Leverage, uncertainty and investment decisions

We explore the role of taxes on stimulating investment decisions for levered firms under cash flows and investment costs uncertainty using the adjusted present value-based real options approach developed by Myers and Read (2019). We extend their work to consider combined tax credits and uncertain investment costs. We then run a numerical analysis to quantify the impact of uncertainty, corporate tax and investment tax credit in stimulating investments. •Investment decisions should take into the correlation of investment costs with cash flows.•Policy-makers should consider the use of investment tax credit in stimulating investments.•High cash flow volatility combined with low investment cost volatility produces the worst outcome in terms of critical value irrespective of their correlation.