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Depreciation Tax Shield

A tax shield is an item that decreases your taxable income, like depreciation expense. We said earlier our depreciation expense is $10,000, and let’s say that our tax rate is 30%. Because depreciation expense decreases taxable income by $10,000, it decreases the amount of taxes we have to pay by $3,000.

Therefore, the depreciation tax shield is shielding us or protecting us from having to pay $3,000 in taxes. This is considered a $3,000 cash inflow for the net present value calculation.