Explain capital expenditure model

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gsenviro eNotes educator| Certified Educator

Capital expenditure, as the name suggests, is the expenses incurred by a business in building assets. These expenses may include,

  • buying land, warehouses, offices, equipment, etc.
  • upgrading existing assets (such upgrading equipment, software, office space, etc.) to enhance their operational life
  • acquiring or starting a new line of business, etc.

These expenses are capitalized, that is, spread over the design life of the capital asset. Hence a capital expense of $100,000 for an equipment with an operational life of 10 years will be reported in 10 installments, instead of reported in that financial year. And these expenses include depreciation as well. Hence when capital expenditure modelling is done, the cost is amortized (when investing in intangible assets such as patents and skills) and depreciated (when investing in deprecating assets) over time.

Hope this helps.