CAPEX and Depreciation Projections: a Universal Approach

CAPEX and Depreciation Projections

I’ve been doing financial modeling since 2001. Initially – for my employers, then for my clients on the local market. In 2011 we have launched CFOTemplates.com website and now my financial models are being used around the world. CAPEX and depreciation projections have always been an integral part of these financial models.

Working on the global market, even when most of the clients are coming from the US, is a great thing to learn different approaches to finance that are being used in different countries. While the basic principles of finance (time value of money, etc.) are the same around the world, some items like depreciation might vary regionally.

Quite often I get client messages like “You know, in our country we have a special regime of depreciation that allows us to use a 7.5-year depreciation for a particular type of assets.” It’s just almost impossible to build formulas for each type of assets.

So, I have created a universal approach to project CAPEX and depreciation for different asset classes while being able to choose almost any depreciation term. While we are using this table as one of the sheets in our financial planning templates, I have also created it as a separate file for education purposes. Feel free to download it from our CFOTemplates.com website and learn the techniques.

CAPEX tips and tricks

Let me summarize some key ideas and tips for CAPEX and depreciation projections:

• Project CAPEX by projects, not by asset classes.
• Forecast non-capitalized costs related to the projects next to CAPEX. Then just link these expenses straight to the P&L, not to the balance sheet. For example, it is wise to forecast insurance costs next to buying the new vehicles. If you choose not to buy the cars, you won’t end up forecasting to buy an insurance for a car you don’t have.
• Split depreciation projections into “Old” and “New”. You can easily forecast depreciation of existing assets by taking the numbers from accounting. Depreciation of new assets is easy to link to the amount of CAPEX. But you would have hard time if you mix both approaches in the same cell.
• Use helper table (Lines 92-114) to use OFFSET formula for depreciation projections. OFFSET is just great for these types of calculations!

P.S. I am now working to create a couple of online courses about financial modeling and budgeting. CAPEX projections will be a section in the course so I will be grateful for any comments you have. You are welcome to connect or follow me on LinkedIn to get new ideas about financial modeling.

CAPEX and Depreciation Projections: sample financial model