In your financial forecast, you're projecting Capital Expenditures as a percentage of revenue, and Depreciation also as a percentage of revenue. To ensure that the PP&E figure never changes, you set CapEx as a % of revenue equal to Depreciation as a % of revenue. For example, CapEx is 3% of revenue and Depreciation is also 3% of revenue. What's the MAIN flaw with projecting CapEx and Depreciation this way?
A.You should never project Depreciation as a percentage of revenue - it should always be tied to the PP&E balance.
B.A company will depreciate its PP&E over many years, so it's not accurate to assume that Depreciation in a single year will always equal CapEx in that year.
C.To grow, the company will likely need to do more than simply maintain its existing PP&E - it will most likely need to spend to acquire or build new assets such as land, factories, and equipment.
D.CapEx and Depreciation rarely move in-line with revenue because a company's need to re-invest into its own business is independent of its sales growth.
A.You should never project Depreciation as a... View the full answer