Abstract
AbstractIn this paper we evaluate an indivisible investment project that is carried out in a corporation under very simple premises. In particular, we discuss a one-period model with certainty, the pure domestic case and proportional tax rates. Surprisingly, the decision problem turns out to be rather complex if one has to make allowance for different taxation of the corporation and its owner. Altogether there are more than 10 cases that have to be distinguished if the firm’s managers want to make a correct decision, depending on the relation of personal and corporate tax rates.
Highlights
For a long time business studies have dealt with the evaluation of taxable investments under the assumption of certainty
It is evaluated whether the investment is to be preferred over its default alternative, measured by the financial resources which are available at the end of the planning period
We have presented the evaluation of an indivisible investment carried out in a corporation
Summary
For a long time business studies have dealt with the evaluation of taxable investments under the assumption of certainty. The taxation consequences of different ways to finance an investment are rarely considered when valuing investments.1 This is especially important if the investment is carried out by a corporation subject to tax. Regarding certainty it is assumed that the investor owns a corporation subject to tax and that a shareholder relief system is applied.. Regarding certainty it is assumed that the investor owns a corporation subject to tax and that a shareholder relief system is applied.6 It is evaluated whether the investment is to be preferred over its default alternative, measured by the financial resources which are available at the end of the planning period (terminal value). The function of the model is rather to evaluate tax effects on the investor’s objective (here, the terminal value) in an extremely simplified and stylized decision situation.
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