Doenges, R. C.; Hamman, W. D.
A icle
Capi al in es men incen i es in an in la iona y
en i onmen
Sou h A ican Jou nal o Business Managemen
P o ided in Coope a ion wi h:
Uni e si y o S ellenbosch Business School (USB), Bell ille, Sou h A ica
Sugges ed Ci a ion: Doenges, R. C.; Hamman, W. D. (1983) : Capi al in es men incen i es in an
in la iona y en i onmen , Sou h A ican Jou nal o Business Managemen , ISSN 2078-5976, A ican
Online Scien i ic In o ma ion Sys ems (AOSIS), Cape Town, Vol. 14, Iss. 3, pp. 89-95,
h ps://doi.o g/10.4102/sajbm. 14i3.1150
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/217832
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Capi al
in es men
incen i es
in
an
in la iona y
en i onmen
The
Sou h A ican
example
R.C.
Doenges
and
W.0.
Hamman
G adua e School
o
Business, Uni e si y o S ellenbosch
The
a en ion in his pape has been di ec ed a he p oblem
whe he
he 30% machine y in es men allowance was su i-
cien ly high enough seen agains he backg ound
o
he
p e-
sen
double digi in la ion. The au ho s a i ed a he in-
e es ing conclusion ha he sho all a eplacemen is
caused
by
he ac ha dep ecia ion o iscal pu poses is
based
upon his o ical cos and no on eplacemen cos .
The
in es men allowance illed his gap and i was concluded ha
his
allowance was high enough in he majo i y
o
cases.
S.
A .
Bus.
Mgm .
1983,
14:
89-95
In
hie die e e aa is gepoog om e bepaal
o
die 30% masjine-
ie
beleggings oelae hoog genoeg is gesien een die ag e -
g ond
an
die huidige dubbelsy e in lasie. Daa wo d o 'n in-
e essan e slo som gekom, naamlik da die eko wa by
e •
anglng
on s aan, e oo saak wo d deu die ei da
dep esiasie
op
his o iese kosp ys
en
nie op e angingswaa de
gebasee
wo d nie. Die beleggings oelae ul dus hie die
ga-
ping
aan
en
daa wo d be ind da die 30% beleggings oelaag
in
die
mees e ge alle oldoende is.
S.-A .
Tydsk .
Bed y sl.
1983,
14:
89-95
This
pape was p esen ed
a
he Annual mee ing
o
he Finan-
cial
Managemen Associa ion in San F ancisco, Oc obe
14,
1982
P o .
R.C.
Doenges,
P o esso
in
Finance, Uni e si y
o
Texas a Aus in and
isi ing
p o esso ,
G adua e School
o
Business, S ellenbosch
P o .
W.D.
Hamman,•
P o esso
in
Finance, G adua e School
o
Business,
Uni e si y
o S ellenbosch, P.O. Box
610,
Bell ille
7S30
Republic
o Sou h A ica
• o
whom
co espondence should
be
add essed
Accep ed
June
1983
The impac
o
inc eases
in
p ice
le els,
commonly
e e ed
o
as
in la ion,
on
he
capi al
in es men
decisions
o
i ms
has
a ac ed a en ion
o
o e
a
decade.
The
na u e
o
his
impac 1•2
has
been
examined;
me hods
o
making
capi al
budge ing
decisions
unde in la ion
ha e
been
de el-
oped;3·4·5
he
e ec i eness
o
ede al
ax
policies
in
o se -
ing
he impac
has
been
analysed
6•
7 and
policy
p oposals
designed
o
o se
he
impac
o
in la ion
on
in es men
deci-
sions
ha e
been
made.
8
O e
he
same
ime
pe iod he
Republic
o
Sou h A ica
has
expe ienced
bo h a
high
a e o in la ion and a
ela i ely
high
eal
g ow h a e. The Sou h A ican Consume P ice
Index
has
shown
double
digi
in la ion a es
since
1973;
9
he compound a e
o
he
decade
1971
-
1980
is
app oxi-
ma ely
13
0/o
wi h
ecen
(
1982)
es ima es
o
a cu en
160/o
a e.
O e
he
same
1971-80
pe iod,
howe e ,
G oss
Domes ic
P oduc
has
a e aged
a
eal
g ow h a e
o
3,6 /
pe annum.
In
such
a si ua ion
i
would
be
expec ed
ha
high
a es
o
in la ion
would
ha e
a
dep essing
e ec on
in es men
in
plan and equipmen and
would
encou age he subs i u-
ion
o
labou o capi al.
