Author(s)

Vince Hooper¹, John Pointon²

¹Xiamen University Malaysia, Kuala Lumpur, Malaysia.
²University of Plymouth, Plymouth, UK.

The purpose of this paper is to develop a valuation model for projects, explicitly taking into account the combined effects of taxation and the risk of obsolescence. In the modelling process it is assumed that a project’s pre-tax net operating cash flows follow a geometric Brownian motion with a declining trend parameter. Obsolescence risk is introduced by means of a Poisson jump. The risk effects on the tax on flows and tax savings through tax depreciation are then evaluated separately. Through sensitivity analysis it is demonstrated that the expected time to obsolescence can have a more dramatic effect upon valuation than moderate changes in tax depreciation rates and corporate tax rates. This is the first paper ever that realistically models obsolescence risk within the context of taxation. The model can be applied to a wide variety of industrial sectors such as oil & gas; shipping; real estate; information technology; telecommunications and new energy.

Capital Budgeting, Dynamic Programming, Oil and Gas, Shipping, New Energy, Telecommunications, Product Life Cycle, Tax, Uncertainty

Hooper, V. and Pointon, J. (2019) Modelling Obsolescence Risk and Taxation in Project Valuation. Journal of Mathematical Finance, 9, 286-300. doi: 10.4236/jmf.2019.93017.