Build a Capex & Depreciation Model

This guide explains how to model capital expenditure (capex) and depreciation in Model Reef using Asset variables and timing rules. The goal is to connect investment plans to P&L, Balance Sheet and Cashflow.

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Before you start

You should have:

• A basic understanding of Asset variables.

• A view of planned capital projects and maintenance capex.

• A sense of appropriate useful lives for different asset classes.

If new to Assets, review:

• Variable Type Specifications (Assets)

• Build a Full Financial Model from Scratch

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What you will build

• Asset variables representing capex for different asset classes or projects.

• Depreciation schedules over the useful lives of assets.

• A clear picture of capex in Cashflow and depreciation in P&L.

• Asset balances over time in the Balance Sheet.

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Step 1: List asset classes and projects

Common groupings include:

• Property, plant and equipment.

• Leasehold improvements.

• Technology and software.

• Vehicles.

• Fitout or expansion projects.

Decide which assets you want to track separately for planning and reporting.

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Step 2: Create Asset variables for new capex

For each asset class or project:

• Create an Asset variable, for example:

  • Capex - Manufacturing Equipment

  • Capex - New Store Fitout

• Define:

  • Purchase amounts per period.

  • Timing of purchases.

• Choose the depreciation method, for example:

  • Straight line.

  • Reducing balance.

  • Units of production.

Set the useful life in periods according to your accounting policy.

These Asset variables will automatically:

• Increase Assets on purchase.

• Trigger capex cash outflows.

• Generate depreciation expense.

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Step 3: Enter opening asset balances if needed

If the business already has existing assets:

• Use the opening balance functionality to set starting Asset balances.

• Provide any required offset entries to keep the Balance Sheet balanced, for example:

  • Retained earnings.

  • Equity.

• Optionally create separate Asset variables for existing assets with:

  • Remaining useful life.

  • Depreciation from model start date onward.

This ensures the starting Balance Sheet is realistic.

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Step 4: Review depreciation in P&L

Open the P&L and confirm:

• Depreciation Expense appears below EBITDA and above EBIT.

• Patterns over time match your understanding of asset lives and purchase timing.

If you see unexpected spikes or drops, revisit:

• Purchase schedules.

• Useful lives.

• Depreciation methods.

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Step 5: Review capex and asset balances in Cashflow and Balance Sheet

In the Cashflow Statement:

• Capex appears in Investing Cashflow as cash outflows.

In the Balance Sheet:

• Asset balances reflect cumulative capex minus depreciation.

• If you model disposals manually, Asset balances should reflect those too.

Use charts or custom series to track total Assets or capex by year for planning.

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Step 6: Distinguish between maintenance and growth capex conceptually

Although Model Reef does not enforce a specific split, it is often helpful to distinguish:

• Maintenance capex:

  • Required to sustain current operations.

• Growth capex:

  • Intended to expand capacity or reach.

You can represent this with separate Asset variables, for example:

• Capex - Maintenance - Stores

• Capex - Growth - New Stores

This allows you to see how much of total capex is driving incremental growth versus sustaining the base.

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Step 7: Use scenarios to test different capex strategies

Create separate models, for example:

• Model - Capex - Base Plan

• Model - Capex - Expansion

• Model - Capex - Deferred Investment

In each:

• Adjust capex timing and amounts.

• Observe effects on cash, leverage, and valuation.

This helps determine whether the returns justify the investment profile.

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Check your work

• Asset variables correctly represent planned capex.

• Depreciation schedules look reasonable and align with useful lives.

• Cashflow captures capex in the correct periods.

• Asset balances in the Balance Sheet are plausible and do not become negative.

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Troubleshooting

Depreciation is surprisingly high or low

Check useful lives, methods and whether you have double counted assets or opening balances.

Cashflow impact of capex seems shifted

Confirm purchase dates and that Asset variables are configured with the correct start periods.

Balance Sheet does not balance after adjusting assets

Revisit opening balances and ensure offsetting entries are correct.

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