of use. Where Several Plants are Competitors. When several existing plants are possible competitors for a chance, the residual value used in the appraisal should represent a fair average of the available improve- ments of the usual and efficient type. This may be calculated from (1) an average initital cost, (2) an average operating life, and (3) an average period of use prior to the purchase of Government stumpage. This process may be simplified where substantial accuracy can be secured by taking a fair proportion of the first cost of any local plant of the size and type required to handle the National Forest chance. Determination of Average Investment. Average investments in such operations upon which profit is calculated should be computed as indicated on page 22, starting with the residual value of the improvements at the date when National Forest timber is purchased. Use of Average Manufacturing Cost and Depreciation. The foregoing is a general guide and statement of policy in sales to existing plants rather than an inflexible rule. In regions where manufacturing costs have been standardized by types of mills, and average figures covering the total cost of manufac- ture, depreciation included, are applicable within safe limits, they may be used in appraisals. Profit-Bearing Period of Investments. Fixed investments are seldom made in one lump at the outset of an operation. They usually begin in advance of cutting, depending upon the amount of preliminary construction which is required. In operations of any size and length additional investments become necessary from time to time, for railroad extensions, road or chute construction, more logging equipment, and the like. The replacement of major items of worn-out equipment, such as teams, rolling stock, and steam logging machinery, is an additional fixed investment. (See p. 7.) Many investments, furthermore, are used during only a part of the total operation. Interest Charges on Preliminary Investments. Interest should be allowed on money invested in improvements for one or more years before cutting begins. The interest which has thus accumulated on preliminary investments on the date when their use begins will be treated in Service appraisals as an addition to the investment itself. Simple interest at 6 per cent will be used uniformly. If two years are required for the construction of improvements before APPRAISING STUMPAGE ON NATIONAL FORESTS. 19 beginning cutting, the amounts to be invested each year should be approximated. Twelve per cent of the first year's expenditure and 6 per cent of the second year's should be added to the estimated investments used in the appraisal. Profit Only During Period of Actual Use. Investment are entitled to profit only from the date when they are actually made. Investments in improvements or equipment which are abandoned or worn out before the end of the operation should be cut out of the profit-bearing capital at the proper time. Profit on invested money should thus be restricted to the period of its actual use. This can be done most conveniently by prorating short-term investments over the entire operation in making up the average profit-bearing capital. (See page 21.) Calculation of Annual Depreciation and Average Investment. Uniform methods of calculating fixed investments and their depreciation are of obvious necessity. To this end, standard forms of tabulation will be of service. The essential facts to be determined are (1) the average profit-bearing capital at work in the business, and (2) the average annual depreciation of the fixed investments. It is of special importance to work out accurately the effect upon these two amounts of addi- tional investments in improvements or equipment made from time to time and used during but a portion of the operation; and similarly of the retirement at various intervals of parts of the investment which are worn out or whose use is terminated. By Separate Years. The most exact method is to carry for each year of the operation (1) the investment required at the beginning of the year, (2) its depreciation during the year, and (3) additional investments necessary at the end of the year. The estimated depreciation during each year is deducted from the investment at its beginning. This figure, with the addition of any new outlays required during or at the end of the year, is the invest- ment in the business at the beginning of the following year. Thus is obtained the profit-bearing capital at the beginning of each year, with the average for the entire operation; the depreciation during each year and for the whole period; and the wrecking or residual value at its end. This is illustrated by the following investments in logging equipment, consisting of a light locomotive, gypsy loader, donkey and yarding engines, blocks, and other rigging. Ten thousand five hundred dollars worth of machinery will be required for the first year's operation. At the end of the first year, $1,200 worth of additional equipment rmut be purchased; and at the end of the fifth year $1,800 worth must be procured. Th's completes the equipment required for the entire 10 years. All of the machinery is depreciated at the rate of 10 per cent annually while in actual use. Investment and depreciation — Logging equipment. Years. Profit- bearing invest- ment. Depre- ciation during year. Addi- tional invest- ment- end of year. Years. Profit- bearing invest- ment. Depre- eial ion during year. Addi- tional invest- ment- end of year. J... $10,500 $1,050 1,170 1,170 1,170 1,170 1,350 1,350 $1,200 8 5,070 3,720 2,370 1,350 1,350 1,350 2 10 9 8 7 650 480 310 140 9 3 10... 4 Total S 1,800 71,430 7,143 12,480 1,248 6 :... 7,770 6.420 Average annual... 7 $1,020 The first year's depreciation is 10 per cent of the initial investment, $10,500. The second, third, fourth, and fifth year's depreciation is the same amount plus 10 per cent of the additional investment of $1,200. The depreciation during the sixth and each 20 APPRAISING STUMPAGE ON NATIONAL FORESTS. subsequent year is the sum of these two amounts plus 10 per cent of the further invest- ment of $1,800. The wrecking value of $1,020 is the difference between the investment at the begin- ning of the last year and the depreciation during that year. This is made up of 10 per cent of the $1,200 investment, which was in use 9 years, and 50 per cent of the $1,800 investment, which was in use 5 years. The average profit-bearing capital represented by this equipment is thus $7,143. The average yearly depreciation to be prorated over the annual-cut is $1,248. Where Depreciation is Irregular. This method is of special service in the case of investments whose depreciation from year to year is irregular rather than at a uniform rate, or "straight line." The following will illustrate: In the same 10-year operation, the estimated cost of steel rails, fastenings, and switches for the first year's logging is $0,500. Extensions of permanent way and spurs for the second year's logging require an additional investment of $2,100; for the third year, $1,700; and for the fifth year, $3,200. Further investments are unnecessary until the end of the seventh year, when $4,000 worth of additional steel must be purchased. All of this steel has a life of 20 years. During the first 5 years of use it depreciates in value at the rate of but 1 per cent annually; and during the second 5 years at the rate of 2 per cent annually. These rates are determined by the local market for "relaying rails," first and second class respectively. The annual depreciation charges are thus calculated at 1 per cent of each of the several investments during its first 5 years of use, and 2 per cent during the remaining period, all items being rounded off to the nearest dollar. For the last year, a charge of $1,200 for lifting the steel and removing it to the nearest shipping point is included in the depreciation. The profit-bearing invest- ment at the beginning of each year is figured as before by adding the new investment at the end of the preceding year, if any, and deducting the depreciation during that year. Investment and depreciation — Railroad steel. Years. rrofit- bearing invest- ment. Depre- ciation during year. Addi- tional invest- ment — end of year. Years. Profit- bearing invest- ment. Depre- ciation during year. Addi- tional invest- ment — end of year. 1 $0,500 8, 535 10,149 io. air. 13. 143 13.008 12.808 $05 86 103 103 135 200 221 $2,100 1,700 8 $10,587 16.309 16.031 $278 278 1,510 2 9 3 10 4 6... 3.200 Total 123.110 12,312 2,979 298 6.. Average annual. . 7 . 4,000 $14,521 The wrecking value consists of — 85 per cent of the first investment $6, 500 87 per cent of the second investment 2, 100 89 per cent of the third investment 1, 700 93 per cent of the fourth investment 3, 200 97 per cent of the last investment 4, 000 Less cost of putting the steel on the market at the end of the operation 1, 200 Where Successive Investments of Varying Life are Made. The method may be further illustrated by the outlays for constructing roadbed, placing ties, laying steel, and ballasting in the same 10-year operation, improvements which are abandoned in the course of logging and hence must be wholly depreciated. APPRAISING STUMPAGE ON NATIONAL FORESTS. 21 The estimated cost of roadbed , ties, and laying steel for the first year's logging is $-1 ,500 . This portion of the railroad will be in use throughout the entire operation. Subsequent investments in roadbed, ties, and labor for laying rails, with the estimated period of use in each instance, are as follows: Years. Invest- ment. Period of use. Years. Invest- ment. Period ol use. $1,800 1,100 1,000 2,100 Years. 2 1 2 1 Sixth $1,500 2.200 1,700 2,500 Years. 5 Third. . 2 Fourth .. Fighth 1 Filth. . 2 No additional investment is required for the tenth year's operation. Each investment for railroad construction must be depreciated during the period of its actual use. The first year's outlay will thus be depreciated at the rate of one-tenth annually throughout the entire operation; the second at one-half annually during the second and third years; the third wholly during the year following the investment; and so on. The detailed calculation follows: Investment and depreciation — Roadbed. Years. Proflt- bearing invest- ment. Depre- ciation during year. Addi- tional invest- ment- end of year. Years. Profit- bearing invest- ment. Depre- ciation during year. Addi- tional invest- ment — end of year. 1 $4,500 5,850 5,000 4,750 5.600 3, 750 5,200 $450 1,350 2.450 1.250 3,350 750 1,850 $1,800 1,100 1,000 2. 100 1,500 2.200 1,700 8 . $5,050 4.000 2,000 $3,550 2.000 2,000 $2,500 B 9 8 10 . Total 6 40,300 4,630 19.000 1,900 6 Average annual.. 7 Thus, while $19,000 ia invested all told in the various railroad grades and must be depreciated on the timber handled, the average profit-bearing capital tied up in such improvements is but $4,630. The entire original outlay is returned in the accu - mulated depreciation charges. Calculation by Investment Items. A simpler and quicker method is to calculate for each improvement or purchase of equipment the yearly depreciation and the average profit-bearing investment, both prorated over the entire operation. Yearly depreciation is determined by dividin the total shrinkage in the value of the improvement or equipment by the number of years in the operation. The average profit-bearing investment is determined by the following formula: One-half of the sum of the initial investment and its residual or wrecking value multiplied by a fraction whose numerator is the number of years during which the particular improvement or equipment is in use and whose denominator is the total number of years in the operation, plus one-half of the yearly depreciation. Wherever depreciation takes place in a "straight line" — that is, at a uniform rate annually during the period of use — this method yields the same results as the preceding calculation. If depreciation does not progress at a uniform rate throughout the period of use, it yields a lower average investment. A uniform rate of depreciation can be fairly assumed, however, in most investments, and is the more common undustrial practice. 