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Distortions Imposed by Inflation on Historical-Cost Depreciation

Published online by Cambridge University Press:  10 May 2017

Boris E. Bravo-Ureta
Boris E. Bravo-Ureta*
Affiliation:
The Department of Agricultural Economics and Rural Sociology, University of Connecticut, Storrs, Connecticut
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Abstract

The use of historical-cost depreciation in periods of persistent inflation decreases the present value of depreciation deductions, thus understating the true economic cost of capital and increasing the real after-tax rate of return required by potential investors. Efforts to correct these problems by adopting depreciation methods that allow for artificially short recovery periods or accelerated rates do not provide an adequate solution. Distortions imposed by inflation on historical-cost depreciation can be adequately corrected by indexing the historical-cost basis.

Type
Contributed Papers
Information
Journal of the Northeastern Agricultural Economics Council , Volume 12 , Issue 1 , Spring 1983 , pp. 91 - 98
Copyright
Copyright © Northeastern Agricultural and Resource Economics Association 

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Footnotes

The author gratefully acknowledges the review and comments of George Ecker, Marvin Kottke and Stanley Seaver.

Scientific Contribution No. 964, Storrs Agricultural Experiment Station, The University of Connecticut, Storrs, CT 06268.

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