Business Investment and Economic Depreciation
Journal of Accounting, Finance, and Economics 5(1), 2015, 84-100
30 Pages Posted: 12 Sep 2007 Last revised: 25 May 2017
Date Written: October 1, 2014
Abstract
We show economic depreciation decreases value maximizing investment hurdle rates and encourages both maintenance and growth. Economic depreciation without maintenance decreases the upside potential of future growth opportunities upon stochastically improved profitability. Managers forestall this decrease with maintenance and expansion investments even with modest current returns. While economic depreciation encourages maintenance and growth for existing businesses, it impedes new venture start in the first instance.
Keywords: Depreciation, Corporate Investment, Maintenance, Real Options
JEL Classification: D92, G31
Suggested Citation: Suggested Citation