AMERICAN SOCIETY OF APPRAISERS: Business Valuation Committee Special Topics Paper #2 Reinvestment Considerations in Terminal Value Estimates: Capital Expenditures and Depreciation Levels That Result in Appropriate Reinvestment Rates^a

When using a valuation method that incorporates a terminal period net cash flow estimate, the valuation analyst will need to estimate a stabilized level of net cash flow. Two primary components of this net cash flow estimate are normalized depreciation expense and normalized capital expenditures. This technical paper will discuss research that has focused on (1) the long-term relationship between depreciation expense and capital expenditures and (2) the variables that influence this relationship. This paper will also highlight the various factors that a valuation analyst may consider when estimating a normalized level of depreciation expense and a normalized level of capital expenditures in a single-period net cash flow estimate.