Corporate Valuation Modeling: A Step-by-Step Guide

CHAPTER 5

Capital Expenditures, Depreciation, Intangibles, and Amortization

A number of items on the balance sheet are of critical importance to a company or have complex interactions with other concepts. In such instances it is best to create separate sheets for these concepts so details can be properly covered and implemented in Excel. Capital expenditure is one of these concepts. These are necessary investments a company makes in order to keep the business operational and to further expansion. As technology develops, more and more companies operate with fewer fixed assets than traditional capital expenditures purchase. Instead, their products are intangible items such as intellectual property, patents, and licenses. Intangible is another concept that we will want to understand and track in detail separately.

Regardless of whether money is invested in a fixed asset or an intangible, both items lose value over time. This complexity, known as depreciation for fixed assets and amortization for intangibles, necessitates rigorous technical methods to insure the concepts are properly implemented. Given that many businesses rely on fixed assets and/or intangibles to continue operations, we should look at each of these concepts carefully.

CAPITAL EXPENDITURES

As mentioned earlier, capital expenditures are investments in fixed assets that contribute to corporate operations. Typically, capital expenditures will be made to purchase property, plant, and equipment. Such purchases can ...