How should a model treat maintenance capex differently from growth capex?

• A. There is no difference; treat the same
• B. Growth capex is expensed immediately
• C. Maintenance capex increases debt only
• D. Maintenance capex preserves the asset base; growth capex expands capacity and may drive higher depreciation; separate and track impacts on asset base.

Answer: (D)

The key idea is that maintenance capex and growth capex affect a company’s finances in different ways, so they should be treated separately in a model. Maintenance capex is the ongoing investment needed to keep the existing asset base working—it's about preserving current operations and capacity. Growth capex, on the other hand, adds new assets or upgrades capacity, which expands the asset base and typically leads to higher depreciation in future periods as those new assets are used.

In modeling, separating them helps you see how much is required just to sustain operations versus how much is actually expanding the business. Capex is capitalized, not expensed immediately, so growth investments reduce cash flow now but show up as depreciation later, reflecting the added asset base. The amount of growth capex can influence future earnings through higher depreciation and potentially increased throughput, while maintenance capex mainly ensures existing operations continue without expanding capacity.

Funding for capex can come from various sources, including debt or equity, so maintenance capex isn’t tied only to debt. The correct approach captures both pieces: maintenance capex preserves the asset base; growth capex expands capacity and may drive higher depreciation, with separate tracking of their impacts on the asset base.