Towards a Theory of the Value of Capital Goods

A Techno-Economic Approach Hrishikes Bhattacharya Studies made so far on the determination of the value of a capital good proceeded with an a priori assumption of exponential decay in capital good. From this assumption flowed the exponential decline in the rental of capital services. The value of a capital good was then determined as equal to the present value of such rentals after taking into account depreciation and other tax incentives. Conflicting results have, however, been obtained in testing the basic assumptions empirically. One of the reasons may be the absence of a theoretical framework for determining the value of a capital good. An attempt is made in this paper to construct such a theoretical framework based on the laws of thermodynamics.