Thus, we estimated the
depreciation tax shield for each company based on the effective tax rate.
Total cost differential between old and new systems will also include depreciation tax shield allowed for the new equipment.
The cost of debt financing for new plant, depreciation and depreciation tax shield are calculated next.
When accounting for its debt tax benefit, the depreciation tax shield can also be valued standalone.
Every additional dollar of step-up induced depreciation tax shield increases the after-tax cash flow of a firm by one dollar, as it reduces the tax burden by one dollar.
Therefore, the present value of the depreciation tax shield to the new buyer is:
The tax basis to the current owner is 316, so the present value of the remaining depreciation tax shield to the current owner is:
While the derivations in this article can be modified to reflect that approach, the author's experience is that actual buyers and sellers of assets include the
depreciation tax shield in cash flows that are discounted at a risk-adjusted rate.
Both models assume that fixed after-tax lease payments are substitutes for the sum of fixed after-tax borrowing payments and the forgone
depreciation tax shield.
Thus the extra tax shields due to lower capital gains rate made the firm elect to recognize the gain because the firm paid the capital gains tax on the $35 and got a $35
depreciation tax shield in the future.
represent those first four terms in equation 10 except the
depreciation tax shield, the following is obtained:
Thus, there is no increased
depreciation tax shield, but also no capital gains tax is levied on the target firm.
