Best way to forecast D&A and Capex
What is the best way to project D&A and Capex in DCF model assuming that you don't have meaningful capex estimations from management? I know you can forecast both as % of Sales or do D&A as % of Sales and make Capex to converge to D&A at the end of forecast period, or reverse. But I can't really get right explanation once I also factor in maintenance vs. growth capex. Any help is appreciated. P.S. I searched similar posts, but couldn't find explanation I was looking for.
How about looking at public comps, if there are some? Put together a quick matrix of their capex as a % of sales, then adjust it for their growth rates, to get a reasonable estimate for your company?
Projecting Depreciation (Originally Posted: 10/04/2017)
I'm on an IB case study team and we are posing as buy-side M&A analysts to evaluate Canadian Pacific's bid for Norfolk Southern pre-4th quarter of 2015–when Ackman had already performed a hostile takeover of CP, appointed Hunter Harrison, and was pressing to merge with NS. What are some metrics, multipliers, or formulas we can use to project depreciation and support with reasoning? Keep in mind that our terminal year is 2015, we have not performed a DCF yet, we cannot calculate the residual value of the change of assets per annum, and our capEx has been projected bluntly via an averaged 2% decrease per annum.
At a larger scope, are analysts required to explain the subjective reasons behind supporting certain models as supposed to others when projecting, and how often is brute averaging performed when there is a lack of knowledge per certain line items or opaqueness surrounding COGS, AR's, SG&A, unusual items etc.
You need to put together a depreciation waterfall. You don't really project depreciation; you project capex. Depreciation is a derivative of capex. The qualitative nature of the asset will dictate the curves selected (MACRS/straight-line) and the useful life of the asset. You can find the use lives of the asset in the financials. As far as the curve is concerned, just go with straight-line. Remember that land is not depreciated.
Depreciation projections (Originally Posted: 08/13/2014)
Hi, I was wondering if it is OK to take depreciation as a constant % of revenue in an income statement projection. I built a PP&E schedule but the problem there is that I am not sure how much CapEx the company would do.
The company already has huge Capital expenditures in the future (it has ordered many trucks-its main operating asset- with balloon payments due at delivery)
Yes, assuming you don't have any more specific info on depreciation projections, that's fine. Always start off simple and you can drill down later.
Alternatively, you could also calculate the $ depreciation of each truck and keep a running count of trucks. Then just take the average number of trucks in each time period and multiply by the $ depreciation per truck. Obviously the assumption here is that the number of trucks is a key operational metric.
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