(5) PV(t)oad = (1-t) ∞Aoe-{α+r(1-t)}u du + t ∫σCe-r(1-t)u du
0 0
Ω
+ t ∫ (C∕Γ)e-r(1-t)u du
0
σ{1-e-r(1-t)} 1e π1iω
α
———]
α+r(1-t)
= PV0 + tC[————— + —————
r(1-t) r(1-t)Γ
In the context of free depreciation the total amount of investment cost can be written off in
the first year. When employing this depreciation method, the present value of asset at year
0 is
(6) PV(t)0fd = (1-t)∞∫ A0e-{ α +r(1-t)}u du + t 1∫ Ce-r(1-t)u du
0 0
1-e-r(1-t) α
= PV0 + tC{————— - —————} .
r(1-t) α+r(1-t)
Furthermore a certain percentage share of investment cost referred to as investment tax
allowance can be deducted from gross profit in the first year when calculating the tax base.
Investment tax allowance is also used in combination with straight-line depreciation.
Unlike the case with accelerated depreciation, the total tax-life of a capital good remains
unchanged. As a consequence, this type of tax incentive provides possibilities of
depreciating the value, which is significantly higher than the original investment cost of a
capital good.
With investment tax allowance the present value of asset at year 0 is
∞ 1 Γ
(7) PVoita = (1-t) ∫ Aoe-{α+r(1-t)}u du + t ∫ (βC)e-r(1-t)u du + t ∫ (C∕Γ)e-r(1-t)u du
0 0 0
β{1-e-r(1-t)} 1-e-r(1-t)Γ α
= PV0 + tC[ ————— + ————— - ——————] ,
r(1-t) r(1-t) Γ α+r(1-t)
where β indicates the rate of investment tax allowance (0 < β < 1).