capital expenditure

Examples of capital expenditure in the following topics:

• Capital Expenditures

  • In short, capital expenditures are the total costs needed to bring a project to a commercially operable status.
  • The following capital expenditures are capitalized:
  • Capitalized expenditures show up on the balance sheet.
  • Capitalized interest, if applicable, is also spread out over the life of the asset.The counterpart of capital expenditure is operational expenditure ("OpEx").
  • The funds used to construct and put a building into use are capital expenditures.

• Free Cash Flow

  • Free cash flows = EBIT x (1 - Tax rate) + Depreciation & Amortization - Changes in Working Capital - Capital Expenditure
  • Free cash flows = Net profit + Interest expense - Net Capital Expenditure (CAPEX) - Net change in Working Capital - Tax shield on Interest Expense
  • Where Net Capital Expenditure (CAPEX) = Capex - Depreciation & Amortization and Tax Shield = Net Interest Expense X Effective Tax Rate
  • Free cash flows = Profit after Tax - Changes in Capital Expenditure x (1-d) + Depreciation & Amortization x (1-d) - Changes in Working Capital x (1-d)
  • Free cash flows = Cash flows from operations - Capital Expenditure ""

• Valuing Repairs, Maintenance, and Additions

  • Improvements to existing plant assets are capital expenditures because they increase the quality of services obtained from the asset.
  • Betterments or improvements to existing plant assets are capital expenditures because they increase the quality of services obtained from the asset.
  • Since these expenditures benefit an increased number of future periods, accountants capitalize rather than expense them.
  • If an expenditure that should be expensed is capitalized, the effects are more significant.
  • Explain what a capital expenditure is and how a company would account for it.

• The Goals of Capital Budgeting

  • The purpose of budgeting is to provide a forecast of revenues and expenditures.
  • Capital Budgeting, as a part of budgeting, more specifically focuses on long-term investment, major capital and capital expenditures.
  • The main goals of capital budgeting involve:
  • The real value of capital budgeting is to rank projects.
  • When a corporation determines its capital budget, it must acquire funds.

• Defining Aggregate Expenditure: Components and Comparison to GDP

  • Aggregate expenditure is the current value of all the finished goods and services in the economy.
  • The equation for aggregate expenditure is: AE = C + I + G + NX.
  • Government expenditure can include infrastructure or transfers which increase the total expenditure in the economy.
  • The GDP is calculated using the Aggregate Expenditures Model .
  • This graph shows the aggregate expenditure model.

• The Circular Flow and GDP

  • In the circular flow model, the household sector, provides various factors of production such as labor and capital, to producers who in turn produce goods and services.
  • Investment, I, is equal to savings and is the income not spent but available to both consumers and firms for the purchase of capital investments, such as buildings, factories and homes.
  • I represents an expenditure on investment capital.
  • G can be equal to taxes, less than or more than the tax revenue and represents government expenditure in the economy.
  • The continuous flow of production, income and expenditure is known as circular flow of income.

• Other Approaches to Calculating GDP

  • It can be measured a few different ways and the most commonly used metric is the expenditure approach; however, the second most commonly used measure is the income approach.
  • This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labor, interest for capital, rent for land, and profits for entrepreneurship.
  • "National Income and Expenditure Accounts" divide incomes into five categories:
  • Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product.
  • By definition, the income approach to calculating GDP should be equatable to the expenditure approach (Y = C + I+ G + (X - M)).

• Gross Domestic Product

  • The expenditure approach works on the principle that all products must be bought by a consumer; therefore, the value of the total product must be equal to consumers' total expenditures.
  • Components of GDP by expenditure are:
  • GDI should provide the same amount as the expenditure method.
  • This method measures GDP by adding the incomes that firms pay households for factors of production -- i.e., wages for labor, interest for capital, rent for land and profits for entrepreneurship.
  • Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product.

• Defining GDP

  • Y = C + I + G + (X − M) is the standard equational (expenditure) representation of GDP.
  • "C" (consumption) is normally the largest GDP component in the economy, consisting of private expenditures (household final consumption expenditure) in the economy.
  • "G" (government spending) is the sum of government expenditures on final goods and services.
  • Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product.
  • Since wages eventually are used in consumption (C), the expenditure approach to calculating GDP focuses on the end consumption expenditure to avoid double counting.

• Calculating GDP

  • GDP can be calculated through the expenditures, income, or output approach.
  • Both of these methods calculate GDP by evaluating the final stage of sales (expenditure) or income (income).
  • The most well known approach to calculating GDP, the expenditures approach is characterized by the following formula:
  • GDP = National Income (NY) + Indirect Business Taxes (IBT) + Capital Consumption Allowance and Depreciation (CCA) + Net Factor Payments to the rest of the world (NFP)
  • GDP at producer price theoretically should be equal to GDP calculated based on the expenditure approach.