In modeling, what is the difference between capex and ongoing maintenance?

• A. Capex is expensed immediately; maintenance is capitalized
• B. Capex is a recurring operating expense; maintenance improves asset value
• C. Capex has no effect on depreciation; maintenance does
• D. Capex adds to asset value and is capitalized; ongoing maintenance is expensed; capex timing and depreciation affect cash flows

Answer: (D)

The key idea is how expenditures are treated for assets in a model. Capital expenditures add to the asset base and are capitalized, meaning they appear on the balance sheet and are depreciated over the asset’s useful life. This not only spreads the cost over time but also affects cash flow through the initial investment and the tax shield from depreciation. Ongoing maintenance, on the other hand, is expensed in the period it’s incurred, reducing current income with no impact on asset value or a depreciation schedule. Because capex timing changes when cash leaves the business and depreciation alters operating cash flow via taxes, capex and its depreciation have a different, broader impact on cash flows than maintenance.