Optimal Machinery Replacement under Accelerated Depreciation

The last several years have seen tax law changes that provide accelerated depreciation for farmers. Accelerated depreciation laws seem to be designed to help stimulate the economy by encouraging farmers to purchase more machinery and to replace machinery more often. Farmers do benefit because lower taxes this year are probably better than lower taxes in future years (as long as marginal tax rates are the same). Less clear, however, is whether farmers should actually replace machinery more frequently. In other words, is the optimal lifespan of an asset reduced due to new. This paper tests for the optimal replacement age under conventional and accelerated deprecation laws and finds that accelerated deprecation laws appear to help farmers. However, the optimal year to replace is not different. This paper introduces stochastic elements into the decision mode