How does inflation impact capex versus depreciation in forecasting?

How does inflation impact capex versus depreciation in forecasting?

• A. Capex is recorded at current (modern) prices; depreciation remains at older prices
• B. Capex and depreciation both adjust to current prices
• C. Depreciation is at replacement cost; Capex uses historical cost
• D. Inflation affects only working capital

Answer: (A)

Inflation changes how you price new investments versus how you allocate the cost of existing assets. When you forecast capex, you’re forecasting the actual purchases of new fixed assets in the year they’re bought, so you use current prices (nominal terms) that reflect today’s inflation. Depreciation, on the other hand, is a non-cash charge that spreads the asset’s original cost over its useful life. That cost basis is the historical cost from when the asset was acquired, not the current replacement price, unless you explicitly restate or revalue the asset. So depreciation stays tied to older prices while capex moves with current prices.

Inflation changes how you price new investments versus how you allocate the cost of existing assets. When you forecast capex, you’re forecasting the actual purchases of new fixed assets in the year they’re bought, so you use current prices (nominal terms) that reflect today’s inflation. Depreciation, on the other hand, is a non-cash charge that spreads the asset’s original cost over its useful life. That cost basis is the historical cost from when the asset was acquired, not the current replacement price, unless you explicitly restate or revalue the asset. So depreciation stays tied to older prices while capex moves with current prices.