Explain why the term tax shield is used in conjunction with depreciation.

jerico

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9 years ago

Explain why the term tax shield is used in conjunction with depreciation.

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Cost Accounting

Edition: 14^th

Authors: Horngren, Datar, Rajan

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cyborg

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9 years ago

Depreciation tax deductions result in tax savings which offset the cost of acquiring the capital equipment. The more rapid for tax purposes an asset's costs can be written off for tax purposes, the earlier the reductions in taxes can be realized. The term tax shield refers to the reduction in the tax payments owed. Thus the faster the depreciation, the earlier the reductions in taxes and the greater the net present value of the tax shield.

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jerico Author

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9 years ago

I can confidently say that it looks and sounds right lol Thank you Slight Smile

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cyborg

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9 years ago

Cool! No problem.

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