Abstract
Recently Brusov et al. have developed innovative investment models that are very close to investment practice. Investment models with frequent payments of tax on profit and of interest on debt at the ends of periods have been considered. However, in practice, payments of tax on profit as well as of interest on debt could be made in advance. In the current paper, we developed, for the first time, innovative investment models with frequent advance payments of tax on profit and of interest on debt and studied the impact of these types of payments on investment project effectiveness. Numerical calculations carried out for four innovative investment models (without split flows) showed that, in the case of advance frequent payments of income tax and interest on debt, all the results related to the effect of the number of payments of income tax and interest on debt on the investment projects’ effectiveness were opposite to the results in the case of payments at the end of the periods obtained by Brusov et al. in the previous article. Thus, this means that the method of payments of tax on profit and of interest on debt (in advance or at the ends of periods) changes drastically the effect of the number of payments of income tax and interest on debt on the investment effectiveness. The verification developed by us for the new models with frequent advance payments of tax on income helps create a comprehensive system of correct valuation of the investments’ effectiveness for two schemes for payments of income tax (in advance or at the ends of periods). The obtained results help the tax regulator (Finance Ministry) understand the influence of the frequency of payments of tax on income and the credit regulator (Central Bank) understand the influence of the frequency of payments of interest on debt on the investment projects’ effectiveness. This allows them to modify and improve tax legislation and credit policy, respectively.
Highlights
[1], we developed innovative investment models that are very close to investment practice
The dependence of the weighted average cost of capital, WACC, which serves as discount rates on level of leverage, L, for different numbers of tax on profit payments per period, was studied
There are practically no investment models that take into account the conditions of the real functioning of investment projects
Summary
[1], we developed innovative investment models that are very close to investment practice. Investment models with frequent payments of tax on profit and of interest on debt at the ends of periods have been considered. In practice, payments of tax on profit and of interest on debt could be made in advance. We developed innovative investment models with frequent advance payments of tax on profit and of interest on debt and studied the impact of these types of payments on investment project effectiveness. We add a review of a few recent papers devoted to frequent payments of income tax as well as advance payments of income tax [2,3]. (where an analysis of papers [4,5,6,7,8,9,10,11,12] was performed)
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