The Cost-of-Capital in Economic Studies

The basic relations combined with the effect of salvage and multiple depreciation can then be expressed as Return Basic (pseudo value)=(i) Depreciation Basic (pseudo value)= (1/sn) Salvage=¿(1¿k) Income tax Basic= (t/1-t)(1-bB/i)(i+1/sn-d)) Salvage=+(1)X (1¿k). The quantities below the basic value in each case are the additive corrections. The use of the correct rather than 1/n in the computation of income tax requirements is not a trivial distinction. The revenue requirements for income tax may differ by several percentage points for different methods of depreciation. The calculation of the value of 1/sn for several methods is covered in Part II. An alternate treatment of invested capital recovered through depreciation is to say that it somehow remains associated with the original plant; but it is reinvested in other plants, and part of the return from other plants is credited to the original plant. This is the treatment used in most previous papers, and is the source of much confusion. Mathematically this approach is precisely equivalent to that used by the author and, correctly applied, will produce the same results. Correctly accounting for all the money is more difficult and fruitless discussions arise about the proper return rate to use on other plants, and the total cost of money.