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Unformatted text preview: ome tax that the firm must pay. This reduction in taxes is
called the depreciation tax shield because depreciation “shields” some of the revenue that the
firm earns from being taxed. The depreciation tax shield is calculated as:
(depreciation expense) * (tax rate)
There are many depreciation methods that firms use. In our discussion of capital budgeting, we
will use the simplest: straight-line depreciation. Straight-line depreciation means that equal 6A:002 – Berg Taxes and Capital Budgeting
Page 3 amounts of depreciation expense will be recorded each year. The annual amount of straight-line
depreciation is calculated as:
(Asset Cost – Residual Value) / (Useful Life in Years)
The annual depreciation tax shield is a real cash savings to the firm, so it is part of the benefit
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This note was uploaded on 09/29/2011 for the course 06A 002 taught by Professor Stuff during the Spring '11 term at University of Iowa.
- Spring '11