One may find in corporate textbooks and valuation manuals and even valuation standards (e.g. TEGoVA) a rule of thumb that never was proven to be correct. In the sustainable cash flow after the explicit forecast horizon CAPEX is often approximated by depreciation charge given this rule of thumb. However, it may materially mislead valuation result for not counting inflation, real growth and irregularities in replacement of fixed assets. The inaccuracy may be particularly high for new business with fresh assets, for SME businesses and other businesses with concentrated fixed assets not divisible and partially replaceable.
Given the lack of empirical evidence supporting the widely-used rule of thumb that CAPEX should equal depreciation charge, it may be time to revisit the methodology with a more scientific approach. By rigorously testing and verifying these rules of thumb, we could transform valuation from an art based on human perception to a craft based on scientific principles. This would not only enhance the accuracy of valuations but also increase confidence in the methodology among practitioners and investors alike.
Even the time value of money vis a vis inflation is not accurate and needs to be more scientific. The whole idea of generalization impact the final results to a very great extent. Commodity specific values calculated in real time basis may be the remedy for the time being.
Arshad hasan Jafri The choice of discount rate is up to justification in each case, including consideration of inflation rate, while the concept of discounting, i.e. time value of money, is fine as to me.
Actually the financial assets are being designed and chosen to beat inflation as eats time value of money. It is more relevant in high interest rates economies like India. Still I agree to your point upto some extent.
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