Depreciation tax shield and Undertaking Declining Balances

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• Depreciation can be a tax shield

  It means that the Depreciation are tax deductible expense and its also a non cash flow expense. Hence it provides tax shield as the company pays taxes on profits post depreciation.

• Straight line and Double declining method of depreciation

  If the firm has enough profits to take advantage of the higher tax shield on depreciation expenditure, it should go for the double declining balance method.

• Depreciation Calculation

  For the year 2005, straight line has a lower depreciation and hence would give a higher net income. Depreciation gives a firm tax shield and hence reduces the amount of taxes paid.

• Depreciation -straight-line versus double declining-balance

  Yes, the choice of one depreciation method over another produce a different amount of cash flow for any year. This is because even though depreciation is a non cash expense, depreciation provides a tax shield = tax rate x depreciation for the year.

• Effect of depreciation expense on financial statements

  The company with the highest retained earnings will be the one that has paid the lowest tax due to depreciation tax shield Highest accumulated depreciation till the end of 2008 is for Company C Accumulated Depreciation Year

• Present value of depreciation tax shield

  The time period is 5 years and rate is 12%. PV pf depreciation tax shield = 4,800 X PVIFA (5,12%) = 4,800 X 3.6048 = $17,302.93 The solution explains how to calculate the present value of depreciation tax shield.

• Leasing vs purchasing the equipment

  Therefore, depreciation provides a tax shield annual depreciation tax shield= tax rate x annual depreciation Depreciation is a non cash expense, hence there is no cash flow on account of depreciation.

• Tax savings from the depreciation tax shield

  tax shield.

• Value of the depreciation tax shield

  The company has a marginal tax rate of 34%. What is the value of the depreciation tax shield?