The Differential Impact of Taxes on Investment Decisions of New and Established Businesses

Abstract

This paper demonstrates that certain provisions of the tax code may have a differential impact on the investment decisions of new and established firms. Using net present value as the investment criterion, it is shown that under conditions of certainty a project may have different net present values for new and established firms. Under conditions of uncertainty the differences in project net present values may be even more pronounced. It is also demonstrated that, contrary to the conventional wisdom, it may be advantageous for certain firms to use straightline depreciation rather than accelerated depreciation for tax purposes.