This
has
no
been
he
case
in
Sou h A ica. The
alue
o
capi al s ock
in
manu ac u ing
indus ies
has
isen
om
RS
223
million
in
1970
o
R9
520
million
in
1979,
measu ed
in
1975
and, an annual a e
o
g ow h
o
6,90/o
(a
highe
a e
o
eal
g ow h han he
economy
as
a
whole).
O e
he
same
pe iod, capi al s ock
pe
employee
in
manu ac u ing
has
inc eased
(in
cons an
and) a a
4,20/o
annual a e.
These
ac s
indica e ha a
ela i ely
high
a e
o
in es men -bo h absolu ely and
pe
employee
-
has
been
main ained
in
manu ac u ing
in-
dus ies
in
Sou h A ica.
Al hough a numbe
o
ac o s con ibu e o Sou h
A ica's economic -and
in es men
-clima e (na u al
esou ces,
especially
gold
and in e na ional poli i~l a -
i udes, along
wi h
mo e
common
gene al
economic
ac-
o s),
i
seems
likely
ha a pa
o
h~
e:ason
o
~e
main enance
o
a sa is ac o y a e
o
capi al
m es men
in
spi e
o
high
in la ion
is
go e nmen
policy.
~ince
1973
~he
Sou h A ican Minis y
o
Finance
has
consciously
p o !d-
ed
ax
allowances
in ended o o
se
some
o
he
nega i e
e
ec s
o in la ion on
business
in es men
in
capi al goods,
, •
10
as
well
as
o p o ide an
in es men
mcen 1 e.
Two
incen i es,
used
in
combina ion,
ha e
~
inco -
po a ed in o Sou h A ican co po a e ax 1
egula. 1ons
~
manu ac u ing
i ms.
11
The i s , e med a
Machine y
I~-
ial
Allowance'
is
essen ially
a
o m
o
accele a ed
dep eaa-
90
ion. A
i m
can ake he 'Ini ial Allowance' -cu en ly
equal o
250 o
o
he cos
o
he asse -as added dep ecia·
ion
in
he i s yea , wi h o dina y dep ecia ion educed
p opo iona ely. Thus
i :
I = In es men
a = Ini ial allowance
(O o)
d = Dep ecia ion
(O o)
m =
Expec
li e
in
yea s
hen i s yea dep ecia ion allowed would be equal o:
a x I +
(1-
a)l/m, ins ead
o
1/m; in subsequen yea s,
allowed
dep ecia ion becomes
(1-
a)l/m.
The
second
incen i e, e med he 'Machine y In es men
Allowance'
p o ides
a deduc ion,
in
he ax yea
o
he pu ·
chase, o a pe cen age (cu en ly
300 o)
o
he cos
o
he
asse
acqui ed.
A
he p esen ime, he
300/o
In es men
Allowance
wi h
co po a e axes a
46,20/o
is
compa able o
a (0,3)(0,462) =
13,860/o
ax c edi .
In
o al hen, he i s
yea 's deduc ion
o
a
new
in es men wi h, say, a
i e
yea
li e,
would
be
0,31
+
0,251
+ (0,75/5)1 = 0,71, o
700 o
o
cos , ins ead
o
no mal dep ecia ion
o
200 o
o
cos .
In
ecen yea s, howe e , he adequacy
o
hese allow-
ances
has
been
ques ioned
se e ely.
MacG ego , o
in-
s ance, has a gued ha wi h
100/o
in la ion he Machine y
In es men
Allowance
should
exceed
480/o
(ins ead
o
300/o)
o
i e-yea
li e
asse s; and
1000/o
o en.yea li e asse s.
In
his
a icle
we
will
de elop a me hodology o es ima ing
he equi ed allowance and e alua e he adequacy
o
he
p esen
300 o
Machine y In es men Allowance.
Al hough he in en
o
ihe ax allowances,
when
ini ia ed,
was
bo h o encou age g ow h and o compensa e o
in-
la ion, he p esen ques ion
is
whe he
o
no hey a e ade-
qua e
as
an
o se o in la ion. Thus
we
de elop a me hodo.
logy
ha
ocusses
on he adequacy
o
he Machine y In-
es men Allowance
as
an o se o in la ion. A majo con-
ce n
o
a i m's managemen
in
an in la iona y en i onmen
is
he ex en o
which
cu en sou ces
o
unds ail o be
su icien o eplace ope a ing asse s ha a e ending hei
use ul
li es.
This de iciency
is
he de e minan
o
he ade-
quacy
o
ax allowances o o se in la ion.
To de e mine his de iciency
we
begin by conside ing he
mos gene al
case:
a s able (non g owing) all equi y i m
wi h
mul iple asse s, wi h an equal po ion (in eal e ms)
o
he asse s being eplaced annually.
