EFFECTS OF INFLATION ON AFTER-TAX PRESENT VALUES WHERE COSTS ARE CAPITALIZED
Bullard, S.H., and W.D. Klemperer. 1986. Inflation and after-tax present values where business costs are capitalized. Mid-South Bus. J. 6(2):11-13.
Business investments often span periods of time with significant inflation. If taxes are not considered, inflation can be ignored in computing the present value of future net income. Inflation should not be ignored, however, in after-tax analyses of rates of return or net present values of potential investments. Inflation affects the present value of business costs which are capitalized for tax purposes, and the influence must be considered for present value calculations to be accurate.
After-tax analyses must include the tax savings which result from being able to deduct business-related costs from taxable income. Costs which are expensed, of course, are deducted entirely in the tax year in which they are incurred. Capitalized costs, however, are deducted later through depreciation, depletion, or as in the case of land, simply by deducting initial costs when the land is sold. After-tax present values where investment or business costs are capitalized are simply present values after taxes have been accounted for, where all or a portion of the costs are capitalized for tax purposes. In such analyses, present values are decreased by inflation. After reviewing the most relevant previous work, the nature and potential degree of this decrease and its relationship with investment period length were examined.