22 APPRAISING STTJMPAGE ON NATIONAL FORESTS. The addition of one-half of the annual depreciation in obtaining the average profit- bearing capital under each item of investment is based on the assumption that depre* ciation is charged off at the end of each year rather than currently during the year. This is equivalent to calculating the average investments as at the beginning of each of the respective years in the operation rather than at the middle of the year. To illustrate: A $10,000 investment is to be wholly depreciated in 10 years, at $1,000 annually. The successive investments at the beginning and middle of each year are: First year.., Secontl year Third year. Tenth year. Total. Average Beginning. Sin.onn 9.000 8.000 1.000 ss.ono 5,500 Middle. $9,500 8.500 7,500 500 50.000 5,000 An average for the beginning of each year is obtained under the formula by taking one-half the sum of the initial investment and residual value (.$10,000+0), together with one-half of the annual depreciation, $1,000. The addition of one-half of the annual depreciation thus results in a figure representing the investment during a 12-month interval in the exact center of the operating period, or the true mathematical average. This treatment of depreciation is not strictly applicable to all operations. It is, however, the more conservative basis of determining average investments and will therefore be followed uniformly in Service appraisals. The calculation of average depreciation and profit-bearing capital by each invest- ment item will be of more general service because of its shorter and simpler form than the other method of calculation, by separate years. The example given on page 19 recast in this form is as fellows: Investment and depreciation — Logging equipment. Years or use. Initial invest- ment. Yearly deprecia- tion. Wrecking value. Average profit- bearing invest- ment. 10 $10. 500 1.200 1.800 $1, 050 108 90 $5, 775 9 $120 900 648 6 720 Total 13, 500 1,248 1,020 7,143 The same results are obtained as under the former method. The annual depreciation of the first item is one-tenth of the initial investment; of the second, one-tenth of a total shrinkage of $1,080; of the third, one-tenth of a total shrinkage of $900. The average interest-bearing investment under the first item is — under the second- under the third — 10 10,500 1,050 . 10 X 2 + 2 ' 9 v , 1,200+120 , 108. X o H — S~> 10 5 1,800+900 , 90 10 X + 2- APPRAISING STUMPAGE ON NATIONAL FORESTS. 23 The calculation of investments in roadbed, ties, and laying steel, on page 21, recast in this form is as follows: Years of use. Initial invest- ment. Yearly deprecia- tion. Average profit- bearing in- vestment. Years of use. Initial invest- ment. Ye3ily deprecia- tion. Average profit- bearing in- vestment. 10 $4,500 1,800 1,100 1,600 2,100 1,500 $450 180 110 160 210 150 $2, 475 270 110 240 210 450 2 S2.200 1,700 2,500 $220 170 250 $330 1 170 1 2 375 Total 1 19,000 1,900 4,630 5 The results are the same as those obtained in the first calculation. The average interest-bearing investment is computed for each item, as 10/10, 2/10, 1/10, etc., of one-half of the initial outlay, this being a 10-year operation, plus one-half of the yearly depreciation. The following illustration shows the application of this method to a complicated railroad investment, parts of which are made and withdrawn at irregular intervals: A main railroad must be built at the outset of a 20-year operation, at a cost of $72,000. Two years will be required for its construction before cutting begins, approximately one-fourth of the amount being expended during the first year and three-fourths dur- ing the second year. Interest on these amounts at fi per cent ($18,000 for two years and $54,000 for one year) will be included as part of the initial investment, which thus aggregates $77,400. It will be fully depreciated in the 20 years' operation. The main railroad suffices for logging during the first two years. Three miles of spurs are then required, to be used four years and abandoned. The estimated cost is $2,000 per mile for roadbed, ties, and labor and $2,400 per mile for steel. Five miles of additional spurs will then be necessary. This will necessitate the purchase of eteel for 2 miles, at $2,400, and an outlay for roadbed, ties, and labor for 5 miles, estimated at $1,800 per mile. These spurs are to be used four years, by which time the timber tributary to them will be cut out. Six miles of spurs into other units must then be graded and laid. The roadbed and labor in track laying are estimated at $1,500 per mile. One additional mile of steel must be purchased at a cost of $2,400. This section of track will supply logs for five years. Extensions aggregating 3 miles must then be provided for the last five years' logging, the 6 miles previously constructed remaining in use. The extensions are estimated to cost $2,000 per mile for roadbed, labor, etc., and $2,400 for steel. The investments in roadbed will be without value at the end of the operation and must therefore be wholly depreciated. All investments in steel rails will be depre- ciated at 5 per cent annually, leaving a wrecking value, for second-hand rails, in the case of steel used during but a portion of the operation. These investments may be tabulated as follows: Years of use. Initial in- vestment. Yearly de- preciation. Wrecking value. Average profit-bear- ing invest- ment. 20 $77,400 l 6, 000 ' 7, 200 ' 9,000 "4,800 1 9,000 »2,400 i 6, 000 2 7. 200 $3,870 300 324 450 168 450 60 300 90 $40, 635 4. . 750 18 $720 3,726 4 1,125 14 1,440 2.268 10 .. 2,475 930 10 1,200 5 900 5 5,400 1,620 il Tot U'J.000 6,012 8,760 54,421 > Roadbed, etc. ! Steel. 24 APPBAISING STUMPAGE 0.N NATIONAL FOBESTS. Of the investments made at the beginning of the third year, for example, the roadbed ia in use four years and the steel 18 years. The average yearly investment for this piece of roadbed is therefore computed as ™X— 5— H — s~; f° r the steel as IS 7200+720 324 2j;X s 1 — 4.03, the stumpage price. The profit on logging and manufacturing may also be calculated separately by using the overturn method for the former and the investment method for the latter. This use of the two methods is adapted to the usual conditions in the industry where logging and milling are conducted by separate business organizations. Manufac- turing operations represent the larger investments and their profit can be determined best as a return on investment. Logging jobbers, however, who supply the mills with timber require comparatively little capital. Personal ability and effort are as a rule the main factors in their business. Their profit may thus be satisfactorily determined (1) by the overturn method, or (2) by payment for personal services with a percentage return on such capital as their logging business may require. While a distinction is recognized in calculations of this character between logging and milling, the stumpage price should always be obtained from the selling price of lumber, not the selling price of logs. (For a further discussion of this point see p. 35.) Rates of Profit Under Overturn Method. The percentage of overturn used in computing profit should be gauged by the per- manency of the operation, the various elements of risk which attend it, and the local requirements and standards of the particular business. For tie or mining timber operations, with the cut contracted in advance and the market risk thus eliminated, 20 per cent may be taken as standard on fairly accessible chances which involve no unusual logging hazards. In saw-timber sales subject to the usual market risks, 25 per cent should be used under average conditions. If, on the other hand, inaccessible timber must be opened up and exceptional risks incu r red in log driving or in marketing the cut, a profit of 30 to 35 per cent is equitable. DISTRIBUTION OF PROFIT AND DEPRECIATION IN MIXED STANDS. Prorated on Quantity of Timber. In the foregoing instructions profit and depreciation have been prorated evenly over the entire cut. This is the simplest method and is directly applicable where one species is involved. The same method may be used in mixed stands. Average figures for profit and depreciation, together with the operating costs, may be deducted (1) from the selling price for each species giving directly its stumpage rate, or (2) from an average selling price for all species giving an average stumpage rate, which may then be distributed over the various species on any basis desired. Prorated on Net Value of Timber. It is preferable to prorate the total annual profit and depreciation in mixed stands on value rather than quantity. The final results are the same. Distribution on value, however, furnishes a fairer basis for fixing stumpage rates as between species. It also affords the most logical means of carrying out the Service policy of maintaining a minimum rate for green timber of each species and adjusting stumpage prices on the more valuable timbers so that they will carry the less valuable in the sale. At the same time it facilitates giving due weight in appraisals to differences in producing costs between species, as in reduced milling charges for inferior woods manufactured only into low-grade lumber or timbers. The most satisfactory method is to prorate the gross annual depreciation and profit over the difference between operating cost and selling price, for the several species in the proportions entering into the annual cut. To illustrate: APPRAISING STUMPAGE ON NATIONAL FORESTS. 45 A yearly cut is made up of 4,000,000 feet of sugar pine, 3,000,000 feet of yellow pine, and 2,000,000 feet of white fir. The margins between selling prices and costs of pro- duction, exclusive of depreciation and profit, are: Species. Sugar pine.. Yellow pine White fir... Selling price. S20 18 15 Operat- ing cost. $10 10 Margin. $10 8 6 The total net value, or sum of the margins, over which depreciation and profit may be prorated, is thus: Sugar pine, $10X4,000 M $40, 000 Yellow pine, $8X3,000 M 24, 000 White fir, $6X2,000 M 12, 000 Total 76, 000 The annual depreciation and profit (using investment method) which must be paid out of this total has been computed as $34,200. Hence " ,'" =$0.45. That is, every dollar of margin between operating costs and selling price must pay 45 cents toward profit and depreciation. The following charges per thousand feet for deprecia- tion and profit, by species, are thus obtained: Sugar pine, 10X10.45 4. 50 Yellow pine, 8X$0.45 3. 60 White fir, 6X$0.45 2.70 By this method inferior species which yield no margin between operating costs and selling price, or a negative margin, but which must be included in the sale for silvi- cultural reasons, are automatically relieved of profit and depreciation, and the charge upon the other timbers for these items proportionately increased. The same result is readily obtained on a thousand-foot basis, using the per cents of the different species in the cut. That is, to obtain the average margin: 45 per cent sugar pine at $10 $4. 50 33 per cent yellow pine at $8 2. 64 22 per cent white fir at $6 1. 32 Total 8. 46 Depreciation and profit per M feet 3. 80 $3 80 |^27=$0.45, to be taken from each dollar of margin for these items. This method of adjusting the prices of the more and less valuable species is believed to accord with customary business practice. Volume of money handled, rather than quantity of this or that product, is the usual basis for figuring carrying charges, depre- ciation, and returns. In logging, improvements are frequently constructed primarily to take out certain valuable species. Inferior timbers may be cut or left as the market warrants. In such cases operators will usually cut inferior species if a profit can be netted over bare operating costs, figuring that the cost of improvements is borne wholly by the better stuff. The foregoing is believed to be a logical and rational application of this principle. 