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 ?
While the focus originally was on the risk of debt tax shields, Lessard (1979) recommends also to separate out depreciation tax shields. The suggestion has been taken up by some oil industry consultants (e.g., de Souza, 2014).
Among the academic sources, Lessard (1979) gives a lucid discussion: "Technically, the depreciation tax shields are subject only to the risk that the firm cannot make use of them.
Depreciation tax shields contribute to project cash flow, but they are not valued separately; they are just folded into project cash flows along with dozens, or hundreds, of other specific inflows and outflows.
However, suppose we ask what depreciation tax shields are worth by themselves.
(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.
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.327).
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.327).
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.299, Formula 1b).
The model results in the maximum price for a given set of estimated cash flows (other than the unknown depreciation tax shields) and the required return on equity.
Letting [ATCF.sup.*] represent those first four terms in equation 10 except the depreciation tax shield, the following is obtained:
From Equation (3), the asset's net present value equals the present value of the unlevered after-tax future cash flows (including depreciation tax shields), plus the present value of the after-tax salvage value, minus the asset's initial cost.