About this lesson
Explanation of what should be considered as CAPEX.
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CAPEX Part 1
When to use
When constructing a basic financial model.
- Assets can be defined as “future economic benefits controlled by the entity as a result of past transactions or other past events”
- Therefore, three key characteristics:
- Expected to provide future economic benefits to an entity
- Need to be controlled by an entity
- Transaction or event leading to the creation of the asset must have occurred already
- Non-Current Asset
- Assets that have a useful economic life of more than one year
- Expected to provide future economic benefit to the entity
- Not intended for resale to customers
- De Minimis limit
- If capital expenditure is expected to create future economic benefits, the amount is not expensed in one period
- Depreciable amount is expensed over the asset’s useful economic life
- Remaining amount (estimated trade-in) value is known as the Residual Value (typically zero)
- Various methods of depreciation
- Straight line Depreciation
- Calculates depreciation on a linear basis
- Amount of depreciation will be the same each period (subject to pro-rating)
- Declining balance Depreciation
- Amount of depreciation decreases each period
- Rate is fixed, dependent on useful economic life and Declining Balance Multiple
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