46 APPRAISING STUMPAGE ON NATIONAL FORESTS. STUMPAGE PRICE. How Obtained in Mixed Stands. The value of stunrpage is taken, in Forest Service appraisals, to be the portion of the lumber selling price left after deducting operating costs, depreciation, and profit. In mixed stands it should be obtained for each species by deducting these charges from its own lumber price. Depreciation and profit should be prorated over the cut on a net value basis, as described on pages 44 and 45. Flat Rates not Desirable. Flat rates for two or more species of different lumber values are not desirable. They may prove inequitable if the proportion of species in the cut differs from that in the estimate; and they tend to make close utilization of inferior species covered by the average price difficult. The standard practice of the Forest Service, therefore, will be to appraise each species having a different lumber value separately and as far as possible upon its own merits. To simplify scaling and cutting reports, however, species whose appraised value does not differ by more than 25 cents may be thrown together under one contract price. Use of Minimum Stumpage Rates. The appraisal of inferior species not infrequently results in very low or negative stumpage prices. It has been deemed advisable to establish a minimum rate of 50 cents per thousand feet for green timber below which no species will be sold. Inferior species will therefore be appraised on their own merits as determined by lumber price and cost of production as long as the resulting stumpage value is not less than 50 cents per thousand feet. If the calculation brings the price below 50 cents, the appraisal will be at that figure. The prices put upon the more valuable species in the stand must then be reduced sufficiently to carry the difference and maintain the average profit which is deemed equitable on the entire cut. Distribution of Loss on Inferior Species. Such adjustments in the stumpage rates of various species may be made by a simple arithmetical process, as follows: It is assumed that separate appraisals, on individual lumber price and producing cost, give the following stumpage rates in a mixed stand of California timber: Sugar pine (30 per cent of stand) $5. 00 Yellow pine (35 per cent of stand) 4. 00 ".bite fir (20 per cent of stand) 20 Incense cedar (15 per cent of stand) —.10 By appraising white fir and cedar at the Service minimum of 50 cents, the amount to be made up on the other species, thousand feet for thousand feet, is 20 per cent of $0.30 + 15 per cent of $0.60, or $0.15. This amount will be spread over the sugar and yellow pine prices; that is, 30 per cent of $5 + 35 per cent of $4, or $2.90, *■> qq = approximately 5 cents, to be deducted from each dollar of stumpage value in the pines. The adjusted rates are therefore: Sugar pine $4. 75 Yellow pine 3. 80 White fir 50 Incense cedar 50 This method should ordinarily be used only when necessary, after profit and depre- ciation have been prorated on value (see p. 44), to maintain the minimum price. Trade Valuation of Inferior Species. The stumpage rates placed upon inferior species should be checked by trade practice and valuation. Consistent and practical results :;)-■ desired, conforming as far as possi APPRAISING STUM PAGE ON NATIONAL FORESTS. 47 ble with the rating of such timbers by local operators. Standard prices for low-grade species representing the operator's valuation and not below the minimum rate may be used throughout a region if found to be most practicable and satisfactory. In any event the prices of the better timbers must be adjusted to yield the total profit called for by the appraisal. Stumpage Prices for Special Products. The methods of appraisal previously discussed should be used where the main products of an operation are other than lumber, as shingles, crossties, poles, or mine timbers. Average selling prices will be determimed for the product in the form in which the usual operator disposes of it, as manufactured shingles, hewn or slabbed ties, etc., and operating costs back to the stump, depreciation and profit estimated. Rates of profit similar to those discussed for saw-log sales should be allowed in opera- tions of similar size, conditions of accessibility, operating difficulties, and risks, except where other rates have been indicated. (See p. 44.) Stumpage rates for special products should be based as far as possible upon the unit of measure common in local trade, as the piece in case of poles and crossties, the linear foot for mining timbers, the stacked cord for shingle bolts or fuel, etc. APPRAISALS FOR SMALL SALES. Small Operations Irregular. Small operations are seldom as closely organized and well supervised as those of good size and permanence. Equipment is usually less efficient, capital inadequate, and labor frequently unskilled and transient. Costs are hence least uniform in small oper- ations and nearly always proportionately higher. Care must be taken in such appraisals not to impose impracticable standards, but to figure on the level of the conditions found. Appraisals Based upon Methods in Use. It is the policy of the Forest Service to base appraisals in small operations upon the methods of logging and manufacture actually employed, even if comparatively ineffi- cient. As far as practicable, small mills should be classified by output and average costs determined by classes, which cover existing conditions as to character of labor available,- amount of capital upon which the business is run, and the kind and effi- ciency of equipment. Such average costs may be used in appraisals when desirable with only such varia- tions as the particular conditions on each chance require. Prices Actually Obtained. The lumber prices used in such appraisals will similarly be the local prices actually obtained by these small operators, not the prices prevailing in the general manufac- turing region. Liberal Profit Necessary. The profits allowed in appraisals for small sales, as indicated on page 41, must be relatively high, averaging more per thousand feet than in larger operations. Thirty to thirty-five per cent on the overturn or 25 per cent on invested capital plus a super- vision charge to cover the personal services of the operator should be the general standard in small sales of saw timber subject to the usual market risks. In sales of ties, mining timber, and other material where the entire cut is contracted in advance a profit of 20 per cent on overturn is usually adequate. Lower profits may be used where current sales and bids indicate that they are satisfactory. Small Operations Competing in General Markets. For small operations whose product is sold in general markets in competition with large plants the average lumber prices prevailing in such markets will necessarily be taken as the basis of appraisals. The grade and quality of the product, which is usually 48 APPRAISING STUMPAGE ON NATIONAL FORESTS. poorer than lumber manufactured by large mills, should, however, be considered. Otherwise the policy indicated above as to efficiency of methods and labor and scale of profits will be followed. As indicated under ' ' Size and type of plants, ' ' page 13, investments will be estimated and appraisals made on the basis of small operations wherever it is practicable for them to handle the timber. If larger operations are clearly more practicable and logical, however, and the timber has been appraised accordingly, the resulting prices must be paid by any purchaser who takes the stumpage. Two standards of value obviously can not be set for the same material. Under such circumstances no concessions to the inefficiency of the small operator can be made. Schedules of Prices for Smalt Sales. District Foresters may authorize Supervisors to establish schedules of stumpage prices for specified parts of their Forests to be used in small sales. This should be done only where conditions are so generally uniform that differences in intensive appraisals of the various sale areas involved would be slight. Such schedules should be worked out under the Supervisor's direction in accordance with the methods described in these instructions, by the use of average selling prices, logging costs, and investments. SAFEGUARDS AND CHECKS. Check by Appraiser's Judgment. As indicated on page 11, all appraisals should be checked by the judgment and business sense of the appraiser. The prices actually recommended should be plainly stated, with the considerations on which they are based, a» well as the rates obtained by strict application of these instructions. Check by Money Profit per Thousand Feet. As indicated on page 39, the dc liars and cents profit per thousand feet is a direct and tangible check which should always be used. Viewing the timber, the chance, anil the investment in a broad way, and comparing them with corresponding operations, the appraiser should satisfy himself a^ to the fairness and sufficiency of this amount. Prices Bid in Former Sales. Prices bid for timber in previous sales, with due allowance for differences in quality, accessibility, and other telling conditions, also afford an excellent check. As far aa practicable their fairness should be gauged by observation of the succeeding opera- tions. Bid prices are of special value as checks because indicating just what local operators, under all the conditions involved, National Forest sale regulations included, are willing to pay for stumpage. As a general rule, the rate of profit indicated by cur- rent bids should govern appraisals in timber comparable in quality and accessibility. Current Stumpage Appraisals. Uniform stumpage rates for timber of the same general quality and accessibility in a given region stabilize the sales business and promote the confidence of purchasers. They also afford an excellent check against hasty or erroneous appraisals. Prevailing prices should never be applied to the ignoring of the quality of the timber and the pioduction costs on a particular chance. The appraiser should, however, check his r-'sults by the going and accustomed rates for the general type of stumpage and loca- tion, and satisfy himself that any departures are justified. Points of thj> nature should be covered in appraisal reports. Prices of Private Timber. A further check is afforded by the rates at which private commercial stumpage is held or sold. When owned by timbermen who know its worth, particularly in regions where buying is active, the price of privately owned stumpage represents the con- sensus of business judgment as to the sum total of all factors, fluctuating lumber APPRAISING STUMPAGE ON NATIONAL FORESTS. 49 markets, reasonable profits, and logging risks included. Care must of course be exercised to consider timber which is comparable in quality and availability and to take only prices obtained by owners who are able to secure full value. Another point of great importance, particularly in comparisons between large tracts, is that, in the cast of privately owned timber, carrying charges for interest and taxes in effect double the investment every ten years. Under National Forest sales, with no taxes, no interest on deferred payments, and deposits for stumpage only in small install- ments in advance of cutting, no such increase in the initial investment takes place. This may be offset by the gain to the private owner from increasing values of lumber which is only realized in part by the operator under a National Forest contract. As a general rule, however, private stumpage in large blocks is worth less than similar stumpage on a National Forest. METHODS OF APPRAISING STUMPAGE; APPLICATION OF PRINCIPLES PREVIOUSLY DISCUSSED. The application of the principles of appraising stumpage which have been dis- cussed is illustrated by the following concrete examples. SYMBOLS FOR ELEMENTS IN APPRAISAL. For convenience in appraisals, the following symbols will be used for various ele- ments in the calculation. For uniformity and ease in checking, any symbols employed — and their use is entirely a matter of convenience — should conform with those given. The symbols are all in terms of one thousand board feet. Z)=Depreciation. P=Profit. .4=Average fixed investment. W= Working capital. V= Residual or wrecking value. C=Operating costs. Jf=Maintenance. G=General expense. T=Taxes and insurance. i?=Extra costs of logging due to Service, regulations. 