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Depreciation Tax Shield
means of reducing income tax payments by deducting depreciation from the taxable income.
Depreciation tax shield is computed as the amount of depreciation multiplied by the tax rate.
Example, if the annual depreciation is $1,000 and the tax rate is10%; the corresponding tax shield will be $100. The amount of depreciation will depend on the depreciation method, using accelerated depreciation allows for faster depreciation during the early life of the asset and slows down as the asset ages, hence,
"it provides for higher tax savings during its early stages of the asset's life."
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