Unformatted text preview: e from the
asset’s sale. This means that there is no tax impact from the sale. In other words, the before tax
cash inflow from the residual value and the after tax cash inflow from the residual value are
equal. Depreciation Tax Shield
In this course we assume that the capital budget investment is a depreciable asset. Occasionally,
firms invest in non-depreciable assets such as land as part of a capital budgeting project. You
will learn how to handle those instances in future business courses.
When a depreciable long-lived asset is purchased, its purchase is recorded as an asset on the
firm’s balance sheet. Over time, portions of the asset’s cost are matched to income and recorded
as depreciation expense on the income statement. Because depreciation decreases net income, it
decreases the amount of federal inc...
View Full Document