How should capital expenditures (CapEx) and depreciation trend within the explicit forecast period?

Within the explicit forecast period, capital expenditures (CapEx) and depreciation usually exhibit a trend that aligns with the overall growth and requirements of the business. The correct answer highlights that as a company matures and optimizes its operations, it may not need to invest as heavily in new capital assets, leading to a decline in CapEx. This is particularly relevant for businesses that reach a stable growth phase, where maintaining existing equipment or technology becomes more important than acquiring new assets.

As a company grows, initial investments in physical assets often lead to significant depreciation. Over time, once these investments are made and the company reaches a certain scale, the relative need for additional large CapEx might decline, while the associated depreciation of earlier investments continues. Therefore, depreciation does not decline since it is a function of past investments but instead reflects the gradual reduction in value of the existing assets over time.

This trend of declining CapEx is often correlated with a company’s maturity stage, as industries that are in a high-growth period may see increased CapEx spending to support expansion efforts. In contrast, more mature companies often manage their assets more efficiently, resulting in a lower need for ongoing capital investments as they generate consistent revenue streams from existing operations.

In practice, firms often aim