What factors affect the current value of the tax shields?
Tax shields usually represent deductions that the company can require on its taxes to reduce tax liability. These items may include items such as charity gifts, mortgage interest, certain therapeutic expenses and amortization or depreciation, among other things. The current value of the tax shields is the amount of money that these future deductions are worth today. The factors that most often affect this are the length of the item, interest rates and inflation. These factors - and others - may be present at the same time or individually influence tax shields at the same time. For example, a mortgage with permissible interest deductions usually takes more years to spend on treatment. The current value of tax gables, which lasts more than one year, is usually of great importance in calculating the net current value of the item. The longer the item exists, the most cases are high for the present value for the deduction. Companies can look at the tax advantages of various projects in selecting several new options for creating higher business income.
Most long -term tax shields have a related interest rate such as a mortgage or bank loan. Other times, the project may require a combination of external financing, resulting in a combination of funding, which includes different interest rates or capital costs. Higher interest rates may result in profitable current value of the tax shields. The final result is a higher deduction for each year, which reduces the tax liability of the company. Most likely, the deduction will be reduced for each year, but the amount subtracted may be higher than the lower interest rate.
The final main factor is inflation present on the market, which can significantly affect the taxes and deductions of the company. Result inflation usually means that the purchasing power of dollars decreases, as inflation rises and vice versa. The current value of the tax shields can be negatively affected because interest rates may increase if inflaCe will increase sharply. This can create a negative situation where the company loses the advantage of tax deductions. Inflation also increases expenditures to start large projects, as more money is required to present projects.