5=Selling price of lumber. X=Stumpage price. £c=All logging costs. Mc=A\l manufacturing costs. EXAMPLES OF THE INVESTMENT METHOD. In the three examples following, the investment method of computing profit has been used. I. A SMALL OPERATION IN THE ROCKY MOUNTAINS. A total stand of 12,610 M feet is available to a central mill site, of which 9,000 M feet may be cut under the established methods of marking. This consists of green Douglas fir, 76 per cent; green Engelmann spruce, 22 per cent; and merchantable dead timber of both species, 2 per cent. The applicant's mill is at present located 8 miles from the new setting. The initial cost of this null was $6,000. It has been operated 3 years out of a total life for small semiportable plants of this type of 10 years. It is therefore reckoned as having depreciated one-third and is now rated at $4,000. A cut of 9,000 M feet will last it 6 years, at which time it will have an approximate wrecking value of $1,000. The appraisal is therefore based upon an operation of 6 years. The present value of the operator's logging equipment, horses, sleds, lumber trucks, harness, tools, etc., is put at $5,000. Its depreciation is figured at the rate of $600 per year, leaving a residual value at the end of the operation of $1,400. The operating costs for which working capital is required total $12.75 per thousand feet log scale, 60813—14—4 50 APPRAISING STUMPAGE ON NATIONAL FORESTS. or $19,125 for the year's cut. 1 The bulk of the lumber is sold and paid for within six months after felling, the average turn of the working capital being four months. On this basis, with a small margin for contingencies, working capital is figured at $8,000. The investments and depreciations may be summarized in the standard form, all investments being made the first year, and all depreciations prorated evenly over 6 years. Item. Logging equipment Road construction, 41 miles up creek to mill site, at $300. Mo.ing mill (8 miles") and setting up Clearing logway and improving spring at mill site M ill and equ ip'ment W ork ing capital Total Initial in- vestment. $5,000 1,350 350 100 4,000 8,000 18,600 Yearly de- preciation. $600. 00 225.00 58.33 16.67 500.00 1,400.00 Wrecking value. Average profit- bearing investment. $1,400 1,000 8,003 10,400 $3,500.00 787.50 204.17 58.33 2,750.00 8,000.00 15,300.00 In accordance with the standard policy for such operations as given on page 41, a profit of 25 per cent on the average investment will be allowed; 25 per cent of $15,300 is $3,825. This, with the yearly depreciation of $1,400, makes a total of $5,225 to be prorated over the annual cut. The equivalent charge per thousand feet log scale is ^ ' , or $3.48 per thousand feet. Two dollars and fifty-five cents of this 1,500 M amount is profit and 93 cents depreciation. The logging costs may be summarized as follows, all in thousand board feet log \»cale: Item. C. M. G. T. E. Total. $1.10 $1.10 $0.40 .05 .40 .05 .25 1.60 1.50 .25 1.60 1.50 $0.10 .10 81.00 1.00 Taxes SO. 02 .02 4.45 .10 1.00 .02 .45 6.02 Logging roads are short, used for the most part less than one year. It is therefore simpler to charge the cost of their construction to operating expenses rather than to fixed investment. Supervision is inserted to cover the personal services of the operator. This is based upon an annual salary of $1,500 spread over the cut. Although in fact applying to the whole operation, it may as conveniently be charged against logging as split between logging and milling. This charge is higher per thousand feet than in a large, efficiently organized operation. Its inclusion is necessary, however, to provide adequately for the element of personal initiative and enterprise in a sale of this character. 1 This includes an assumed stumpage rate of $3, all logging costs except supervision and all milling costs extended to log scale by 10 per cent overrun. The supervision charge is, in this instance, a return to the operator himself, coming at the end of the year or whenever a surplus accumulates. It need not, therefore, be covered by working capital. The transportation charge from mill to market is also elimi- nated, since it is incurred just prior to sale and can be assumed fairly as paid by a portion of the product. APPRAISING STUMPAGE ON NATIONAL FORESTS. 51 Taxes are obtained as a 1 per cent valuation of the average investment in logging equipment prorated over the annual cut. This is based upon an assessment of one- third of the actual value and a levy of 3 cents on the dollar. Milling costs may be summarized likewise, per thousand feet lumber tally. Item. C. M. T. Total. Milling (including sawing, edging, surfacing 25 per cent oicut, and piling). $4.00 50.20 SO. 04 .06 $4.00 .20 .04 .06 2.50 2.50 Total 6.50 .20 .10 6. SO The figure of $4 for milling is the average of 4 mills of this general type and output in the region. Mill taxes are computed, like logging taxes, as 1 per cent of the average value of the property. This includes 330,000 feet of lumber, or two months' cut, 1 which is assumed to be carried steadily on hand.^ Insurance is figured as a 2 per cent premium on three-fourths of the average value of mill and yard stock. 2 Selling costs are included in the supervision item of $1, this part of the work being handled by the operator personally. The lumber is marketed in an agricultural valley, the distributing point being approximately 7 miles by wagon haul from the mill. Seventy-five per cent of the cut of green timber of both species is sold in the rough as boards and dimension stock, at a delivered rate of $16. Twenty-five percent is surfaced for finish and sold at a delivered rate of $24. The average lumber selling price of green timber is thus: 75 per cent rough and dimension at $16 $12 25 per cent finish, at $24 6 Average selling price 18 Dead timber is all cut into rough boards. On account of stain and check, it com- mands a lower price than green, averaging $15 per thousand feet. The stumpage averages 16 logs per thousand feet. With a circular saw of one-fourth inch kerf and relatively inefficient methods of manufacture, overrun can not be placed conserva- tively at more than 10 per cent. The average lumber selling prices extended to log scale are thus: For green timber ($18X1.10) $19. 80 For dead timber ($15X1.10) 16. 50 The milling and haulage costs, similarly extended, total $7.48. Stumpage rates may then be determined by the formula, X=S —Lc— Mc—D—P, all in terms of log scale, as follows: For green timber: $19.80-$6.02-$7.48-$0.93-$2.55=$2.82. For dead timber: $16.50-$16.98, as above, = -$0.48. 1 It is assumed that the mill will operate 10 months in the year, cutting 150,000 feet of logs per month, or figuring overrun at 10 per cent, 165,000 feet of lumber. 2 The average value of the mill used in calculating taxes and insurance is $2,750, the average interest, bearing investment. The value of the yard stock of 330,000 feet is: Assumed stumpage rate, S3, and logging c^ 02 costs, exclusive of supervision, $5. 02, both reduced to mill-tally basis; that is, =$7.29; together with milling costs, S4.20. The latter exclude taxes, insurance, and haulage. The total of $11.49 times 330,000 makes the average yard stock worth $3,791.70. 52 APPEAISING STUMPAGE ON NATIONAL FORESTS. Putting a minimum price of 50 cents on the dead stumpage, the final prices become: 2 per cent of $0.98 (difference to be made up) $0. 0196 98 per cent of $2.82 (on which difference is to be prorated) 2. 76 ?~^ — --=$0. 0071, reduction for each dollar in the price of green timber. $2. 76 Hence the final prices become: For dead timber, $0.50 per thousand feet; for green timber, $2.80 per thousand feet. The total return of the operator under this calculation is $1 for supervision (personal services) and $2.55 on his investment, or $3.55. This is deemed equitable for small operations of this type, and checks closely with the monetary profit at which such operations are rated ou page 40. (Initial capital, $18,800; output, under 10,000 feet daily.) 2. A MIDDLE-SIZED OPERATION IN THE BLUE MOUNTAINS. This chance will cut approximately 80,000,000 feet. Eighty per cent of the stand is yellow pine, the remainder Douglas fir and western larch. The operation is planned for 10 years at an annual cut, log scale, of 8,000,000 feet. The central point of the business is on a trwnk line railroad where the planing mill is located. It has a rated value of $15,000. It will be well maintained with a view to succeeding operations and should have a residual value of $10,000 at the end of the sale. From this central point, an existing common carrier railroad, forming a tap line or feeder for the main system, runs near the chance. It is proposed to build a single band mill, with a capacity of 40,000 feet of lumber daily, on the sale area. It will cost $30,000 and have a residual value of $10,000 at the end of the operation. Freight on green rough lumber between these points is equivalent to $2.50 per thousand feet. Five miles of railroad connecting the mill with the tap line and running up into the woods will be used during the entire operation. Its estimated cost beneath the stee' is $1,900 per mile. In addition, the following branches will be required: (1) A lateral 2 miles long, to be used 2 years; (2) A lateral 5 mileo long, to be used 5 years; (3) Short spurs, totaling 12 miles, to be used on the average 1 year. These laterals and spurs will cost on the average $1,200 per mile beneath the steel; 9 miles of steel all told will be required. This will cost $2,200 per mile, and is estimated to be worth half that amount at the end of the operation. One light engine with gypsy loader and rolling stock, costing all told $12,000, are required for log hauling. Their residual value is estimated at $3,000. For logging to rail, eight teams will be required. Their cost with harness is $400 each. Skidding equipment will cost $2,000. The maintenance charge on teams and skidding outfits will necessarily be heavy, amounting to $800 a year. With this expenditure for maintenance, however, the value of the equipment will be kept close to its initial cost. It residual value may therefore b„ reckoned at $3,000. Further items of investment may be listed as follows: Item. Wood camps Shop and tools Woods and track tools . Work ing capital Residua] value. 35,000 The working capital is computed as follows: Current cojts for logging and stumpage will be turned every four months. These aggregate $6.28, including an assumed APPRAISING STUMPAGE ON NATIONAL FORESTS. 53 Btumpage rate of $3 for pine (80 per cent) and $1 for fir and larch (20 per cent). The freight and milling costs, which average $8.53, log scale, for all species, are turned every §6 ^8 $8 53 two months. The working capital required is thus :? -^-+' ?1 -k—> or ? 3 - 51 wr each 3 fa thousand feet, log scale, in the year's cut. On 8,000,000 feet this, amount, to $28,080. Twenty-five per cent has been added as leeway for contingencies, making the total $35,000. The investments and depreciations may be summarized as follows: Item. Initial investment. Number of years used. Annual deprecia- tion. Residual value. Average profltbearing investment. Planing mill Sawmill Railway steel Main logging railway grade First lateral railway grade Second lateral railway grade Spur railway grades Engine, loader, and rolling stock. Teams and skidding equipment Camps Shop and tools Woods and track tools Working capital Total 315,000 30,000 19, 800 9,500 2,400 0,000 14,400 12,000 5,200 2,000 1,500 500 35. 153, 300 $500 2,000 990 950 240 600 1.440 900 220 200 100 50 8,190 310,000 10,000 9,900 3,000 3,000 500 "ss.'ooo 71,400 $12,750 21,000 15,345 5,225 300 1,800 1,440 7,950 4,210 1,100 1,050 275 35,000 107,505 The average investment at work in the operation and entitled to profit is thus $107,505. Former competitive bids for timber in this region, which is relatively accessible and involves but average risks, and for chances which are comparable in size and permanency of the operation indicate that a return of IS per cent on the invest- ment is a fair going basis for sales of National Forest stumpage. At this rate the annual profit (18 per cent of $107,505) amounts to $19,350.90, or $2.42 per thousand feet, log scale. *R8 1 90 The annual depreciation charge is -^- ' or $1.02 per thousand feet, log scale. The operating costs are estimated as follows: Logging per 1,000 feet log scale. Item. C. M. a. T. R. Total. $0.80 $0.80 $0.40 .04 .40 .04 1.10 .30 .30 1.10 .30 .30 80.10 .15 .20 .10 .15 .20 $0.25 .25 $0.02 .02 .02 .02 Total 2.50 .45 .25 .04 .44 3.68 54 APPRAISING STUMPAGE ON NATIONAL FOKESTS. Manufacture and transportation per 1,000 feet lumber tally. Item. C. M. G. T. Total. SI. 90 $1.90 $0.20 .20 2.50 2.10 .60 2.50 2.10 .60 .10 .10 $0.20 so. or. .01 .07 .20 .06 .01 .07 .30 .30 Total 7.10 .30 .50 .14 8.04 1 In these iteTis the average yard stock carried at the planing mill is p t at 1,200,000 feet of pine and 300,000 feet of larch and fir. Mine is credited with an avorage cost of $13.07, and larch and fir with an average cost of S10.45. These are based 'pon (1) ass m.ed st mpage rates of $3 for pine and $1 for larch and fir, (2) foxing costs of S3.0S and (3). milling and transportation costs ol $7.00 and S6.20, res-ie tively. St m page charges and lodging costs are reduced for 10 per cent overr.in. Milling costs are exclusive of taxes, ins -ranee, and eelliug charges. Not more than 20 per cent of the larch and fir lumber is dressed as compared with 60 per cent of the pine lumber. The average cost of planing and finishing larch and fir is therefore 70 cents per 1,000 feet on the total of these species. The total cost of manufacture and transportation in the case of larch and fir is therefore $1.40 less than for pine, or $6.64. This timber runs from 8 to 10 logs per 1,000 feet. Results obtained in current sales, however, indicate that an overrun exceeding 10 per cent can not be used safely in etumpage appraisals. Extended for this overrun, the milling and transportation cost for yellow pine, log scale, is $8.04X1,100, or $8.84; and for larch and Douglas fir, $6.64X1,100, or $7.30. From s'udy of current manufacture of similar timber in local mills and compila- tion of selling prices during the past two years, the average cut and selling price of yellow pine, by grades, are ascertained to be as follows: Grade. Weight in cut. Grade price. average price. 