A tax shield is a reduction in taxable income that results from taking allowable deductions, such as depreciation and interest expenses. By lowering taxable income, the tax shield ultimately decreases the amount of tax owed, which can enhance cash flow and increase the value of an investment. Understanding tax shields is essential for evaluating the cash flows of projects, assessing different capital budgeting techniques, and considering the impacts of capital structure on financial performance.
congrats on reading the definition of tax shield. now let's actually learn it.