Explanation:
1. Calculate Year 2 Net Sales:
Year 1 Net Sales = $1,000 million
Year 2 Net Sales = $1,000 × (1 + 10%) = $1,100 million
2. Calculate Year 2 Depreciation Expense:
First, calculate the Year 1 ratio:
Depreciation Expense / Net PP&E beginning of year = $36 / $480 = 0.075 (7.5%)
Year 2 Net PP&E beginning of year = Year 1 Net PP&E end of year = $530 million
Year 2 Depreciation Expense = $530 × 0.075 = $39.75 million
3. Calculate Maintenance Capital Expenditures:
Maintenance CapEx = Depreciation Expense = $39.75 million
4. Calculate Growth Capital Expenditures:
Growth CapEx = 5% of Year 2 Net Sales = 0.05 × $1,100 = $55 million
5. Calculate Total Capital Expenditures:
Total CapEx = Maintenance CapEx + Growth CapEx
Total CapEx = $39.75 + $55 = $94.75 million ≈ $95 million
6. Verify with PP&E Reconciliation:
Net PP&E at beginning of Year 2 = $530 million
Add: Total CapEx = $94.75 million
Less: Depreciation Expense = $39.75 million
Net PP&E at end of Year 2 = $530 + $94.75 - $39.75 = $585 million
Conclusion: The forecast total capital expenditure for Year 2 is closest to $95 million, which corresponds to option C.
Ultimate access to all questions.
An analyst gathers the following information about a company (in $ millions):
| Year 1 | |
|---|---|
| Net sales | 1,000 |
| Depreciation expense | 36 |
| Net PP&E-beginning of year | 480 |
| Net PP&E-end of year | 530 |
Forecast assumptions for Year 2:
The forecast total capital expenditure for Year 2 is closest to:
A
$55 million.
B
$86 million.
C
$95 million.
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