2 $46. 00 $0.92 8 34.00 2.72 15 24.00 3.60 20 16.00 3.20 25 12.50 3.12 20 14.00 2.80 5 12.00 .60 5 10.00 .50 100 17.46 B select and better.. C select No. 1 shop No. 2 shop No. 3 shop No. 1 comll-on No. 2 coirui on No. 3 conm.on Total The average cut and selling price of western larch and Douglas fir, by grades, have been similarly ascertained to be approximately as follows: Grade. Finished stock, flooring, etc. No. 2 common ^ No. 3 common Total. Per cent of cut. Grade price. $16.00 12.00 10.00 100 Weight in average price. $0.96 6.48 4.00 Extended by 10 per cent overrun, the average selling prices, log scale, are: For yellow pine, $17.46X1,100, or $19.21. To this should ba added $0.30, the net return per thousand feet log scale from the sale of slabwood (0.5 cord per thousand at $0.60). For larch and Douglas fir, $11.44X1,100, or $12.58. APPRAISING STUMPAGE ON NATIONAL FORESTS. 55 The stumpage rates may now be calculated aa follows: For yellow pine: Average selling price $19- 51 Depreciation $1. 02 Profit 2.42 Logging 3. 68 Manufacture and transportation 8. S4 Total 15. 96 Balance for stumpage 3. 55 For larch and Douglas fir: Average selling price 12. 58 Depreciation 1-02 Profit 2.42 Logging 3. 68 Manufacture and transportation 7. 30 Total 14. 42 Deficit 1.84 Establishing the minimum rate of 50 cents per thousand feet for larch and Douglas fir, the total deficit of $2.34 on these species may be distributed on the pine stumpage as follows: Twenty per cent of $2.34 is $0.47, the amount to be taken up by the stumpage price of pine. Eighty per cent of $3.55 is $2.84, the average stumpage rate which must carry this $0 47 deficit. |^j=$0.165, to be deducted from each dollar of stumpage value of yellow pine. The final stumpage rates are thus: For yellow pine, $2.97 per thousand feet; for larch and Douglas fir, $0.50 per thousand feet. Prorating the annual charge for depreciation and profit on net value in:-tead of quantity, in accordance with the principles discussed on page 44, stumpage prices by species are obtained as follows: Deducting operating costs only from average selling prices, the margin is: For yellow pine, $6.99 per thousand feet, log scale; for lajch and fir, $1.60 per thousand feet, log scale. With a yearly cut of 6,400,000 feet of pine and 1,600,000 feet of larch and fir, the total margin is $47,296. The sum of yearly depreciation and profit is $27,541. Dividing the latter figure by the former, it is ascertained that each dollar of margin must pay $0,582 toward depreciation and profit. On yi?llow pine, therefore, these charges amount to $4.07 per thousand feet, leaving $2.92 for stumpage. On larch and fir, they amount to $0.93 per thousand feet, leaving $0.67 for' stumpage. The average price is the same as that obtained under the first computation. The second method is to be preferred aa more logical and less arbitrary. 3. A LARGE OPERATION IN THE IDAHO PANHANDLE. This chance is estimated to cut, under Service methods of marking, 600,000,000 feet in a 20-year operation. The timber consists of the following species: Percent. White pine 27 Yellow pine 4 Lodgepole pine 1 Engelmann spruce 3 Per cent . Western larch and Douglas fir 33 Western red cedar 25 White fir 7 56 APPRAISING STUMPAGE ON NATIONAL FORESTS. The chance is exceptionally adapted to railroad logging. From a central point, where the system of logging spurs would logically begin, the most practicable route to the nearest railroad connections requires 32 miles of track. The first 20 miles of this distance taps a region of extensive agricultural resources, behind it lies a heavily timbered belt which contains upward of 6,000,000,000 feet. There is little doubt that permanent traffic in timber and agricultural products will maintain this portion of the railroad as a common carrier, and that considerable freight outside of the National Forest sale will contribute to its support from the outset. The cost of this portion of the railroad is estimated at $20,000 a mile. Two-fifths of the total expenditure of $400,000 will be made two years, and three-fifths one year in advance of the beginning of the operation. Including interest on these amounts, for two and one years, respectively, at 6 per cent, the initial investment is computed as $433,000. This investment does not depreciate, but with adequate charges for main- tenance remains intact throughout the operation. The permanent traffic then avail- able will give it a residual value equal to the first cost. In the stumpage appraisal this tap-line railroad may be treated in either of two ways. First, it may be handled as an integral part of the operation, like other investments. In that case, because of its permanency and low risk, a return of 10 per cent annually is believed to be equitable. It is but fair, furthermore, to charge a portion of this re- turn to the outside traffic available for the road. It is the appraiser's judgment that such outside traffic during the sale period as a whole should net $25,000 a year over and above its proportionate share of the cost of rolling stock, operation, and maintenance. This leaves $18,360 as the annual charge for profit on the tap line to be borne by the National Forest stumpage, in addition to its portion of the cost of operation, main- tenance, and rolling stock. Second, the tap line may be regarded as an independent business enterprise. In this case its only relation to the timber sale is as a common carrier which will transport the product on a freight-tariff basis. A freigh t- tariff , under this assumption, is thus sub- stantiated for the combined charges for rolling stock, operation, maintenance, and profit under the first assumption. In comparison with other railroads making similar hauls, the freight rate is figured at 55 cents per thousand feet of logs, log cars being fur- nished and maintained by the shipper. The remaining 12 miles of railroad will be a logging road primarily, but will tap fully as much private as Government timber. From careful study of the location and ownership of this timber, it is concluded that to prorate the cost of the logging railroad three-fifths to the National Forest chance and two-fifths to adjacent private stumpage will be safe and equitable. The cost of this main logging road, or feeder, including steel, is put at $6,000 per mile. The initial investment, $43,200 of which is to be car- ried by the Government timber, will be fully depreciated during the 20-year period allowed for the operation. The average investment in the feeder should return the same profit allowed for the capital used in the operation as a whole. The best location for a manufacturing plant is 92 miles from the chance, at a good- sized valley town. The low elevation, making conditions for seasoning lumber and continuous operation of the mill much more favorable, and better facilities for railroad shipments more than offset the distance from the timber. This location will require a log haul of 60 miles from the end of the tap line over an existing railroad, at a quoted charge of 80 cents per thousand feet log scale with cars furnished by the shipper. The manufacturing site is estimated to cost $25,000. This will be a permanent in- vestment, in a rapidly growing town, subject to no risk and with every prospect of appreciation in value. As in the case of the tap line, therefore, no depreciation will be figured and a return of 10 per cent throughout the life of the sale will be adequate. With an annual cut of 30,000,000 feet, this will amount to approximately 8 cents per thousand feet, log scale. The plant itself, a double-band sawmill and planing mill, will cost $255,000. The location is one of the most permanent to be found anywhere APPRAISING STUMPAGE ON NATIONAL FORESTS. 57 in the West, in a large valley whose drainage contains upward of 30,000,000,000 feet of virgin timber. It can be fairly assumed, therefore, that the plant will have a life of at least 30 years, or a residual value at the end of the present operation of $85,000. The tract will be logged by railroad spurs extending from the end of the feeder up each of its three main watersheds. Three miles of main logging spur will develop the first watershed, which will furnish about four years' cut at 30,000,000 feet of logs an- nually. Three miles of main spur must then be constructed to the junction of the sec- ond and third watersheds, each of which will furnish about eight years' supply of logs. An extension of the main spur 9 miles up each of these streams will be necessary. Approximately 58 miles of branch spurs will be required on the three watersheds. These branches can, however, be operated with 8 miles of steel in continuous use. The logging will require, therefore, 3 miles of steel for the main logging spurs during the first four years, thereafter 12 miles; and 8 miles of steel for the branch spurs through- out the entire sale. Seventeen and one-half per cent of the timber, on agricultural lands which are to be cut clean, will be logged by steam machinery. The rest will be logged with horses. Woods improvements will consist of trail chutes and a few short pieces of flume. The investments required in the operation, aside from the tup line and mill site, are summarized in the following table: Summary of Investments. Item. Manufacturing plant Main logging railroad Main logeing spurs: ' 3 miles steel, at $3,090 3 miles grading, at $1,500 9 miles stee 1, at $3,090 , 3 miles grading, at $l,i;00 9 miles grading at $1,600 9 miles grading, at $1,500 Switch layouts Branch losing spurs: 8 miles steel, at $2,300 58 miles grading, at $1 ,200 Logging and railroad equipment: 3 4 donkey engines, at $7,500 120 sets teams and outfits with woods tools, at $700 7 locomotives, at $12,000 ' 300 log cars, at $500 s 6 log jammers, at $5,000 Miscellaneous equipment: Portable railroad camps 6 Log camps Railroad shop and equipment Working capital 8 Initial in- vestment. Total. $255,000 43, 200 9,270 4,500 ' 27,810 4,800 14,400 13,500 1,000 18,400 09,600 30,000 84,000 84,000 150,000 30,000 0,000 9,000 2,000 220,000 Number of years used. 1,076,480 20 Annual deprecia- tion. ;,500 :,160 463 225 ,112 240 720 075 50 920 i,480 ,200 ,200 ,500 ,500 300 450 100 Residual value. $85,000 5,562 220,000 310,562 Average profit- bearing in- vestment. $174,250 22,680 4,866 562 13,905 2,040 3,240 3,037 525 9,660 5,220 S,250 12,600 23, 100 41,250 8,250 1,650 1,125 1,050 220,000 557,260 1 All items for railroad steel and iron are depreciated at 5 per cent annually. 2 Two years is the average period of use of each spur grade. 8 The initial investments include replacements throughout the life of the sale. Logging machinery, locomotives, and rolling stock depreciate completely in 10 years; hence double the average stock in use at any given time is figured. Teams and tools depreciate completely in 5 years; hence four times the average stock is provided for. < Three locomotives will be sufficient for the first 10 years; for the last 10 years four will be needed. 8 This is based upon log transportation for the entire distance over tap line and present railroad to the manufacturing plant, requiring 150 cars in continuous use. 8 Two complete sets, at $3,000 each and each lasting 10 years, are provided for. 7 Four years is the average period of use of the log camps. 