From the Equity book.
Cap ex - Depreciation Expense = Incremental FCInv
Incremental FCInv = cap ex spent on new equipment.
Doesn’t this seem like an incredibly rough estimate?
not for a company that is fairly long established. (in the maintenance phase of its life cycle). For such a company - the expectation is that the year on year investment on PP&E would be equal to the depreciation expense incurred in the year.
Interesting - Is that how some company’s determine yearly depreciation? “We have to buy $50 in parts every year so we will depreciate this $50/year.” I always thought they would determine the life of the asset and divide the cost by the amount of years of life.
bump
life of asset / life of asset is an accountant’s way of apportioning cost. ideally in the early years of life of an asset - you would have no charge for maintenance. most often, you would find maintenance costs becoming larger the older the machine gets.
the depreciation (straight-line or whatever) you read about is just an “apportioning” of the cost (and shows up on the balance sheet) since it provides you a tax break (again accounting).
for a company in the maintenance portion of its life - they would ideally like to report a bigger # as the depreciation expense (accounting), get a tax break, etc. etc. but what they actually expense out (actually spend) - would just be what they expect to pay to keep the machinery in running condition.
Got it, depreciation expense and cap ex should be related to each other, so cap ex above depreciation should be the incremental fixed capital investment, or cap ex for new equipment.