In a DCF model, what adjustment should be made for non-recurring expenses?

In a DCF model, the treatment of non-recurring expenses is crucial for accurately assessing the underlying cash flows of a business. Non-recurring expenses are those that are not expected to occur regularly as part of the business's ongoing operations, such as legal settlements, asset write-downs, or one-time restructuring costs.

The correct approach is to adjust them out of the cash flow projections. This is because including non-recurring expenses would obscure the true operational performance of the business. By removing these expenses, the DCF model presents a clearer picture of the company's typical cash generation capabilities, allowing for a more accurate valuation.

The intention behind excluding non-recurring expenses is to focus on sustainable, recurring cash flows that the business can generate in the future. This methodological adjustment ensures that the financial analysis remains relevant and indicative of the company's ongoing value, distilling potential volatility caused by one-off costs that do not reflect the company's normal operational reality.