The Daily Technical #119: How would you forecast capex and D&A when creating a financial model?

Good morning. Welcome to the 119th edition of The Daily Technical.

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OVERVIEW OF YESTERDAY’S QUESTION
What is the relationship between depreciation and the salvage value assumption?

Companies typically assume a salvage value of zero by the asset's end of life.

This means the asset is considered worthless when its useful life expires.

The difference between an asset's cost and salvage value is the total depreciable amount.

When a zero salvage value is assumed, depreciation expenses are higher annually, maximizing tax benefits.

Straight Line Annual Depreciation = (Asset Historical Cost − Salvage Value) / Useful Life Assumption

Common Mistakes

1. Focusing solely on straight-line depreciation. Be aware of alternative methods, like declining balance, which treat salvage value differently. Broaden your understanding by learning about the impacts of all methods.

2. Failing to link depreciation with tax benefits. Emphasize how depreciation lowers taxable income, especially when salvage value is zero. This highlights the financial strategy behind depreciation policies.

TL;DR

• Salvage value often assumed zero at asset's end of life, indicating asset worthlessness.

• Depreciation calculated as asset cost minus salvage value equals total depreciable amount.

• Zero salvage value increases annual depreciation expenses, maximizing tax benefits.

• Straight Line Annual Depreciation = (Asset Cost − Salvage Value) / Useful Life.

TODAY’S QUESTION
How would you forecast capex and D&A when creating a financial model?

Type your answer here. Within 60 seconds you’ll have custom feedback in your inbox.

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