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The Relationship between Investment and Asset Life

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  • Prezas, Alexandros P

Abstract

Optimal investment in an asset and its optimal life are shown to be interrelated through operating cash flows and depreciation allowance, as well as book and salvage values upon termination; thus they are determined simultaneously. Asset life and investment are positively (negatively) related if delaying abandonment increases (reduces) the benefit of marginal investment. If investment and asset life are positively related, increased debt financing or allowable depreciation positively impact on them; otherwise, the impact is ambiguous in sign. Further, investment in a zero salvage value asset and its holding period increase with depreciation or leverage when (1) its cash flows form an annuity or (2) the firm employing it is tax-exempt. Copyright 1994 by MIT Press.

Suggested Citation

  • Prezas, Alexandros P, 1994. "The Relationship between Investment and Asset Life," The Financial Review, Eastern Finance Association, vol. 29(4), pages 539-555, November.
    • Handle: RePEc:bla:finrev:v:29:y:1994:i:4:p:539-55
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    Cited by:

    1. Raineri, Ricardo, 2010. "Asset life and pricing the use of electricity transmission infrastructure in Chile," Energy Policy, Elsevier, vol. 38(1), pages 30-41, January.

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