What is the capital expenditure and its factors?

Capital expenditures are the funds used by the company to improve, purchase or maintain the company’s long term assets. With these funds, the company improves its efficiency or increases the capacity. Long term assets include property, equipment, infrastructure etc.

Types of capital expenditures include the following −

• Expenses incurred in maintaining the present level of operations.
• Expenses incurred in increasing their present capacity for the future.

Importance

The importance of capital expenditures is explained below −

• They have long-term effects.
• They are difficult to reverse or they are irreversible.
• Very expensive for some sectors/companies like manufacturing, utilities etc.
• Depreciation.

Challenges

The challenges involved with regards to the capital expenditures are as follows −

• Costs related to identifying, measuring and estimating are difficult/complicated.
• Lots of uncertainty.
• Sometimes, problems will occur in estimation of discount rates due to temporal spread.

Considerations

The factors which determine the capital expenditures are given below −

• Nature of business − Purchase of capital assets (For example, purchase of furniture).

• Revenue generation − Revenue generated for more than one accounting period.

• Purpose − Expenditure spent for major repairs to increase their capacity.

• Materiality − Amount is material.

Examples

• Computer equipment
• Furniture & fixtures
• Intangible assets
• Machinery
• Software’s
• Vehicles
• Office equipment