In
Exhibi I such a
i m
is
desc ibed
in
he absence
o
in la ion (bu wi h he
ini ial allowance included o dep ecia ion pu poses).
I ,
as
shown, di idends paid equal ne p o i , hen in each yea
he
i m
e ains exac ly he cash
low
equi ed o eplace
e i ed asse s.
In
Exhibi
II
we
show he same i m wi h in la ion,
assuming ha he impac
o
in la ion
is
he same o bo h
he cos
o
new
asse s and o Ea nings be o e Oep ecia·
ion and Taxes. I once again
we
assume ha epo ed p o.
i s a e paid ou
as
di idends, he cash a ailable o asse
eplacemen
is
clea ly insu icien , because
o
inadequa e
dep ecia ion allowances.
Finally,
in
Exhibi III,
we
es ablish a no ma i e bench-
ma k o compa e
wi h
he ac ual e ec s
o
in la ion. Co.
lumn 1 epea s he no.in la ion case
o
Exhibi I, In column
2, he 'expec ed' amoun s o each ow a e ound
by
ais.
ing
he igu es
in
column 1
by
he compounded a e
o
in·
la ion. Thus
we
can
see,
o ins ance, ha a s ockholde
S.-A . Tydsk . Bed y sl.
1983,
14(l)
who ecei ed a di idend
o
R26,90
in
he absence o
in la.
ion should expec o ecei e
R47
,41, ( he equi alen
in
eal
e ms
o
R26,90)
a e
i e
yea s
o
120/o
in la ion.
Simila ly
i dep ecia ion we e o inc ease wi h he in la ion a e
h~
no de iciency
in
cash low o eplacemen would
occu .
In column 3
we
epea he ac ual esul s
o
i e
yea s
o
120/o
in la ion ( om Exhibi II) and
in
column 4
we
ind
he di e ence be ween 'ac ual' and 'expec ed'.
This
shows
ha he de iciency in a ailable cash low has been
epo ed
as g oss p o i and hus paid ou as axes ( he 'in la ion
ax
bonus') and as 'excess'
o
'bonus' di idends.
On his basis a mo e o mal model can
be
de eloped
o
iden i y an adequa e ax allowance o o se he
e ec s
o
in la ion. Once again
we
assume ha asse s a e
eplaced
in
equal eal amoun s annually and ha
all
he
a iables
de e -
mining ea nings be o e dep ecia ion and axes a e
a ec ed
by he same a e
o
in la ion as a e he cos s
o
eplacemen
~se s.
I
I = annual in es men amoun , X =
ea nings
be o e dep ecia ion and axes, 0 = dep ecia ion, T =
axes,
P = p o i s ( = di idends), C = 0 + P = o al
cash
low
a e ax, A = equi ed machine y in es men
allowance
(in cu en and), M = equi ed machine y
in es men
allowance (as a
0/o
o
in es men ), i = in la ion a e, =
ax a e, m = asse li e ( = numbe
o
asse s), n =
ime
pe iod, wi h n = m, a = ini ial allowance, as a
decimal,
d
= annual dep ecia ion
(1
-
a)
m, and = a e o
e u n
on asse ( = RoA), hen o any yea , in he
absence
o
in la ion,
X = m( .l);
0 =
al
+
(1-a)I
=
al
+ m.d.I;
T =
(X-0);
P = X -0 -
(X-
0);
=
(1- )(m. .I
-O);
A = X -T - P -I =
0.
Wi h con inuous in la ion in yea
'm'
he equi ed
in es -
men o be made,
Im,
will
equal he ini ial amoun o
in-
es men being eplaced (lo) adjus ed o in la ion
by
lc,(l
+
i).
A he same ime,
~
= .m.Im = .m.Ic,(l +
i)m;
bu
Om
= a(m-l + dim-I +
dJm_
2
•••
dJo,
Since
m
om
=
alm(l
+
i)-
1 + dlmI:(l + i)-n,
As a esul , o al cash low a e ax
(0
+ P)
will
be
C =
Om
+ (1- )CXm -
Om)
=
x.(1- )
+
Dm
m
=
.m.lm(l- )
+ [alm(I
+i)-
1 + dlmE(]
+i)-
0] (1)
s.
A .
J.
Bus.
Mgm .
1983,
14(3)
A
he
same
ime, expec ed p o i ( = di idends)
will
be
eal
p o i
adjus ed o in la ion, o
P.(l+i)m
= (1- )(m. .Io -00
)(1
+i)m.
