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A comment on the cost of capital for investments with non-homogeneous components

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  • Jorge Navas Rodenes
  • Jesus Marin Solano

    (Universitat de Barcelona)

Abstract

In 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 Info

Paper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 146.

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Length: 10 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bar:bedcje:2006146

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Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.
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  1. Ruane, Frances P., 1982. "Corporate income tax, investment grants, and the cost of capital," Journal of Public Economics, Elsevier, Elsevier, vol. 17(1), pages 103-109, February.
  2. Kort, Peter M., 1988. "Optimal dynamic investment policy under financial restrictions and adjustment costs," European Economic Review, Elsevier, Elsevier, vol. 32(9), pages 1769-1776, November.
  3. Hassett, Kevin A. & Hubbard, R. Glenn, 2002. "Tax policy and business investment," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 20, pages 1293-1343 Elsevier.
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