A vertical (laterally integrated) two-dimensional numerical model was implemented to study the hydrodynamics, saltwater intrusion, and suspended sediment in the Danshuei River–Tahan Stream due to the Shihmen Reservoir construction in the upriver reaches. The construction of the reservoir and water diversion in the upper reaches of the river system significantly reduces the freshwater inflow and drastically changes the river bathymetry. The model was calibrated and verified with the available hydrographic data measured in 1977, 1978, and 1999 as well as measured salinity and suspended sediment concentration in 1999. The overall performance of the model is in reasonable agreement with the field data. The validated model was then used to investigate the change in hydrodynamics, saltwater intrusion, suspended sediment distribution, and flushing time as a result of reservoir construction in upper river of Tahan Stream. The model simulations indicate that more tidal energy propagates into the estuarine system after reservoir construction because of the substantial increase in river cross-sections. The limits of saltwater intrusion after reservoir construction extended farther inland 2–3 km than those after reservoir construction. The modelling results also reveal that the suspended sediment concentration before reservoir construction was higher than that after reservoir construction along the river mouth to Kuan-Du due to the significant bathymetric change after the reservoir construction. The calculated estuary flushing time was strongly dependent on river flow and reduced 2.3–25 h under different river discharges after reservoir construction due to the change in river bathymetry.