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, Peter M., 1988.
"Optimal dynamic investment policy under financial restrictions and adjustment costs,"
European Economic Review,
Elsevier, vol. 32(9), pages 1769-1776, November.
- Kort, Peter, 1988. "Optimal dynamic investment policy under financial restrictions and adjustment costs," Other publications TiSEM 38929238-c28e-4196-9b5b-6, Tilburg University, School of Economics and Management.
- Kort, P.M., 1985. "Optimal dynamic investment policy under financial restrictions and adjustment costs," Research Memorandum FEW 195, Tilburg University, School of Economics and Management.
- 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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