What is the simplest method for projecting Depreciation and Capital Expenditures?

What is the simplest method for projecting Depreciation and Capital Expenditures?

• A. Make each one a percentage of revenue.
• B. CapEx should be a fixed amount each year while Depreciation follows revenue.
• C. Depreciation follows a fixed dollar amount and CapEx is random.
• D. Use a detailed PP&E model for CapEx only.

Answer: (A)

Relating depreciation and capital expenditures to revenue is the simplest way to project both. When you scale these items as a percentage of revenue, you’re using one clear driver—the top line—to estimate how much asset wear and investment the business will need as it grows. This keeps the model easy to maintain, ensures depreciation and CapEx move in tandem with business activity, and avoids guessing about asset ages, lifetimes, or timing of projects. In reality, depreciation depends on the asset base and depreciation schedules, and CapEx can be highly project-specific or lumpy. A more detailed PP&E model would capture those nuances, but it adds complexity. The percentage-of-revenue approach is preferred when the goal is a straightforward, easy-to-use projection.

Relating depreciation and capital expenditures to revenue is the simplest way to project both. When you scale these items as a percentage of revenue, you’re using one clear driver—the top line—to estimate how much asset wear and investment the business will need as it grows. This keeps the model easy to maintain, ensures depreciation and CapEx move in tandem with business activity, and avoids guessing about asset ages, lifetimes, or timing of projects.

In reality, depreciation depends on the asset base and depreciation schedules, and CapEx can be highly project-specific or lumpy. A more detailed PP&E model would capture those nuances, but it adds complexity. The percentage-of-revenue approach is preferred when the goal is a straightforward, easy-to-use projection.