An Extended Asset Replacement Model: Impacts of Taxation, Inflation and Technological Advancement on Optimal Asset Duration

The article develops an extended way to determine asset replacement strategies that takes inflation, taxation and technological advancement into account simultaneously. The model, which modifies classical asset replacement models developed by Perrin (1972) and Smith (1990), implies that the inflation effects on replacement decisions are generally positive, except in the case of short assets that are not fully written off at the end of their life where ambiguity exists. Tax effects on asset optimal lives are also analysed in a context of zero and positive inflation. Results show that a tax cut generally incentivizes firms to increase the frequency of replacement, and that this incentive will become stronger with higher inflation and longer time to replacement. Technological progress is found to play an insignificant role in the replacement decision after the tax cut/rise.

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