8 The working capital is arri< ed at as follows: It is estimated that an average yard stock equivalent to about one-third of the annual cut must be kept on hand. This has a cost value, excluding depreciation and profit and including an assumed a\ erage stumpage price of $1.50, of $12.99 per thousand feet log scale (taking the lower schedule of costs, p. 59). His also figured that an average supply of 3,000,000 feet of logs should be kept ahead of cutting at the mill, and 2,000,000 feet of logs ahead of railroading in the woods. The cost value of the former is $7.59, and of the latter, $5.03. Stumpage at $1.50 is included in each case. Accounts receivable are estimated at $32,475. This is equivalent to one month's sales, 2,500,000 feet, at a cost value of $12.99. While many sales will be made on 60-day payments, it is believed that they will be 58 APPEAISING STUMPAGE ON NATIONAL FORESTS. This operation involves the development of a manufacturing and logging industry in an entirely new region and the exploitation of a chance now wholly inaccessible. Risks beyond the ordinary are involved in: 1. Climatic conditions, no large operations or extensive construction work having been conducted heretofore in these mountains. 2. Acquisition of additional timber to carry two-fifths of the investment in the main logging railroad. 3. Working out successfully the main transportation problem which involves (1) satisfactory traffic and log haul agreements with an established common carrier, and (2) enlisting other capital to construct the tap line or developing outside traffic to carry the tap line if built as part of the lumbering plant. Under these conditions a return of 20 per cent annually on the invested capital is deemed equitable and necessary to place the chance upon the market. With an average investment of $557,260, the annual charge for profit is thus 3111,452; or, on an annual cut of 30,000,000 feet, $3.68 per 1,000 feet. The annual charge for depreciation is $1.27 per 1,000 feet. The logging costs are summarized as follows: Stump to upper terminus of tap line. Item. C. M. G. T. R. Total. $0.70 1.55 SO. 70 1.55 SO. 55 .02 .55 .02 .21 .20 .36 .21 .20 .36 SO. 11 .27 .10 .11 .27 .10 .12 .12 SO. 15 .15 SO. 40 .40 Total 3.02 .48 .40 .15 .69 4.74 1 Based up)n 17.J per cent p:> ver logging at SI. 22 and 82$ percent horse logging at SI. 63. 2 ' "'his is a special silvicultural requirement proposed for the sale area. 3 'his charge covers trail chutes, flumes, landings, and other current improvements aside from railroad grades, which are provided for under fixed investments. The cost of manufacture and sales, exclusive of depreciation, has been avera for a number of large mills in the Inland Empire similar to the proposed plant at $4.50 per thousand feet lumber tally. Mill scale studies conducted at these plants indicate that 20 per cent is a conservative figure for overrun under Forest Service scaling in this class of timber. The milling charge per thousand feet log scale is thus $4.50X1,200, or $5.40. offset bv an e iui . alent amount of cash business. The average outstanding deposit for stumpage is put at $5,000; and the average amount required as a margin to meet contingencies at $20,000. These items are then: 10,000,000 feet of yard stocV, at $12.99 $129,900 3,000,000 feet of logs at mill at $7.59 22, 770 2,000.000 Teet of logs on landings, at $5.03 10, 0;i0 Accounts recei able 32, 475 Running deposit on stumpage 5, 000 Contingencies 20,000 Total 220, 205 This mav be c'iec v ed from the total yearly operating cost and frequency of turn. The cost of the year's cut. eiclusi e of depreciation and profit, is $389,700 (30.000,000 at $12.99). This would indicate an average turn of about seven months— which is liberal but not excessive for a large operation of this nature. APPRAISING STUMPAGK ON NATIONAL FORESTS. 59 If the appraisal is based upon the assumption that the tap line can be constructed practically as a common carrier independent of the lumbering operation, the only other charges to be taken into account are for freight on logs to the manufacturing plant, aggregating $1.35 per thousand feet log scale. If it is assumed that the tap line must be built by the lumbering company as part of the operation, under the conditions above stated, additional charges are necessary, as follows: Profit on portion of tap line investment ' $0.61 Depreciation of additional rolling stock required 2 08 Profit on average investment in additional rolling stock 2 09 Railway operation 3 25 Railway maintenance 3 10 Maintenance of additional rolling stock 04 Total : 1. 17 The charge for log freight from the end of this tap line to the mill is $80 per M feet in any event. Profit and production cost, exclusive of stumpage price, may then be sum- marized as follows: Return on investment in mill site Profit Depreciation Lodging costs Milting costs Tap-line transportation Main-line transportation Total With tap line as part of operation. 17.14 With tap line as independ- ent common carrier. SO. 08 3.68 1.27 4.74 5.40 .55 .80 16.52 Where different methods of handling the main transportation problem should be considered, as is frequently the case in inaccessible chances, it is desirable for the appraiser to present the cost data under each. In this instance the choice obviously lies between a more and a less conservative policy as to whether the sale of National Forest stumpage should await the general economic development of the region or whether the Government timber should itself carry the principal burden of such development. Ordinarily the more conservative policy will be followed under such conditions. Stumpage prices will be based, therefore, upon the lower schedule of costs. The average lumber value of the white-pine timber on the tract has been deter- mined from three tables, which follow. The first gives, for sound timber, the aver- age value by grades of stumpage of varying size, as indicated by the number of logs per thousand feet. i $18,360 prorated annually over 30,000,000 leet. (See p. 56.) * The additional equipment required is 2 engines in current use. Their depreciation, at 10 per cent annually, and average investment are figured as 32,400 and S13.200, respectively. Profit on the latter figure is allowed at 20 per cent. » These are the estimated proportions of the total costs of operation and maintenance chargeable to the timber. (Seep. 56.) 60 APPBAISING STUMPAGE ON NATIONAL FORESTS. Sound White Pine. Grade value per thousand. Logs per thousand. Grade. 18 6 3 Per cent of grade. Propor- tional value. Per cent ofgTade. Propor- tional value. Per cent of grade. Propor- tional value. $45. 00 38.00 27.00 20.00 25.00 21.00 15.00 11.00 6.00 0.14 1.97 3.72 .43 47.20 21.73 21.03 3.66 .12 $0.06 .75 1.00 .09 11.80 4.56 3.15 .40 .01 1.57 6.10 8.88 7.91 SO. 71 2.32 2.40 1.58 12.26 12.67 9.29 24.41 15.19 9.09 14.97 2.07 .05 $5.52 C select 2.51 Shop 4.88 29.92 ' 7.48 18. 10 ! 3. 86 22. 18 3. 33 3.80 1.91 2.25 4.85 .19 .53 .01 .23 Total 100 21.82 100 22.22 100 25.91 The second table gives similar data for defective white pine. Defective White Pine. Grade value per thousand. Logs per thousand. 1 Grade. 15 10 Per cent of grade. Propor- tional value. Per cent of grade. Propor- tional value. Per cent of grade. Propor- tional value. $45.00 3S.00 27.00 20.00 25.00 21.00 15. 00 11.00 6.00 0.91 3.52 7.17 .21 18. 23 15. 38 28.24 23.77 2.57 $0.41 1.34 1.94 .04 4.56 3.23 4.24 2.61 .15 0.93 - 7.85 11.32 1.83 14.12 6.94 27.85 25. 2S 3.88 $0.42 2.9S 3.06 .37 3.53 1.46 4.18 2.78 .23 10.94 11.60 11.60 9.87 4.68 3.77 19.21 22.41 5.92 $4.92 4.41 3.13 Shop 1.97 1.17 .79 2.88 2.47 .36 Total 100 18. 52 100 19.01 100 22.10 The third table sets forth the run of the white-pine stumpage on the chance, by size classes of sound and defective timber, respectively, with the average cut of grades and grade values. Grades and Grade Values or White Pine. White pine. 3-log, sound 6-log, sound 18-log, sound 4-log,' 28 per cent defective. . 10-log, 32 per cent defective. 15-log, 32 per cent defective. Average value per thousand Deducting 6 per cent depreciation in yards . Per cent of log class In the stand. Lumber value. Per thousand. $25. 91 22.22 21.82 22.10 19.01 18.52 Propor- tional. $6.22 3.56 4.36 3.54 2.28 2.22 22.18 1.32 20.86 APPRAISING STUMPAGE ON NATIONAL FORESTS. 61 The mill-run prices of the other species have been similarly determined, as follows: Yellow pine 116. 87 Lodgepole pine 15. 00 Engelmann spruce 14. 00 White fir 13.00 Larch, Douglas fir, and cedar 12. 00 In determining the total value of each species log scale, it is figured that in addition to an overrun of 20 per cent a net return of 40 cents per thousand feet will be obtained for white, yellow, and lodgepole pine from the manufacture of lath and a net return of 30 cents per thousand feet for all species from the sale of slab wood and mill waste. The log-scale values of the respective species are therefore: i White pine, $20.86, extended for 20 per cent overrun $25. 03 Lath 40 Slab wood and mill waste 30 25.73 Yellow pine, $16.87, extended for 20 per cent overrun 20. 24 Lath 40 Slab wood and mill waste 30 20.94 Lodgepole pine, $15, extended for 20 per cent overrun 18. 00 Lath 40 Slab wood and mill waste .30 18.70 Engelmann spruce, $14, extended for 20 per cent overrun 16. 80 Slab wood and mil] waste 30 17.10 White fir, $13, extended for 20 per cent overrun 15. 60 Slab wood and mill waste 30 15.90 Larch, Douglas fir, and cedar, $12, extended for 20 per cent overrun 14. 40 Slab wood and mill waste 30 14.70 If the total charge for profit and depreciation, $5.03 per thousand feet, be pro- rated on the margin between operating costs and selling price of the respective species, in accordance with the method discussed on page 45, 1 the following stumpage prices are obtained: White pine $3. 56 Yellow pine 2. 36 Lodgepole pine 1, 81 Engelmann spruce $1. 41 Whitefir 1.11 Other species 81 'The average margin is S6.63 (average selling price, $18.12, less the operating costs, $11.49). U^s-StUS to be taken for each dollar of margin to make up profit and depreciation. With this figure 5nd the difference between operating costs and the selling price of each species, the stumpage rates are readily derived. 62 APPRAISING STTJMPAGE ON NATIONAL FORESTS. EXAMPLES OF THE OVERTURN METHOD. In the three examples following the overturn method of computing profit has been used. 1. SMALL SHORTLEAF-PINE OPERATIONS IN ARKANSAS. In this region logging is easy and readily contracted at established rates. A great deal of milling business is done on small capital. Current bids indicate that relatively low profits are satisfactory to the operators. The chance is estimated to contain 20,000,000 feet, to be cut in five years. The timber will be logged to small, portable mills for sawing; then dried in "smoke kilns" for several days; thence hauled to a point on a common-carrier railway at which the operator's finishing plant is located. Logging conditions are very similar over the entire tract, but the chance is divided into five operating units, because of the differ- ent lengths of haul from mill to rail. Hauling distance is the determining factor in fixing stumpage rates. Logging operations in this region are very simple, because of the rough country and thin, scattered stands. The timber runs from 1J to 2| (rarely 3) logs per tree and from 8 to 10 logs per thousand feet. It is very sound, less than 10 per cent of the logs showing any defect. Small portable sawmills, cutting from 8,000 to 16,000 feet per day and costing from $1,200 to $3,000 each, are set up in "hollows" or narrow valleys, where from 600,000 to 2,000,000 feet of logs can be brought in by wagon haul. Log haul to the mill sites for the area as a whole seldom exceeds 3 miles, and the average haul is 1£ miles. Logging and milling costs in the region are very uniform and easily standardized. Felling, bucking, and brush disposal is usually contracted at $1 per thousand feet, the cutters furnishing their own tools, oil, etc. Bunching logs, loading on wagons, and hauling to the mill is done either by contract or with the operator's teams. Con- tract rates are usually $1.25 for the first quarter mile and 25 cents for each additional quarter mile, this price including what little road building is necessary, which may cost $30 per mile. A 1-mile haul thus costs $2 by contract, and an average haul of H miles $2.50, four to five trips per day being made at that distance, with from 250 to 350 feet per team. The price is so based as to allow the contractor from $3 to $3.50 per day for himself, wagon, rigging, and two mules; hence it is not certain that the cost of contracting can be reduced if the operator logs his own timber. Nine or ten men are employed at the sawmill, cutting as many thousand feet a day. As an average for 5 miles examined cutting from six to sixteen thousand feet per day, wages aggregate $1.50 per thousand feet. This includes piling in the smoke kilns, where most of the lumber stays about a week before hauling. Lumber is cut a little scant, so that 2-inch lumber when seasoned measures 1| inches and inch stock about thirteen-sixteenths. On account of the long lumber haul, No. 3 common boards are not saved, but burned with the slabs and edgings. Under these conditions the cut of No. 2 and better grades was found to overrun log scale by 5 to 10 per cent, but this overrun is almost wholly lost by shrinkage at the planer. Lumber is hauled to rail by contract, at $2 for a 7 to 8 mile haul, $3 for an 11 or 12 mile haul, $3.50 for a 14-mile haul, and $4 for an 18-mile haul. The roads are hilly, but otherwise fairly good except in wet weather. A team will haul 900 to 1,100 feet of half-dried lumber 12 miles and return in a day. The investments required to cut this body of 20,000,000 feet in five years may be tabulated as follows: APPRAISING STUMPAGE ON NATIONAL FORESTS. 