Objectives

Section Learning Objectives

3.1

Types of Capital Expenditures

📖 Key Definition

Capital Expenditure (Capex) = Funds used to acquire, upgrade, or maintain physical assets
Capex appears on the Balance Sheet (PP&E) and is expensed over time through Depreciation.

🔧 Maintenance Capex

Spending to maintain current operations

  • Replace worn-out equipment
  • Repair and upkeep of existing assets
  • Does NOT increase capacity
  • Usually equals Depreciation expense
Maintenance Capex ≈ Depreciation
Example: Replacing an old machine with identical new one

🚀 Growth Capex

Spending to expand the business

  • New factories, stores, warehouses
  • Geographic expansion
  • Increases productive capacity
  • Drives future revenue growth
Growth Capex = Total Capex - Maintenance Capex
Example: Opening 50 new retail stores
💡 Modeling Tip

How to forecast Capex:
• Maintenance Capex = Depreciation (or % of Gross PP&E)
• Growth Capex = Based on expansion plans or % of incremental revenue
• Total Capex = Maintenance + Growth

3.2

Capex Forecasting Approaches

Common Capex Forecasting Methods

Method Formula Best For
% of Revenue Capex = Revenue × Capex % Mature, stable companies
Fixed Asset Turnover Capex = (Revenue / FAT) - Existing Net PP&E Asset-intensive industries
Management Guidance Use disclosed capex plans All companies (if available)
Depreciation + Growth Capex = Depreciation + Growth Capex % Growing companies

Example: TCS Capex Forecast (% of Revenue Method)

Item 2025A 2026E 2027E 2028E
Revenue 289,456 318,402 350,242 385,266
Capex % of Revenue 13.8% 14.0% 14.0% 14.0%
Capex 39,930 44,576 49,034 53,937
Excel: =Revenue * Capex_Percentage
Example 2026E: =318,402 * 14% = 44,576
3.3

Depreciation Methods

📖 Key Concept

Depreciation allocates the cost of a tangible asset over its useful life.
It's a non-cash expense that reduces taxable income but does NOT reduce cash.

Straight-Line Depreciation (Most Common)

Annual Depreciation = (Cost - Salvage Value) / Useful Life
=SLN(cost, salvage, life)

' Example: Asset costing ₹10,00,000, salvage ₹50,000, 10-year life
=SLN(1000000, 50000, 10)
' Returns: ₹95,000 per year

Depreciation Schedule: Multiple Asset Classes

Asset Class Cost (₹) Salvage (₹) Life (Years) Annual Depr. (₹) Excel Formula
Buildings 10,000,000 500,000 30 316,667 =SLN(10000000,500000,30)
Machinery 5,000,000 250,000 10 475,000 =SLN(5000000,250000,10)
Computers 2,000,000 100,000 5 380,000 =SLN(2000000,100000,5)
Vehicles 1,500,000 100,000 7 200,000 =SLN(1500000,100000,7)
Furniture 800,000 50,000 10 75,000 =SLN(800000,50000,10)
TOTAL 19,300,000 1,000,000 - 1,446,667 -
Excel Lab

Hands-On: Build Depreciation Schedule

📥 Download Practice File

⬇ Download lecture-06-capex-data.csv

🎯 Exercise: Create Depreciation Schedule

Task 1: Set Up Asset Schedule

  1. Create a new sheet named "Depreciation"
  2. Set up columns: Asset Class, Cost, Salvage, Life, Annual Depr
  3. Enter the 5 asset classes from the table above

Task 2: Calculate Annual Depreciation

Use the SLN function for each asset:

' Buildings
=SLN(B2, C2, D2)

' Or manually:
=(B2-C2)/D2

Task 3: Build 5-Year Schedule

Year Buildings Machinery Computers Vehicles Furniture Total
1 316,667 475,000 380,000 200,000 75,000 1,446,667
2 316,667 475,000 380,000 200,000 75,000 1,446,667
... ... ... ... ... ... ...
5 316,667 475,000 0 200,000 75,000 1,066,667

Note: Computers are fully depreciated after Year 5 (shown in yellow)

Task 4: Verify Results

  • Year 1-5 Total Depreciation should be 1,446,667
  • Year 6+ (after computers fully depreciated): 1,066,667
  • Check: Total depreciation over all years = Cost - Total Salvage
Summary

Key Takeaways

  • Maintenance Capex ≈ Depreciation (maintains current operations)
  • Growth Capex expands capacity and drives future revenue
  • Capex % of Revenue is the most common forecasting method
  • SLN function in Excel calculates straight-line depreciation
  • Depreciation is non-cash - added back in cash flow statement
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