CAPITAL INVESTMENT UNDER UNCERTAINTY: CALCULATING THE PRESENT VALUE OF THE DEPRECIATION TAX SHIELD WHEN THE TAX RATE IS STOCHASTIC

The assumption of a positive marginal tax rate in each period over the life of an investment project does not properly characterize the tax position of a significant number of firms. The paper develops a lower bound on the present value of the tax shield from declining balance depreciation given a r...

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Bibliographic Details
Published in:The Engineering economist 1996, Vol.41 (3), p.243-251
Main Authors: HURLEY, W.J., JOHNSON, L.D.
Format: Article
Language:English
Subjects:
Annual reports
Business cycles
Capital budgeting
Capital expenditures
Capital investments
Cash flow forecasting
Discounted cash flow
Economic life
Economic models
Income taxes
Investments
Present value
Random variables
Salvage value
Studies
Tax basis
Tax rates
Taxable income
Uncertainty
Useful life
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Summary:The assumption of a positive marginal tax rate in each period over the life of an investment project does not properly characterize the tax position of a significant number of firms. The paper develops a lower bound on the present value of the tax shield from declining balance depreciation given a reasonable assumption about the stochastic nature of the period by period marginal tax rate. It turns out that the standard textbook formula is a reasonably good approximation of the true present value of the tax shield since our lower bound is very close to the textbook formula.
ISSN:0013-791X
1547-2701
DOI:10.1080/00137919608967491