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CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling

A company has sales of 500 million, and net PP&E of 300 million at the start of the year. Management expects sales to grow to 600 million and to maintain the ratio of sales to net PP&E. Annual depreciation is forecast at 40 million. Capital expenditure for the year is closest to:

Capital expenditure is about 100 million. Constant sales to net PP&E implies ending net PP&E of 360 million, an increase of 60 million. Capex must also replace 40 million of depreciation, so 60 plus 40 equals 100 million. Ignoring depreciation gives 60 million.

  1. A60 million
  2. B100 million
  3. C160 millionCorrect

Explanation

Sales to net PP&E is 500/300 = 1.667. Ending net PP&E = 600/1.667 = 360. Capex = ending 360 - beginning 300 + depreciation 40 = 100 million. Wait, the net increase is 60; adding depreciation gives 100.

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