63 Item. Moving and setting up mill, 10 sets, at $300. Logging roads, 100 miles, at $30 Logging teams, 15, at $400 » Wagons and harness, 15 outfits, at $100'... Sawmills, 2, at $3,000 2 Planer and dry kilns 2 Real estate 3 Working capital < Total. Initial investment. Number of years used. $3,000 3,000 6,000 1,500 6,000 8,000 2,000 4,500 31,000 A nmial deprecia- tion. $eoo 600 900 225 420 560 3,305 Residual value. $1,500 375 3,900 5,200 2,000 4,500 17,475 Average profit- hearing investment. $600 600 4,200 1,050 5,160 6,880 2,000 4,500 24,990 1 Depreciated at 15 per cent annually. 2 Depreciated at 7 per cent annually. 8 Exclusive of residence, store, and small farms, which are self-sustaining. < Consists of lumber at planer, $3,000, and lumber at sawmills, $1,500. Otherwise the turn is sufficiently quick to pay operating costs directly from sales of the product. Note.— One year is taken as the average period of use of the money required for mill sets and logging roads. The production costs, figuring an annual cut of 4,000,000 feet, arc: Depreciation ($3,30o-f-4,000,000) $0. 83 Felling, bucking, and brush disposal, contract price 1. 00 Team maintenance and labor, bunching and hauling to mill 2 Sawmill labor Labor at kiln and planer (labor of 15 men, $26.25, to plane, run through dry kiln, and load, prorated on 20,000) Taxes and insurance (annual amounts — $400 and $500, respectively) General expense (The total annual amounts are: Supplies and repairs, $150; superintendent $1,200; bookkeeper, $900; general office expenses, $390.) Total production cost, exclusive of stumpage and lumber haul 7. 61 The average cost of the lumber haul, from planer to rail, is $3 per thousand feet. The net price of the lumber at the shipping point has averaged $16 per thousand feet for the past 15 months. The profit on overturn is put at 23 per cent, which corre- sponds with the general returns from such operations in the region. The average stumpage price is thus $16— $10.61— $1.23 ($10.61), or $2.95. This gives the operator a profit of $2.44 per thousand feet, or a gross annual return of $9,760. It is equivalent to a return of 39 per cent on the average investment. The stumpage price may be adjusted approximately between the several units in the chance, to provide for variations in the cost of lumber haul, as follows: 2.00 1.50 1.32 • 22J . 73J Item. Unit A. Unit B. Unit C. Unit D. Unit E. $7.61 3.50 2.44 S7.61 3.50 2.44 $7.61 2.50 2.44 $7.61 3.75 2.44 $7.61 Profit 13. 55 16.00 2.45 n. r.r, 16.00 2.45 12.55 16.00 3.45 13.80 16.00 2.20 12 55 3 45 2. A LOGGER S SALE IN NORTHERN MONTANA. A chance on a drivable stream tributary to the Kootenai River contains 14,000,000 feet, running 76 per cent yellow pine, 16 per cent western larch, and 8 per cent Bougias fir. The timber averages from three to four logs to the tree and eight logs to the thou- sand feet. The season of high water L short and no satisfactory drive can be handled without cleaning about 6 miles of stream bed and constructing two splash dams. The stream has never been driven before. With these improvements, it will be practicable 64 APPRAISING STUMPAGE ON NATIONAL FORESTS. to drive from two to four million feet annually 6 miles to the Kootenai River. The operation will, therefore, extend over four logging seasons. About one-fourth of the timber can be skidded directly from the stump to the land- ings. Another fourth can be drayed to the creek over an average distance of H miles. Where topography is suitable, logs will be skidded short distances to chutes and han- dled through them to the creek. Approximately 30 per cent of the timber will be logged in this way. The rest, on account of uphill dopes, must be loaded on sleds and hauled to the landings. The following investments will be required: Item. Initial investment. Number of years used. Annual deprecia- tion. Residual value. Average profit- bearing investment. $1,500.00 1,200.00 2,500.00 2,000.00 1.500.00 500. 00 5, 000. 00 8,000.00 4 2 2 4 4 2 4 4 S375. 00 300. 00 025. 00 500. 00 375. 00 125. 00 500. 00 8937. 50 3 miles of dray road, at S400 150. 00 1,000 rods of chute, at §2.50 937. 50 2 splash dams, at 51,000 1,250.00 937. 50 187.50 Teams, sleds, drays, and woods tools 53,000.00 8,000.00 4,250.00 8,000.00 Total 22,200.00 2,800.00 11,000.00 16,950.00 1 The logging season covers 5 months, from Nov. 1 to Apr. 1. Logging costs, exclusive of breaking rollways and driving, total * Mi- 1 , ami the stumpago price is assumed to be $2. The average cut is 700,O0nfeet of logs per month, involving a cost for stumpage and logging of $3,514. It is figured that sufficient capital must be furnished to run the camp 2 months, or $7,028, with a margin of 51,000 for contingencies. The logs are delivered in Kootenai River and paid for in May. Driving charges and logging costs for the last 3 months of the season can usually be carried on the operator's books until the logs are sold. Often, indeed, contracts are made under which part payment is advanced on the scale of the logs in rollways. Logging costs are summarized as follows: Depreciation of fixed investments ($2,800-4-3, 500,000) $0. 80 Felling and cutting, by contract 70 Swamping 40 Brush disposal 25 Skidding 45 Chuting, draying, and hauling 40 Tote team 03 Horse feed 15 Blacksmithing and repairs 14 Decking in rollways 30 Breaking rollways < 15 Driving to Kootenai River 30 General expense, clerk, etc 20 Total 4. 27 The current log price for mixed runs of these species on Kootenai River is $7.50 ' per thousand feet. The cost of driving downstream 25 miles to a large going mill, which forms the only available market, and booming is $1 per thousand feet. The standard manufacturing cost at this plant, including depreciation on mill and equip- ment, is $5 per thousand feet, lumber tally. The normal overrun in this timber is 20 per cent. This is reduced, however, by loss in driving and storage, to 12 per cent. The average mill-run lumber selling prices are $15 for yellow pine and $12 for larch and Douglas fir, or for the chance: Yellow pine, 76 per cent, at $15 .• $11. 40 Larch and fir, 24 per cent, at $12 2. 88 Average price 14. 28 1 In this instance, however, the manufacturers furnish a part of the capital required by the loggers, which has the effect of an increase in the log price. APPRAISING STUMPAGE ON NATIONAL FOEESTS. 65 Fifteen per cent profit on overturn is equitable for the cost of the main river drive and of manufacturing. Aside from loss in driving, the risk, at this large, well- developed plant, is comparatively slight. On the other hand, a profit of 35 per rent on overturn is deemed but fair to the logger, whose entire success depends upon the development and use of a stream hitherto undriven. Using the overturn formula which provides separate rates of profit for logging and manufacturing, the stumpage price is determined as follows: A'=$15.99 ' -$4.27 - .35($4.27) -$1 -$5.G0 ' - .15($l+$5.60). A"=$2.64. The logger's profit, as thus computed, is 35 per cent of $4.27, or $1.49. The manu- facturer's profit is 99 cents. At the prevailing log market the logger's profit would be$7.50-(4.27+2.64),or 59 cents, a rate on the overturn of 14 per cent. This indicates that the appraisal is high for the log market but equitable for the lumber market, allowing a total profit of $2.48. The latter should govern the appraisal. This operation is typical of small sales to loggers who sell their cut to large going mills. As in this instance, the log market is usually an unsafe basis for appraisal. Investments are small as a rule, particularly where stream driving is employed. Twenty-five per cent return on the average investment in this operation, using a high rate on account of the risks involved, would yield a profit of $1.21 per thousand feet. Rarely will a straight investment return at the usual rates give an adequate logger's profit in such cases. If a return of 25 per cent on the average investment were supple- mented by a supervisory charge for the personal services of the contractor, however, no such charge being included in the operating costs, a practicable margin would be afforded. In this instance the greater part of eight months each year is spent by the purchaser on the logging operation. A salary of $150 per month as foreman would add $1,200 a year, or 34 cents per thousand feet, to the returns from the enterprise. The total return thus realized, $1.55, would make the sale a good logging proposition. The alternative method of determining profit on manufacturing in sales of this char- acter is as a percentage of the average investment in the milling plant and working capital required to run it, prorated over its total annual cut. The average milling investment in the case discussed may be put at $275,000, with an average yearly cut, log scale, of 30,000,000 board feet. A return of 12J per cent on this mill investment may be regarded as equitable. This calls for an annual sum for profit of $34,375, or $1.14 per thousand feet of logs manufactured. In lieu of this figure, a standardized milling profit, found by experience to be generally applicable throughout the region, might be used. 3. A SALE OF TIE AND MINING TIMBER IN WYOMING. A chance containing 60,000,000 feet of lodgepole pine is to be cut out in five years. Its products, with their average selling prices delivered at the railroad, are as follows: Product. Amount. Per cent of stand. Average price. 518,400 pieces 27 54 12 7 2 »0. 57 1,036,800 pieces 720,000 pieces .60 .30 4,200,000 feet 18.00 i Selling price and milling cost are extended for 12 per cent overrun. 2 90 per cent standard, at $0.60; 10 per cent seconds, at $0.30. 3 Side 1 imber only made in cutting sawed ties. 60813—14- 66 APPRAISING STUMPAGE ON NATIONAL FOEESTS. The operation of the chance will require the construction of 27 miles of flume from the timber to a river in the main valley below the mountains, down which the ties and other products will be driven to a small storage and loading yard at the railroad. A dam must be built to form a storage reservoir on the sale area, into which the timber is delivered by branch flumes, and two additional dams to control the supply of water for the reservoir and flumes. A sawmill with a daily capacity of 50,000 feet will be built at the outlet of the reservoir to slab or saw the larger logs into ties with a small by-product of side lumber. An old freight road running near the chance must be repaired and 12 miles of addi- tional road built to reach all of the camp sites; 35 miles of telephone line are required, paralleling the flume, to connect the sawmill, headquarters camp, and flume camps with the office at the railroad. Unloading ground and storage yards at the latter point must be purchased at a cost of approximately $1,000; and $1,200 expended for a boom in the river and a jack-chain system to land the ties and other timbers in the yards. Office buildings will, however, be rented. Horse skidding and sled hauling to the reservoir or branch flumes will be employed exclusively. The commissary and store which will be maintained at the headquarters camp are not included in the appraisal. (See p. 13.) This enterprise, including the construc- tion of the buildings used, the furnishing and hauling of supplies, and the employment of a cook and storekeeper, is regarded as distinct from the timber sale. The seasons for various parts of the operation are: Cutting, June 1 to January 31, eigfet months. Skidding, July 1 to February 28, eight months. Hauling, November 15 to March 15, four months. Milling, May 15 to October 15, five months. Fluming, May 15 to October 15, five months. The investments necessary will be tabulated in the usual form. Item. 27 miles of flume, at $2,500 Main reservoir dam 2 side dams, at $1,000 35 miles of telephone, at $30 Sawmill Repairs on freight road 12 miles of new road, at $300 Headquarters camp, stables, etc . Woods camps (4 sets) 60 teams, at $350 40 sets draft harness, at $60 35 sets skidding harness, at $17.15 30 logging sleds, at $70 10 wagons, at $125 Axes, saws, pea vies, chains, etc. . Landing ground Landing equipment Working capital* Total Initial investment $67,500 2,000 2,000 1,050 20,000 5,000 3, 600 2,000 2,000 21,000 2,400 600 2,100 1,250 3,000 1,000 1,200 102,000 239,700 Number of years used. Annual deprecia- tion. $13,.