Tax-Adjusted Replacement Models

The 1984 UK Finance Act introduced changes in tax legislation with consequences for both capital and revenue expenditure on plant. The one- and two-cycle rent models for capital equipment replacement and the infinite-cycle discounted-cost model are extended here to incorporate the new tax features. A specific replacement problem is used as the basis of an analyis of the sensitivity of the optimal replacement period to parameters. Whilst all these models are consistently insensitive to the new tax legislation, there is no consistency across models with respect to which parameters dominate choice of optimal replacement period.