Depreciation tax shield

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Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.

Depreciation Tax Shield

A tax deduction that comes from the depreciation of an asset. For example, if one spends $1,000 on an asset and its book value is reduced to $800 the following year, the depreciation tax shield is $200.
References in periodicals archive ?
10) Note that the depreciation tax shields that Ruback mentions are the tax benefits that stem from conventional asset depreciation of the firm, while the specific depreciation tax shields examined in this paper are asset step-up induced in the framework of corporate acquisitions via an asset deal structure.
4) Accordingly, the valuation of asset step-up induced depreciation tax shields via appropriate discount rates is a fundamental issue in the context of mergers and acquisitions.
Ruback (1986) assumes depreciation tax shields to be free of risk.
Discount Rates for Asset Step-up Induced Depreciation Tax Shields
We start with the risk-less after-corporate tax interest rate, which is, according to Ruback, the appropriate discount rate to value risk-less after-tax corporate cash flows (Ruback assumes depreciation tax shields to be free of risk; Ruback, 1986, p.
Ruback explicitly refers to depreciation tax shields as being risk-less cash flows whose market value can be determined via this rate (Ruback, 1986, p.
Both latter assumptions are not realistic for step-up induced depreciation tax shields.
Such a proceeding regarding the valuation of depreciation tax shields in the context of adjusted present valuation is also promoted by Tirtiroglu, who assumes these benefits to be free of risk (Tirtiroglu, 1998, p.
General depreciation tax shields depend on the level of depreciable/amortizable assets and can vary significantly due to the volatility of investments in depreciable assets.
The following paragraphs first describe which sources of uncertainty persist for step-up based depreciation tax shields and thereon show how the discount rates of Equations (3) and (4) have to be further adjusted to account for these uncertainties.
But the fact that in economic downturns a good proportion of firms often generate taxable losses proves that this source of uncertainty is realistic and has to be included into the valuation of depreciation tax shields.
represent those first four terms in equation 10 except the depreciation tax shield, the following is obtained: