DCF Question - Large Growth CapEx for One Year

I'm currently doing a DCF for an automotive parts supplier. Management has stated that they will be spending a few hundred million to build a new factory in 2018.

However, when I incorporate this growth capex into my unlevered DCF, it causes the entire PV of UFCF to go negative. As a result, more than 100% of the value of the company now comes from the terminal value, which is obviously a problem.

Should I just normalize capex and not count the building of the factory, and instead just increase maintenance capex in the future?

If I do do that, how should I account for the increased revenue from the new factory.

Any help would be appreciated.

Thanks!

 

No, that makes sense. Growth capex is a gamble. What your DCF is telling you is that the project better work. You can't have your cake and eat it too -- you can't spend a shitton of money on a project to grow the company and expect to still generate positive cash flow.

Now, you might want to break out more info on the project itself (ie show the costs and incremental cash flow) separately just so people can understand how much of the value is coming from the existing business vs the growth capex.

 
Best Response

If you are projecting WC as a percentage of revenue, then your WC will increase as your revenue does. A positive change (i.e. increase) in WC will lower your FCF. The reason for this is because when WC increases, current assets have increased at a larger rate than current liabilities have. An increase in assets represents a cash outflow and therefore a decrease in FCF.

 

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