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Subject:  Further Thoughts on Cap Ex Date:  12/11/2000  8:11 PM
Author:  WTilson Number:  5675 of 10416

Let's start with a quick example: a company buys a truck for $100,000 that it expects will last for 10 years. The company will depreciate $10,000 each year over that period -- an expense on the income statement (albeit one that is not usually broken out separately). In the first year, on the cash flow statement $10,000 will be added back in the "Depreciation and amortization" line, and the full $100,000 cash cost will appear under cap ex.

On the balance sheet, as soon as the truck is purchased, cash will decline by $100,000 and "Net property, plant and equipment" will increase by the same amount, and then decline by $10,000 per year as the depreciation is moved to the income statement.

(Incidentally, the failure to account for cap ex is one of the many reasons why EBITDA -- earnings before interest, taxes, depreciation and amortization -- is such a bogus number. EBITDA ignores very real, very necessary, and often very large capital expenditures. Occasionally there is a legitimate reason for a company to use EBITDA as its primary measure of profitability, but in general, be very wary when this is the case.)

Maintenance Cap Ex vs. Growth Cap Ex
Maintenance cap ex is what a company