Since
Io=
D0 =
lm(l
+i)-m,
Po(l
+i)m
=
(1- )[ m
Im(l
+i)-m -
lm(l
+i)-j(l
+i)m
= (I - )[ mlm -
I.J
= mlm(l - ) -
lm(l
- ).
(2)
Then,
i s ockholde s ecei e hei expec ed eal in la ion
adjus ed
di idend (wi hou an 'in la ion bonus'), ne
cash
low
a ailable o asse eplacemen
will
be
m
imd
E(l+i)-n
-
mlm(l- )
+
lm(l- )
m
= lm[ a(l
+i)-
1 + d E
(1
+i)-D
+
(1- )].
(3)
The
de iciency in cash low equi ed o he
new
asse
will
hen
be:
A = 1.-
[Cm
-Po(l
+i)m]
=
Im
[I
-
(1- )
- a(l
+i)-
1 - d E
(1
+i)-'1
=
lm
[I
-
a(l+i)-
1 -d
(l+i '1,
(4)
bu
A
is
he
cash
de iciency a he ime he in es men
is
made.
An adequa e machine y in es men allowance will
be
(a)
Exp essed
as a pe cen age
o
in es men ;
(b)
Recei ed
in
he yea a e he in es men
is
made, and
hus
also subjec o in la ion;
(c)
Su icien , as a deduc ion be o e axes o equal
'A'
on
an
a e ax basis.
The e o e
M1 =
A l
+i)
--- .
= (I
+i)
[I -a(l
+i)-
1 -d
:
(1
+i)-'1.
(.S)
I~
Tab~e
1,
he equi ed in es men allowance (M) o
asse s
Wi h
di e en a es
o
in la ion
is
calcula ed.
Tabla
1 Machine y in es men allowance equi ed
o
selec ed asse li es and in la lon a es
Asse
li e
In la ion
a e
(yea s)
81/o
12'lo
16'l
20'1
s
18,32
26,44
34,03
41,17
10
28,65
29,S4
48,9S
S7,27
IS
36,78 48,86
58,66
66,9S
20
43,24
SS,63
6S,21
73,09
91
Mo e
impo an ,
i
is
clea ha , i
go e nmen
p o ides
a bene i
equal
o 'A'•
i
is
doing
no
mo e
han e u ning
o he
i m
he amoun
o
axes
ha
ep esen
he,.
l
ion bonus'
(c .
Exhibi
III).
Ac ual
axes
wi h
in la i~:
:;
equal o:
(X-D)
= ( .m.I.) - im[a(l+i)-1 + d E(l+i)-n).
.
A
he
same
ime
expec ed
axes
( eal
ax
on
eal
income
mc eased
by
in la ion) a e: '
( .m.Io -lo)(l +
i)m
= mI0
(1
+
i)m
- I0
(1
+
i)m
The di e ence
be ween
ac ual and
expec ed
axes
( he 'in-
la ion bonus') hen
is
m
( ml.) -
lm[a(l
+ i)-1 -d
E(l
+ i)-1 -
[ mim
- IJ
m
=
im
(1-a
(1
+i)-
1 -d E (I +i)-n]
(6)
o he
same
as
exp ession
(4)
abo e.
The
p eceding
eq.
(.S)
o
'M,'
p esen s
an
adequa e
in-
es men
allowance
o
i ms
o indus ies
which
a e
ee
o
aise
p ices
in
an in la iona y en i onmen .
In
Sou h
A ica,
howe e ,
a
numbe
o
p ede e mined
indus ies a e
subjec o
p ice
con ol.
In
gene al
con olled
p ices
will
be
se
so
ha
EBIT
/To al
Asse s
emains
a p ede e mined
pe cen age.
In
such
cases,
an
allowance
o
'M
1'
will
be
in-
adequa e
since
he denomina o s o he equa ion
will
lag
in la ion.
To e alua e
such
a si ua ion,
we
mus
igno e
changes
in
p o i s and
di idends,
and, abs ac ing
om
ou p io
analysis
and
using
he o iginal
asse s
being
eplaced
as
a
base,
we
can
say:
(a)
Cos
o
new
asse s
=
Io(l
+
i)m;
I m
(b)
No mal (s aigh
line)
dep ecia ion =
~
E
(1
+
i)°;
(c)
Cash
low
e ec
o
ini ial
allowance
(a)
=lc,
[1
-;:
(l+i)°
+
a(l+i -l
-
~
(l+i)D]
m
=
lo
[a(l +i)m-l -! E (l +i)°J;
(d) Adjus men o con e
cash
low
equi ed o a ax
allowance
ecei ed
la e
-(I
+i)
- 10 (l +
i)m
Then,
ocussing
on he
cash
lows
ha
occu
wi hou
ega d
o p o i ,
we
can
iden i y he
allowance
equi ed
by
M2 = (Adjus men ) [Cos -No mal dep ecia ion -
In-
i ial
allowance]
= (d)
[a
-b -
c],
o
(I
+i~
1Io(l
+i)m
-
.!Q.ml
(1
+i)° -
lo
[ao
+i -•
lo(l
+ )m
- ! (I +i)°
l!
