Premium
Distortions in Capital Asset Acquisition and Financing under Cost‐Based Reimbursement
Author(s) -
Trigeorgis Lenos,
Brindamour Paul
Publication year - 1993
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1993.tb01356.x
Subject(s) - finance , reimbursement , business , internal financing , debt , asset (computer security) , payment , cost of capital , vendor , debt financing , economics , profit (economics) , microeconomics , health care , computer security , marketing , computer science , economic growth
The paper examines distortions in the acquisition and financing of capital assets under a cost‐based reimbursement system within an adjusted present value (APV) framework. For a not‐for‐profit (NFP) vendor the acquisition, when internally financed, is typically a negative‐NPV investment. But when financed through debt with reimbursed interest payments, the combined decision becomes worthwhile (positive APV). This can explain why NFP firms resort to substantial debt financing even though internal funds may be available and any tax benefits are absent. Policy implications and suggestions for improving unintended inequities in the system are also discussed.