Module II· DCF — Mechanics & FCFAdvanced

Question

How do you distinguish maintenance capex from growth capex in your capex assumption?

Answer

Mechanics

Maintenance capex keeps the existing asset base — and thus output — constant. Growth capex expands capacity for future growth.

Approximation methods

D&A as a rule of thumb: D&A roughly equals maintenance capex (really a lower bound, because book values don't reflect replacement cost).
Capex-to-revenue ratio: from zero-growth comparable companies (mid-cycle).
Management disclosure: some companies report maintenance separately.

Forecast vs. terminal

```
Forecast: Total Capex = Maintenance + Growth
Terminal: Capex = Maintenance × (1 + g)
```

Important

Growth capex has an NPV ≥ 0 (otherwise growth would destroy value), but in a DCF that value contribution already sits in the growth FCF.

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