Capital Expenditure

Capital expenditure, abbreviated as CapEx, is the funds that a company spends on acquiring, upgrading, or maintaining physical assets, such as property, buildings, equipment, or infrastructure.  These expenditures are typically made with the intention of generating income or providing long term benefits to the company.  Capital expenditures are distinguished from operating expenditures (OpEx), which are the day-to-day expenses incurred in the normal course of business operations, such as salaries, utilities, and rent.

common examples of capital expenditures

• Purchase of new equipment or machinery.
• Construction or renovation of buildings and facilities.
• Acquisition of land or property.
• Investments in software or technology infrastructure.
• Expansion of production capacity.
• Upgrades to existing equipment or facilities to improve efficiency or extend their useful life.

Capital expenditures are recorded on the company's balance sheet as assets and are typically depreciated or amortized over their useful life.  Depreciation is the gradual allocation of the cost of the asset over its expected useful life, while amortization applies to intangible assets like patents or copyrights.

Capital expenditures play a crucial role in the strategic planning and growth of a company, as they can contribute to improving productivity, expanding operations, and maintaining competitiveness in the market.  However, they also require careful consideration and financial planning due to their significant upfront costs and long term implications for the company's financial performance and cash flow.

 

capital expenditure Formula

\( CapEx = PPEC - PPEP + DE  \)

Symbol

\( CapEx \) = capital expenditure

\( DE \) = depreciation expense

\( PPEC \) = PP&E current year

\( PPEP \) = PP&E previous year

\( PP \)&\( E \) = property, plant, and equipment