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In your financial forecast, you're projecting Capital Expenditures as a percentage of revenue, and Depreciation also as a percentage of revenue.

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.

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A.You should never project Depreciation as a... View the full answer

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