.
92
M _ 1
l(l+·)m+I
_
(l+i)
(l+i)n
_
2 - (l +
i)m
1 m
[ a(l +
i)m
-
a(~
i)
(1
+
i)n
J I
=
(1
+
i)
-
(1
+ i)(l +
i)
-m ( 1 +
i)n
-a
m
+ a(l
+i)(l
+i m
(1
+i)n
m
(7)
=
(1
+
i)
[ + + a(l + i)-1 - ( + -a)
(1
~)-n
J .
(8)
When M2
is
compa ed o
Mi,
i can
be
seen -as ex-
pec ed - ha he necessa y in es men allowance o a i m
unde p ice con ol
is
highe , since
M2
-
M1
= [
(1
+i)
J__-a(l
+i)-
1
-(J__-a)
(1
+i-"J
m
-
(1
+i)
[
1-a(l
+i)-
1 -
(l
;a)
(1
+i)-n
J
m
=
(1
+ i) [
+-
1 -
(+-a)
E
o;
i)-"
m
+
(1-a)
E
(1
+i)-"J
, m
m
=
(1
+ i) [ ( + -
1)
( 1 - E
o;
i)-"
) J (9)
Since
li
>
1,
o O < <
l;
and
since
(1
+i "
< l
m
o O < i <
1,
M2-M1,
is
posi i e so long as i
and
a e
posi i e bu less han
1.
One addi ional al e na i e
is
possible. In some cases a
p ice con olled i m
is
pe mi ed
o
include so-called
'ad-
di io_nal
dep ecia ion' in es ablishing i s p ices, so ha he
~~i ed
pe cen age
is
based on (EBIT -Addi ional Dep e-
c1a 1on)/To al Asse s. In heo y, such addi ional dep ecia-
ion
is
de e mined annually as he di e ence be ween he
expec ed cos
o
he eplacemen asse and he no mal
(s aigh line) dep ecia ion
o
exis ing asse s; o , a e axes
(1
- ) [
Io
(1
+
i)m
-
~
E
(1
+ i)n] ,
I
we
con e his
o
a ax allowance ecei ed a yea la e ,
we
ha e
DA
= (~I~il~
i)J)
[ Io(l +
i)m
-
~
(1
+
i)n]
= < 7/~~)m ) [ o +i)m -!
o
+i)n l
=
(1
+ i)(l - ) [ + S.-A . Tydsk . Bed y sl.
198
3,
l4(
3)
m
{l + i)-m E
(1
+i}n]
m
(10)
In
o de
o
de e mine
he
equi ed in es men
allowance
(M3) o a p ice con olled i m pe mi ed o use 'addi ional
dep ecia ion' in p ice-se ing
we
can se
Howe e ,
we
can also exp ess
DA
(eq. (10)] as:
m
DA
=
(1
+
i)
[
J__
-E
(1
+
i)
-n - 1 +
(1
+
i
n J
m
m
m
=
(1
+i)
[
<+
-
1)
(1
-E
o;i)-">
J , (ll)
which
is
he same as eq. (9),
o
M2
-
Mp
Thus i
is
clea
ha
M3
=
M2
-
(M2-M1)
M3
=
M1,
As a esul only wo exp essions - M1 and M2 -
a e
equi ed
o
de e mine he adequacy
o
he Sou h A ican
Machine y In es men Allowance: M2 o i ms unde
s ic
p ice con ol
and
M1 ( = M3) o hose no p ice con olled
and
o hose p ice con olled i ms pe mi ed o
use
'addi-
ional dep ecia ion'.
F om
a p ac ical s andpoin ,
a
leas one addi ional
a iable should be conside ed. Mos Sou h A ican
i ms
use gea ing ( inancial le e age)
o
some ex en ,
wi h
he
esul ha he e ec s
o
in la ion a e he eby diminished.
F om
he s andpoin
o
ou
exis ing models ( o M1
and
Mi) he e ec
o
gea ing can mos easily be in oduced
by
es ima ing i s impac
on
cash lows
and
con e ing he
cash
low e ec in o he same e ms as he equi ed in es men
allowance. Thus
i
we
assume
ha
a cons an po ion o
each asse equi ed
is
inanced by deb , he gea ing a io
(g) is
g -Deb
-
-i-
n
and he
amoun
inanced by equi y will be
In
(1
-
g).
