A comment on the cost of capital for investments with non-homogeneous components
AbstractIn this paper, the expression for the cost of capital is derived when net and replacement investments exhibit differences in their effective prices due to a different fiscal treatment. It is shown that, contrary to previous results in the literature, the cost of capital should be constructed under an opportunity cost criterion rather than a historical one. This result has some important economic consequences, since the optimizing firm will take into account not only the effective price for the new investments but also consider the opportunity cost of replacing them.
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Bibliographic InfoPaper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 146.
Length: 10 pages
Date of creation: 2006
Date of revision:
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Postal: Espai de Recerca en Economia, Facultat de CiÃ¨ncies EconÃ²miques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.
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Find related papers by JEL classification:
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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- Kort, P.M., 1985.
"Optimal dynamic investment policy under financial restrictions and adjustment costs,"
195, Tilburg University, Faculty of Economics and Business Administration.
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- Kort, Peter, 1988. "Optimal dynamic investment policy under financial restrictions and adjustment costs," Open Access publications from Tilburg University urn:nbn:nl:ui:12-153450, Tilburg University.
- Hassett, Kevin A. & Hubbard, R. Glenn, 2002. "Tax policy and business investment," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 20, pages 1293-1343 Elsevier.
- Ruane, Frances P., 1982. "Corporate income tax, investment grants, and the cost of capital," Journal of Public Economics, Elsevier, vol. 17(1), pages 103-109, February.
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