Programming for the Tax Interactivities of Capital Investment and Financing Decisions

Abstract

Capital investment decisions need to take account of the relevant cash flows which are incremental to each project. The tax effects of a project are clearly an example of relevant cash flows. However, the tax effects of one project may impact upon the tax effects of another. For example, one project may result in significant capital expenditure, which could change the firm's basic profits such that a different marginal tax rate may be applied. The marginal tax rate of a second project depends upon whether the first project is accepted. Thus capital investment decisions need to be made considering projects jointly. The importance of this has been highlighted by a number of authors, including Fawthrop (1971), Grundy and Burns (1979) and Rickwood and Groves (1979). Simulation models have been built by Hodgkinson (1989), whereas optimisation models have been developed by Berry and Dyson (1979), Pointon (1982) and Ashford, Berry and Dyson (1986).