I
we
assume ha equal annual loan educ ion paymen s
a e made, hey will be equal
o
gln/m
o each asse ;
wi h
in la ion his will become
gim
(1
+ i) -n
m
o all asse s.
A
he same ime wi h in la ion he
new
amoun
bo owed
o
pu chase
Im
will
be
glm.
Thus he
ne
cash low
o
he i m will be
glm
-
g!m
(1
+ i) -
n,
When his cash low
is
con e ed
o
he e ms in
which
M
is
exp essed (by changing om a cash low o a
ax
allowance)
we
ha e

s.
A .
J. Bus. Mgm . 1983,
14(3)
m
_ g(l+i) [l- E
(l+i)-"]
- m ·
(12)
Using
eq.
(12)
bo h M1 and M2 can be adjus ed o ake
in o
accoun he e ec s
o
gea ing:
=
(1
+
i)
[ I -
a(
I + i) -I - d
(1
+
i)
-n
(13)
m
[ 1 1 _
a)
E
(1
+
i)
-n
M2=
(l+i)
T -
a(l+i)-
1 -
(T
-m
-
=
<4E
[ 1 - g -a (l + i) -i
-
(1
-g - a )
o;i)-n].
(14)
The
impac
o
gea ing
is
clea ly o educe he equi ed
amoun
o he Machine y In es men
Allowance.
As
Table
2
shows,
o
i ms
ha a e no
p ice
con olled o
a e
allow-
ed
o
use
'addi ional dep ecia ion'
in
se ing con olled
p ices,
he p esen
300Jo
a e
is
mo e han ample
o
a
gea -
ing
a io o
300Jo.
Howe e ,
i ms
unde s ic
p ice
con-
ol
will
ind
he allowance inadequa e -
e en
wi h
500/o
gea ing
-i in la ion
exceeds
120Jo.
(Table
3).
Table
2 Machine y in es men allowance equi ed
(%)
o selec ed asse li es, in la ion a es and le els
o gea ing
(M
1)
Asse
li e
Gea ing In la ion a e
(yea s)
(g)
80/o
120/o
160/o
200/o
s 0 18,32 26,44
34,03
41,17
30 4,19 6,15
8,03
9,85
so
neg
neg
neg neg
10
0 28,65 39,S4
48,95
57,27
30 5,58 7,90
10,03
12,01
so
neg
neg
neg neg
IS
0 36,78
48,86
58,66 66,95
30 6,67 9,15
11,34
13,31
so
neg
neg neg
neg
20
0 43,24 55,63
6S,21
73,09
30
7,S3
10,06
12,21
14,14
so
neg
neg
neg
neg
93
Table
3 Machine y in es men allowance equi ed
(%) o selec ed li es, in la ion a es and le els
o
gea ing
(M
2)
Asse
li e
Gea ing In la ion a e
(yea s)
(g)
8"10
12'1,
16'1,
20'1,
5 0
43,65
62,83
80,65
97,33
30
29,S3
42,54
S4,6S
66,01
so
20,11 29,01
37,32
45,14
IO
0
70,02
96,27
118,74
138,42
30
46,95
64,64
79,83
93,17
so
31,S7
43,SS
53,88
63,00
IS
0
90,78
120,06
143,53 163,13
30
60,67
80,36
96,21
109,SO
so
40,59
53,89
64,66 73,74
20
0
107,26
137,34
160,25
178,80
30
11,S6
91,78
107,25 119,85
so
47,76
61,40
71,92
80,SS
In
conclusion,
i
appea s
ha
he
Sou h
A ican
ax
policy
may
well
ha e
done
wha
was
in ended:
s imula e
g ow h
and
o se in la ion. I
we
conside
he
pe iod
o
he
la e
1970s,
when
he
in la ion a e
was
abou
130Jo
pe
annum
and
he
ax
a e
420Jo,
Column
(1) o
Table
4 indica es ha
a manu ac u e (no s ic ly p ice-con olled)
wi h
ela i e-
ly
modes
le els
o
deb
should
no
ha e
been
ha med
by
he
impac
o in la ion
on
in es men .
Speci ic
i ms
-
o
ins ance,
wi h
une en
asse
eplacemen
pa e ns, o
wi h
cash
lows
une enly
impac ed
by
in la ion -
may
ha e
had
mo e
(o
some imes
less)
o a
p oblem.
