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Capital Budgeting with Taxes under Uncertainty and Irreversibility / Investitionsplanung mit Steuern bei Unsicherheit und Irreversibilität

Niemann Rainer () and Sureth Caren ()
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Niemann Rainer: University of Tübingen, Department of Economics, Mohlstr. 36, D-72074 Tübingen, Germany
Sureth Caren: University of Paderborn, Department of Business Administration and Economics, Warburger Str. 100, D-33098 Paderborn, Germany

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2005, vol. 225, issue 1, 77-95

Abstract: This article investigates the derivation of post-tax investment rules and neutral tax systems under risk neutrality and risk aversion for irreversible investment projects. Integrating taxes into real option theory, it can be shown that the possible approaches dynamic programming and contingent claims analysis yield identical investment rules under risk neutrality. Under risk aversion, contingent claims analysis requires a sophisticated capital market model which is still missing. In contrast, dynamic programming as an individual approach permits explicit investment rules at least in the pre-tax case. After taxes, both approaches fail to reach general solutions. Nevertheless, we succeed in proving neutral tax systems for the first time under risk aversion in the real option context using dynamic programming.

Keywords: Tax neutrality; investment decisions; uncertainty; real options; risk aversion; Entscheidungsneutralität der Besteuerung; Investitionsentscheidungen; Unsicherheit; Realoptionen; Risikoaversion (search for similar items in EconPapers)
Date: 2005
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