Social Valuation of Projects e-bog

Whilst the greatest effort has been made to ensure the quality of this text, due to the historical nature of this content, in some rare cases there may be minor issues with legibility. The purpose of the current paper is to derive a simple valuation rule that takes into account both the tax distortions and project-risk considerations. The analysis will show that Bailey and Jensen's solution is wrong. The main result is that the tax distortions might lead to define a hurdle rate for certainty equivalent projects which differs from the market rate of interest, but that in general the project risk adjustments are independent of the tax distortions. This solution is similar to the one proposed by Schmalensee[1976]. The main difference is that the current paper proposes a very simple derivation of the result which relies on both a version of Fischer Black[1981] Simple Discounting Rule to characterize the tax externalities, and an Adjusted Present Value Rule to account for these in public project valuations.