In
gene al,
howe e ,
i
appea s ha
ax
policy
was
su icien o o se in la ion
and
e en
o
encou age
some
in es men ,
i
he
i m's capi al
s uc u e
included
deb .
Since
gea ing
le els
o
300Jo
o
mo e
a e
common
o
Sou h A ican
i ms,
and,
in
manu ac u -
ing,
asse
li es
ypically
a e age
less
han
10
yea s,
such
a
esul
seems
p obable.
Fo
he
same
class
o
i ms
he u u e
is
mo e
di icul .
Wi h
an
expec ed
in la ion a e o
160'/o
and a cu en
ax
a e o
46,20Jo,
Column
(2)
o
Table
4
shows
a highe
b eake en
gea ing
a io han
Column
(1).
Howe e ,
since
b eak-e en
gea ing
emains
below
200Jo,
he
end
esul o
many
i ms
should
be
sa is ac o y.
In
con as
many
p ice-con olled
i ms
ha a e no
allowed
'addi ional dep ecia ion'
(c .
Table
3)
ha e
un-
doub edly
el
some
nega i e
e ec s o in la ion, wha e e
Table
4 'B eak-e en' gea ing a ios o a machine y
in es men allowance
o
30% and ini ial allowance
o 25%
(I).
(2).
Asse
li e
(yea s)
i =
13"1o,
=
420/o
i =
16"1,,
= 46,2'1,
s
neg
4,64'1,
10
9,760/o
14,61
'lo
IS
14,03"10
18,17'1,
20
16,17'1,
19,93'1,
"See
ex .
94
hei
le el
o
gea ing. Wi h expec ed in la ion a 16% i
seems
unlikely ha any such i ms
will
escape some in la-
iona y impac on hei eplacemen in es men s.
Se ious
as
his si ua ion
may
be,
he o e all esul
is
no
as
bad
as
ha ep esen ed
by
some widely-ci ed c i ics
o
he p esen allowances.
In
Table
5,
whe e ou esul s a e
compa ed
wi h
hose o a c i ic's,
i
can
be
seen
ha ax
policy
is
gene ally much close o being adequa e han
he
sugges s, excep o sho e -li ed asse s belonging o p ice
con olled i ms.
Table
5 A compa ison o M1 and M2 wi h c i ic's
es ima es o equi ed allowances a 8% in la ion and
no
gea ing
Asse
li e
(yea s)
M1
M2
C i ic"
5
18,32
43,65
36,42
10
18,65
70,02
72,90
15
36,78
90,78
20
43,24
107,26 148,86
"Sou ce:
Re .
10.
F om he s andpoin
o
he go e nmen , main aining -
o
e en
inc easing - he allowances
seems
a easonable
policy. Fo he unle e ed
i m
ha
is
no s ic ly p ice con-
olled, an in es men allowance
o
300Jo
o mo e does no
equal he in la ion ax bonus
when
in la ion
is
a
160Jo.
Since
he in la ion ax bonus o go e nmen
is
no educed
by
he addi ion o
gea ing
o he o mula (gea ing simply lowe s
he amoun
o
non-bo owed unds equi ed, and hus he
in es men base) a
300Jo
(o highe ) allowance should en-
cou age g ow h
by
le e ed i ms. The se ious p oblem con-
Appendix
S.-A . Tydsk . Bed y sl.
1983,
l4(J)
on ing go e nmen
is
he pligh
o
he s ic ly
p ice-
con olled i m.
On balance, howe e ,
i
appea s ha , o
many
i ms
Sou h A ican ax policy has been a ealis ic and
ela i e!;
success ul app oach o he p oblem
o
o se ing
he
nega i e
impac
o
in la ion on in es men and,
in
some
cases,
may
also ha e se ed as a s imulus o in es men .
While
highe
cu en in la ion a es may subs an ially educe
i s
use ulness
as an in es men s imulus,
i
should emain an adequa e
in-
la ion allowance o i ms able o main ain a
gea ing
a io
o
200Jo
o mo e, ha a e no s ic ly p ice-con olled.
Re e ences
1.
Kim,
M.K.
In la iona y e ec s
in
he capi al in es men
p ocess:
An
empi ical examina ion.
J.
Fin. Sep .
1979,
p.941.
2.
Nelson,
C.
In la ion and capi al budge ing ,
J.
Fin,
June
1976,
p.923.
3.
Bailey,
A.O. (J .) & Jensen, D.L. Gene al p ice
le el
adjus men s
in
he capi al budge ing decision. Financ. Manage.,
Sp ing
1977,
p.26.
4.
