The Analytical Derivation and Empirical Test of a Tax-Adjusted Fundamental Value Model

A tax-adjusted fundamental value (FV) model was developed and tested that incorporated information about differential tax benefits between new and owned used assets and specified the effects of these differences on discounted after-tax cash flows. The results indicate that the accuracy of the FV point estimates of economic value is reasonably robust across 3 alternative capacity depreciation schedules. In contrast, the historical cost (HC) point estimates are at their highest level of accuracy when generated by a straight-line pattern, while the current cost (CC) point estimates are most accurate when generated by a double-declining balance pattern. The accuracy of the HC and CC models depends on the choice of capacity depreciation schedules.