Accounting for Semi-Permanence
28 Pages Posted: 6 Jun 2014
Date Written: June 4, 2014
For much of its life, a tangible capital good is irreversibly committed to an investment projects. The paper examines what it means for capital to be sunk, or to be semi-permanently invested. Value sunk is measured using the options available to managers of a project. External prices may or may not be relevant to an enterprise. Fixing the value of options is the only role for external prices of the assets. Moreover, marginal prices are not used in valuing sunk capital. The choice of real or nominal prices is considered in terms of measured benefits, costs, wealth and income of a project.
Keywords: capital value, irreversible investment, sunk capital, options
JEL Classification: D24, D92
Suggested Citation: Suggested Citation