In a company with stable growth, how does capex typically compare to depreciation?

In a company with stable growth, how does capex typically compare to depreciation?

• A. Capital expenditure is unrelated to depreciation
• B. Capital expenditure equals depreciation
• C. Capital expenditure is less than depreciation
• D. Capital expenditure is greater than depreciation

Answer: (D)

In a company with stable growth, capex typically exceeds depreciation. Capex is the cash invested in new or upgraded fixed assets to support growth and maintain capacity, while depreciation is the accounting allocation of the asset’s cost over its life and does not require current cash outlays. To sustain ongoing growth, a firm must replace worn-out assets and fund additional capacity, so annual capex tends to be higher than the depreciation charge, leaving positive net investment. If capex equaled depreciation, the asset base would stay flat and growth would stall; if capex were less, the asset base would shrink. Thus, capex greater than depreciation best describes stable-growth firms.

In a company with stable growth, capex typically exceeds depreciation. Capex is the cash invested in new or upgraded fixed assets to support growth and maintain capacity, while depreciation is the accounting allocation of the asset’s cost over its life and does not require current cash outlays. To sustain ongoing growth, a firm must replace worn-out assets and fund additional capacity, so annual capex tends to be higher than the depreciation charge, leaving positive net investment. If capex equaled depreciation, the asset base would stay flat and growth would stall; if capex were less, the asset base would shrink. Thus, capex greater than depreciation best describes stable-growth firms.