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Distortions in Capital Asset Acquisition and Financing under Cost-Based Reimbursement

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  • Trigeorgis, Lenos
  • Brindamour, Paul

Abstract

The paper examines distortions in the acquisition and financing of capital assets under a cost-based reimbursement system within an adjusted present value (APV) framework. For a not-for-profit (NFP) vendor the acquisition, when internally financed, is typically a negative-NPV investment. But when financed through debt with reimbursed interest payments, the combined decision becomes worthwhile (positive APV). This can explain why NFP firms resort to substantial debt financing even though internal funds may be available and any tax benefits are absent. Policy implications and suggestions for improving unintended inequities in the system are also discussed. Copyright 1993 by MIT Press.

Suggested Citation

  • Trigeorgis, Lenos & Brindamour, Paul, 1993. "Distortions in Capital Asset Acquisition and Financing under Cost-Based Reimbursement," The Financial Review, Eastern Finance Association, vol. 28(3), pages 417-429, August.
    • Handle: RePEc:bla:finrev:v:28:y:1993:i:3:p:417-29
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