A comment on the cost of capital for investments with non-homogeneous components

Jorge Navas Rodenes and Jesus Marin-Solano

No 146, Working Papers in Economics from Universitat de Barcelona. Espai de Recerca en Economia

Abstract: 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.

JEL-codes: C61 D92 H32 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2006
New Economics Papers: this item is included in nep-pbe
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