Excerpt from Inflation, Uncertainty, and Investment This paper considers the effects of inflation, interest rates and uncertainty on a firm's choice between assets of different lives. We first focus on the impact of inflation and interest rates on the value of nominal depreciation tax shields. We find that the effect of an inflation-induced increase in nominal interest rates on the breakeven prices of short and long-lived assets is not monotonic. At low initial nominal interest rates, an increase in the interest rate ...
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Excerpt from Inflation, Uncertainty, and Investment This paper considers the effects of inflation, interest rates and uncertainty on a firm's choice between assets of different lives. We first focus on the impact of inflation and interest rates on the value of nominal depreciation tax shields. We find that the effect of an inflation-induced increase in nominal interest rates on the breakeven prices of short and long-lived assets is not monotonic. At low initial nominal interest rates, an increase in the interest rate increases the maximum price that the firm is willing to pay for the short-lived asset relative to the long-lived asset. At some point, the effect reverses so that a further increase in interest rates reduces the maximum or breakeven price of the short-lived asset. Simulation results indicate that these changes occur at rates that are within the range of recent u.s. Experience, 52 to 202. Second, we focus on the impact of relative price uncertainty on the decision to choose a short or long-lived asset. We find that uncertainty increases the breakeven price of shorter-lived assets: in other words, given uncertainty about future relative prices, short-lived assets will be chosen over long - lived assets at higher prices than under certainty. The change in the breakdown price occurs because both long and short-lived assets have a valuable switching option. The Option is more valuable for short-lived assets because the opportunity to switch occurs sooner. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at ... This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully; any imperfections that remain are intentionally left to preserve the state of such historical works.
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