Adult-Gerontology Clinical Nurse Specialist (CNS) Practice Exam

What role does depreciation play in a capital budget?

1. It accounts for the annual costs of maintaining equipment.

2. It influences the projected costs for major purchases.

3. It is not relevant to capital budgets.

4. It establishes the expected lifespan of purchased assets.

The correct answer is: It establishes the expected lifespan of purchased assets.

Depreciation plays a crucial role in capital budgeting by establishing the expected lifespan of purchased assets. This is essential for organizations as it helps determine how long the asset will be productive and beneficial to the business. By understanding the lifespan, financial planners can better allocate resources and predict when replacement or additional expenditures may be necessary. Depreciation also affects financial statements, influencing tax deductions and overall financial health, making it essential for accurate long-term budgeting and investment decisions. While maintenance costs, projected costs, and relevance to capital budgets are important factors in financial planning, they do not capture the core function of depreciation as it relates to determining the longevity and value retention of capital assets. Depreciation directly informs how management views the benefits of their investments over time.