An article in the current (August 2018) issue of Business Valuation Update examines what it calls the Delaware court’s erroneous default position in fair value proceedings that capital expenditures should equal depreciation in determining terminal value in a DCF analysis. That is, the assumption is that the company has zero net capital expenditures. “The assumption makes sense only if one assumes the non-real-world scenario of both no growth and no inflation,” the authors say, and they demonstrate this in detail. The authors of the article are Gilbert E. Matthews (Sutter Securities Inc.) and Arthur H. Rosenbloom (Consilium ADR LLC).

As the authors point out, if the firm is expected to grow in perpetuity, how can it do so with no net capital investment? But many valuation experts do indeed assume capex equal to depreciation in their terminal value calculations, according to surveys. What to consider instead? You can look at industry averages for capex/depreciation ratios and use that as the basis for an assumption for your subject firm. Another approach is to estimate the net capex based on the subject company’s return on capital.