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Optimal Asset Abandonment and Replacement: Tax and Inflation Considerations

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  • Chen, Son-Nan

Abstract

The tax and inflation effects on the abandonment and replacement policies are examined for capital assets. The tax effect is shown to defer abandonment for some classes of assets while the asset duration is shortened for others depending on the characteristic of the marginal rates of return of extending asset life. Moreover, inflation may increase or decrease the asset duration depending on the rates of inflation growth of asset nominal cash flows and abandonment value and depending on the relaitve benefit of asset abandonment. In additon, the Fisher hypothesis of constant real returns relative to anticipated inflation is also examined in the case of asset abandonment and replacement. The results derived for a single cycle of replacement carry over to the replacement policy in an infinite cycle of replacement. Copyright 1991 by MIT Press.

Suggested Citation

  • Chen, Son-Nan, 1991. "Optimal Asset Abandonment and Replacement: Tax and Inflation Considerations," The Financial Review, Eastern Finance Association, vol. 26(2), pages 157-177, May.
    • Handle: RePEc:bla:finrev:v:26:y:1991:i:2:p:157-77
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    Cited by:

    1. B. Anthony Billings & Sergei N. Glazunov, 2004. "The Effect of Taxes on the Retirement of Machinery and Equipment," Public Finance Review, , vol. 32(3), pages 235-268, May.

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