Cooley, P.L. Roen eld , R.L. & I -Keong Chew. Capi al
budge ing p ocedu es unde in la ion. Financ.
Manage.
Win e
1975,
p.18.
5.
an
Ho ne, J. A no e
on
biases
in
capi al budge ing
in oduced
by
in la ion.
J.
Financ. Quan . Anal. Ma ch
1971,
p.653.
6.
Landsk one ,
Y.
&
Le y,
H.
In la ion, dep ecia ion,
and
op imal
p oduc ion. Eu . Econ. Re .
1979,
p.353.
7.
Pa ke , J. & Zieha,
E.
In la ion, Income Taxes,
and
he
Incen-
i e
o Capi al In es men . Na l. Tax.
J.
June
1976,
p.179.
8.
Aue bach,
A.
& Jo genson,
D.
In la ion-p oo Dep ecia ion
o
Asse s. Ha . Bus. Re .
Sep .-Oc .
1980,
p.113.
9.
Sou h A ica
1982;
O icial Yea book
o
he Republic
o
Sou h
A ica, 8 h ed. Johannesbu g: Ch is
an
Rensbu g
Publica ions,
1982,
p.348, p.482, p.524.
10.
MacG ego ,
I.
In es men and o he allowances -
a e
hey
ade-
qua e incen i es
in
an
in la iona y en i onmen ?
Fac
and
opi-
nion pape no.
7,
Sep .
1978;
Cen e o
Business
S udies,
Uni .
o he Wi wa e s and (R.S.A.)
pp.2-3,
12-14.
11.
Silke, A.S. (Ed.). /98/1 /982 Old Mu ual Income Tax Guide,
Old
Mu ual Insu ance Co., Sou h A ica,
1982,
p.
86
ol.
Exhibi
I Mul iple asse i m, no in la ion
Asse
To al o
i m
Pu chased
a
ime
0 I 2 3 4
Yea
5
Ini ial in es men
100 100 100
100
100
500
Cash
low de e minan s
Ea nings be o e dep ecia ion
and ax
(RoA
=
30117o)
30
30
30
30
30
150
Dep ecia ion
15 15 15 15
40
100
G oss p o i (EBIT)
15 15 15 15
(10)
50
Tax (a
46,211/o)
6,93 6,93 6,93
6,93
(4,62)
23,10
Ne
p o i ( = di idend)
8,07
8,07
8,07
8,07
(5,38) 26,90
Cash
low
a ailable
100
Cash equi ed o
new
in es men
100
Di e ence (de iciency) 0
~---
A .
J. Bus. Mgm . 1983, 14(3)
95
Exhibi
II Mul iple asse i m, wi h 12% in la ion
Asse
To al o
i m
Pu chased a ime 0 2 3 4 Yea 5
Ini ial in es men 100 112 125,44
140,49
157,35
635,28
Cash low de e minan s
EBDT (RoA =
30%)
30(1,12)5
33,60(1,12)4
37,63(1,12)3
42,15(1,12)
1
47,21(1,12)
~-n
= 52,87 = 52,87
=
0,3In-l(l,12)
= 52,87 = 52,87 = 52,87
264,35
Dep ecia ion (SLD)
15
16,80
18,82
21,07
23,(i()
95,29
Dep ecia ion (ini ial
allowance)
39,34
39,34
---
G oss p o i
(EBln
37,87 36,07
34,05
31,80
(10,07)
129,72
Ta1l
(46,20'/o)
17,50
16,66
15,73
14,69
(4,65)
S9,93
Ne
p o i
( = di idend) 20,37
19,41
18,32
17,11
(S,42)
69,79
Cash low a ailable
(95,29 + 39,34)
134,63
Cash equi ed o
new
in es men
(I
00)( I, 12)5 =
176,23
Di e ence (de iciency)
(41,60)
Exhibi
Ill
Mul iple
asse
i m: ac ual
s
expec ed
wi h 12% in la ion
(I
(2)"
(3
(4)"
Expec ed
Ac ual
Di e ence
No In la ion
In la ed
(Ex
I)
[Ex
IX(l,12)'] (Ex
II)
((3)-(2))
EBDT
ISO
264,35
264,35
0
Dep ecia ion
100
176,23 134,63
(41,60)
G oss
P o i
so
88,12
129,72
41,60
Tax
(46,20'/o)
23,10
40,71
S9,93
19,22
Ne p o i
69,79
22,38
( =
di idend)
26,90
47,41
Cash low
a ailable
100
176,23 134,63
(41,60)
Cash eq. o
176,23
0
in .
100
176,23
Di e ence
(de iciency)
0 0
(41,60) (41,60)
"See
Tex