A comment on the cost of capital for investments with non-homogeneous components
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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- Kort, P.M., 1985.
"Optimal dynamic investment policy under financial restrictions and adjustment costs,"
FEW 195, Tilburg University, School of Economics and Management.
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- 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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