In a private equity model, how should sustaining capex be treated in calculating free cash flow compared with growth capex?

• A. Add sustaining capex to FCF
• B. Treat both the same and subtract both
• C. Subtract sustaining capex from cash flow; growth capex can be capitalized or affect cash flows depending on approach
• D. Subtract only growth capex; sustaining capex is expensed

Answer: (C)

The key idea is to separate capex into maintenance (sustaining) and growth (expansion) to reflect how they affect cash flow. Sustaining capex is the cash needed just to keep the current asset base functioning, so it directly reduces the cash flow available to investors in the period and is subtracted from cash flow.

Growth capex funds expansion and typically creates additional value in future periods. How you treat it depends on the modeling approach: you can capitalize it, adding it to the asset base and depreciating it over time, which means it does not hit current period FCF dollar-for-dollar but will affect FCF indirectly through depreciation tax shields and higher cash flows later. Alternatively, if you don’t capitalize growth capex, you would treat it as a current cash outflow, reducing FCF now. Either way, the sustaining capex is subtracted from cash flow, while growth capex can be capitalized or otherwise reflected in future cash flows depending on the method used.