->00 400 400 210 2,000 1,000 720 400 400 3,000 320 80 210 100 360 160 23,260 Residual value. $10,000 6,000 800 200 1,050 750 1,200 1,000 400 102,000 123,400 Averag* profit- bearing Investment. $40,500 1,200 1,200 630 16,000 3,000 1,800 1,200 800 15,000 1,760 440 1,680 1,050 2,280 1,000 880 102,000 192,420 1 Each of the woods camns and branch roads to them will be in use but part of the total operation. • The calculation of working capital is given in detail on p. 68. APPRAISING STUMPAQE ON NATIONAL FORESTS. 67 The operating costs for the various products are estimated as follows: Felling, bucking, hewing, etc Brush disposal and cutting defective timber Skidding Hauling to flume, including cost of temporary roads Fluming or driving to mill Sawing 1 Fluming and driving to railroad and handling in yard.. Maintenance of improvements and equipment 2 General expenses 2 Total. Hewn ties, per piece. SO. 122 .030 .050 .040 .035 .010 .017 Sawed ties, per piece. JO. 031 .024 .031 .056 .016 .055 .035 .013 .022 .283 Mine props, per piece. $0. 030 .010 .050 .035 .025 .005 .009 Lumber, per 1,000 feet. SI. 00 .75 1.00 1.78 .50 2.50 1.25 .422 .743 9.944 1 No overrun can be figured on account of the large part of the logs cut into ties, which are dealt with sepa- rately by the piece, and the inability to flume and market short lengths and low grades. J Under these items there is charged against each product only the expenditures for upkeep of improve- ments and equipment, supervision, inspection, office costs, etc., applicable to that part of the operation. The annual depreciation will be prorated over the net value of the year's cut; that is, the total margin between operating cost and selling price. This is: Product. Annual cut. Margin per unit. Total margin. do 103, 680 207,360 144,000 840 SO. 266 .317 .136 8.056 S27,578.88 65,733.12 do.... 19,584.00 M feet.. 6,767.04 119,663.04 The mill depreciation, $2,000, should obviously be borne by the mill products, lumber and sawed ties, exclusively. The remaining depreciation, $21,260, is charge- able to the entire cut. The depreciation charge for the several products is thus determined as follows: For the sawmill . 7 ^- L nf) ,„ =$0,028 per dollar of margin on lumber and sawed ties. $21 260 For other improvements and equipment ^ ^ g 63 Q4 =$0. 178 per dollar of margin on the entire cut of all products. Depreciation on lumber, per thousand feet $1. 66 Depreciation on sawed ties, per piece 065 Depreciation on hewn ties, per piece 047 Depreciation on props, per piece 024 Adding depreciation to the operating costs, the total overturn for the respective products is: Hewn ties $0. 351 Sawed ties 348 Props 188 Lumber 11. 604 Twenty- five per cent of the overturn is believed to be a fair profit margin for hewn and sawed ties. These are contracted in advance in large quantities, are always in demand, and involve no market risk. The operation requires, however, an excep- tional amount of working capital and is subject to more than the ordinary logging risk on account of the possible shortage of water, delays in fluming, and hanging up 68 APPRAISING STUMPAGE ON NATIONAL FORESTS. of part of the year's cut. A profit margin of 35 per cent is deemed equitable on props and lumber. The market for this material ia uncertain, and much of it must often be carried in the yards for considerable periods before it can be sold. The stumpage prices are thus fixed as follows: Product. Overturn. Profit. Selling price. Stumpage rate. $0,351 .348 .188 11.604 $0. 08775 .087 .0658 4. 0614 $0.57 .60 .30 18.00 $0 13 The price of sawed ties is equivalent, at the ratio of 32 per thousand feet, to a log scale rate per thousand board feet of $5.31. Since both sawed ties and lumber are manufactured from logs too large for hewing, their respective prices may be averaged in the ratio of 54 to 7 (per cents in the total cut) at $4.97. The large amount of working capital required on account of the limited fluming sea- son adapts this chance to appraisal by the investment method more logically than by the overturn method. The need for a large working fund as well as considerable money for improvements makes the enterprise primarily capitalistic in nature. The requirements of the investment method would be met by a return of 20 per cent upon the average profit-bearing investment of $192,420. Twenty per cent is regarded as an equitable margin under the risks indicated. In estimating the working capital for this operation, it is assumed that the average date of delivering the year's cut at the railroad is August 1, the middle of the fluming season; and that wages are paid on the 15th of the month following that in which the work was done. The working funds required for logging must cover cash payments for stumpage, labor, horse feed, maintenance, and general expense throughout the cutting, skidding, and hauling seasons and carry these payments until the following August 1. The various expenditures may be tabulated by dates as follows, the number of months elapsing between each payment and the date of delivery being indicated: Date. Stumpage. Labor. Horse teed. Mainte- nance. General ex- pense. Total. Months carried. $5,000 $5,000.00 1,107.50 11,441.27 8, 625. 79 5,000.00 8, 188. 29 19, 125. 79 7, 125. 79 5,000.00 8,375.11 8,312.61 13,312.61 4,075.84 545. 00 545.00 14 15. . . $500 100 825 $607. 50 545.00 545. 00 13J 12* 1!' July 15 5,000 $4,299.27 5, 755. 79 $1,500 1,500 Aug. 15 Sept. 1 . . 5,000 15 5, 755. 79 5, 755. 79 5,755.79 1,500 7,500 325 325 825 607. 50 545. 00 545.00 10* 91 s 1 Oct. 15 5,000 Nov. 15. . . Dec. 1 5,000 15... . 7,542.61 7, 542. 61 7,542.61 3, 243. 34 225 225 225 225 607. 50 545. 00 545. 00 607. 50 545.00 545.00 7i i 41 31 21 Jan. 15 Feb. 15 5,000 Mar. 15 Apr. 15. . . May 15 . . . . Total 30,000 53, 193. 60 12,000 3,800 6,790.00 105, 783. 60 The labor bills paid on July 15 cover felling, bucking, hewing, etc., and brush dis- posal and cutting defective trees for one month's cut of each product; that is, for one- eighth of the annual cut. The wages paid in August, September, October, and No- vember cover the same items together with labor charges for one month's skidding. In the payments for December, January, and February, labor charges for hauling are included. The March payroll covers only the last month's hauling and skidding. APPRAISING STUMPAGE ON NATIONAL FOBESTS. 69 The'cost of horse feed averages $1,500 per month for the eight months while skidding and hauling are in progress. It is necessary, however, to tote in the winter's supply in September; hence feed for five months is charged to the October expenditures. The expenditures for loose feed are included in the skidding and lumbering costs given on page 66. The payments for maintenance cover the salaries of a blacksmith at $75 per month, two assistant blacksmiths at $50 per month, and a harness maker at $50 per month. These men are employed for eight months, July 15 to March 15. Material for the blacksmith and harness shops costing $1,000 are also included in the payments for maintenance, one-half on August 15 and one-half on November 15; together with an expenditure of $1,000 for keeping the flume in repair. Five hundred dollars of the latter item are paid on June 15, the rest in installments of $100 during each of the suc- ceeding five months. Under "general expense" entries are charged the salaries of a foreman at $200 per month, a bookkeeper at the headquarters camp at $100, and a general agent and bookkeeper at the railroad yards at $125. These are year-round men paid off on the 15th of each month. Other items charged to general expense are the premium on a $20,000 bond, amounting to $250 annually paid in quarterly installments, beginning June 15; rent for the office at the yards, at $20 per month; and $100 per month to cover miscellaneous items such as Belling lumber and props, check scaling, etc. By multiplying the expenditure in each month by the number of months until date of delivery and dividing the sum of these products by 12, the average working capital required for logging operations is found to be $80,176.53. Expenditures for milling, fluming, and driving are incurred during the five months' season from May 15 to October 15; and average as of August 1, the average date of delivering the year's cut at the yards. On August 1, thereforo, it can be fairly assumed that all milling, fluming, and driving charges have been paid, in addition to the stumpage and logging costs enumerated above. That is, an amount of working capital equivalent to the total annual expenditure for stumpage and operating costs is on that date invested in the year's cut. This amount is readily obtained for each product from the operating costs given on page 66 and the stumpage prices on page 67 as follows: For hewn ties $44, 997. 12 For sawed ties 92, 897. 28 For props 30, 816. 00 For lumber 10, 310. 16 Both kinds of railroad ties will be sold and paid for within an average of one month after delivery. It is not probable that payment for props and lumber, however, will be received in less than an average of three months A yearly fund of working capital equivalent to one-twelfth of the total coBt of the railroad ties and one-fourth that of the other products is therefore needed to carry yard stock from date of delivery to date of sale. This amount is $21,772.74 which, added to the working capital UBed in logging, makes the total for the operation, $101,949.77. APPENDIX. FORM FOR SUMMARIZING THE ESSENTIAL DATA IN STUMPAGE APPRAISALS. The use of the following summary in outline form is desirable to present concisely the more essential features of the appraisal. This summary Bhould be prefixed to all reports submitted to the Forester: 1. The sale area. (1) District, Forest, main watershed or other descriptive location, designation of sale or chance. (2) Area covered by appraisal (acres). (3) Distance from chance to common carrier, or local market, by proposed logging road, flume, drivable stream, etc. (method of transportation and miles). (4) The stand: a. Total estimated cut (thousand feet). b. Name and per cent of each species. c. Kind and per cent of each product to be cut (saw logs, ties, mine props, etc.). 2. Investments. (1) Name main units (railroad or flume with length, sawmill with capacity, etc.). (2^ Average fixed investment. (Profit-bearing.) (3) Annual depreciation. (4) Average working capital. (5) Total average investment in operation. 3. Cost of production (per thousand feet log scale, piece or other unit; separately by species or products as required). (1) Depreciation. (2) Logging. (3) Manufacture. (4) General Expense. (5) Forest Service requirements. (6) Total. 4. Profit margin. (1) Estimate of risk (low, average, high). (2) Method used (investment, overturn, pay for personal services). (3) Rate. (4) Profit in dollars and cents (per thousand feet log scale or other unit of output). 5. Selling price (per thousand feet log scale, piece, or other unit; separately by species and products as required). 6. Recommended stumpage price (per thousand feet log scale, piece, or other unit; separately by species and products as required). 7. Important contract terms. (1) Cutting period. (2) Construction period. (3) Other terms which materially influence the appraisal. 70 O LIBRARY OF CONGRESS