Is It Possible to Increase the Investment Efficiency by Increasing Tax on Profit Rate? An Abnormal Influence of the Growth of Tax on Profit Rate on the Efficiency of the Investment

Abstract

Within the modern theory of capital cost and capital structure by Brusov–Filatova–Orekhova (BFO theory) (Brusov and Filatova, Finance Credit 435:2–8, 2011; Brusov et al., Appl Financ Econ 21:815–824, 2011a, Res J Econ Bus ICT 2:16–21, 2011b, Res J Econ Bus ICT (UK) 2:11–15, 2011c, Appl Financ Econ 22:1043–1052, 2012a, J Rev Global Econ 1:106–111, 2012b, J Rev Global Econ 2:94–116, 2013a, J Rev Global Econ 2:183–193, 2013b, Cogent Econ Finance 2:1–13, 2014a, J Rev Global Econ 3:175–185, 2014b; Filatova et al., Bull FU 48:68–77, 2008; Brusova, Financ Anal Prob Sol 34:36–42, 2011) and modern investment models created within this theory, the influence of the growth of tax on profit rate on the efficiency of the investment is investigated. It has been shown that for long-term investment projects, as well as for arbitrary duration projects, the growth of tax on profit rate changes the nature of the NPV dependence on leverage at some value t*: there is a transition from the diminishing function NPV(L), when t < t*, to the growing function NPV(L). The t* value depends on the duration of the project, cost of capital (equity and debt) values, and other parameters of the project.