Taxes and Investment Decisions

• This article deals with the effects of a proportional income tax with given depreciation rules on the ranking of different investment projects. The analysis, which presupposes a perfect capital market and the use of present values as a preference criterion in the selection of projects, is performed both for the case where the discount rate is identical before and after tax and for the case where the discount rate is reduced by taxation. Where the discount rate is identical before and after tax, taxation will affect the ranking of investment projects provided there is a difference in the acquisition costs of the investments. Differences in life span between the projects will be decisive only if it is assumed that there is a covariation between life span and length of the depreciation period. Where the discount rate is reduced by taxation, investment projects with a longer life span will be favored at the expense of shorter-lived projects, provided the projects may be written off at the same rate. On the other hand, the ranking of projects involving initial investments of varying magnitude is not affected in a clear-cut way. The article concludes by demonstrating a method of varying the tax-based depreciation between different investment projects so that the ranking is unaffected by allowance for taxation.

Ämnesord

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

Publikations- och innehållstyp

ref (ämneskategori)

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