The Effect of Corporate Tax on Investment Historic and Replacement Cost Depreciation
The prevalent assertion that replacement valued depreciation deductions are superior to historic valued deductions is critically examined in this paper. The neoclassical theory of the firm with constraints on debt issue provides the analytic foundations for examining the investment decision of the corporation. The effect of replacement and historic valued deductions on the investment decision is then derived. It is shown that historic valuation of depreciation is at least as good as replacement valuation and, under reasonable circumstances, actually superior.
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