Depreciation in a Simple Regulatory Model: Comment

In a recent paper, Jaffee concludes that a regulated firm, seeking to maximize the present worth of cash flows, should adopt a certain form of decelerated depreciation. He assumes the firm is financed solely by debt, and does not take account of the constraint that earnings must at least cover interest. The present note considers a firm financed by a mixture of debt and equity, and includes the interest constraint; it is shown that under these circumstances the optimal depreciation schedule is fastest during the earlier portion of the life of an item of plant.