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We hope to increase sales by 25% next year by investing in PP&E. We booked $1,500,000 in sales...

Question:

We hope to increase sales by 25% next year by investing in PP&E. We booked $1,500,000 in sales this year, and our depreciation expense was $72,000. We ended this year with $875,000 of PP&E (net). How much should the firm plan for CAPEX assuming that our PP&E (net) and depreciation remain constant as a percentage of sales?

Trend Analysis:

In trend analysis, the financial statements (profit and loss statement and balance sheet) are analyzed to evaluate the financial performance of the organization. The horizontal analysis and vertical analysis used in trend analysis and are used to extrapolate the numbers based on past trends in the future

Answer and Explanation:

  • The sales will increase by 25% next year and the projected sales revenue is $1,875,000 ($1,500,000 x 125%)

The percentage of PP&E (net) and depreciation to sales revenue for the current year and next year is calculated below

Current Year Next Year
Sales (A) $1,500,000    $1,875,000   
depreciation expense (B) $72,000 $90,000
Percentage {(C= B/A) *100) 4.80% 4.80%
PP&E (net) (D) $875,000 $1,093,750   
Percentage {(E= D/A) *100) 58.3333% 58.3333%

Increase In Capex = next year PP&E (net) - current year PP&E (net) + next year depreciation expense - current year depreciation expense
= $1,093,750 - $875,000 + $90,000.00 - $72,000
=$236,750

The investment in Capex would be $236,750 in the coming year


Learn more about this topic:

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Comparative Statements as Balance Sheet Disclosures

from Accounting 201: Intermediate Accounting I

Chapter 4 / Lesson 9
974

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