Examples of Capital Expenditure
Capital Expenditure or Capex refers to the total expenditure on the purchase of assets by the company in given period of the time and the example of which includes expenditure on purchase of buildings, office equipments, intangible assets, furniture and fixtures, computer equipments, and motor vehicles, expenditure on the extension or the addition of the assets etc.
Most common examples of Capital Expenditure (Capex) are as follows –
- Land
- Building
- Office Furniture
- Computers
- Office Equipment
- Machinery
- Vehicles
- Patents
- Copyrights
- Trademarks
- Licensing and rights
- Softwares
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Source: Capital Expenditure Examples (wallstreetmojo.com)
Top 4 Practical Examples of Capital Expenditure (Capex)
Given below are the top examples of capex.
Example #1
The new production unit set up by ABC Ltd., which would increase its production capacity by 300 MT.
ABC Ltd. is an entity engaged in the production of cement; the company had an existing capacity of 500 MT, the market demand for cement has grown significantly, due to increasing infrastructure and real estate activities in the country. Given the increased market demand, ABC Ltd. decided to set up a new production unit, in the same vicinity as the existing unit; a new unit is expected to increase the production capacity of 300 MT.
This new unit, being set up by the company, is an example of a capital expenditure made by the company. As the unit is being set up, with an objective to increase the production capacity and the benefits of the units would flow to the entity for more than a year.
The increase in the production capacity of the entity is not a basis for classifying the amount spent on setting up the production unit as capital expenditure. In the above example, even if the production capacity would have remained constant and the new unit brought efficiency in production or helped in reducing the waste from the factory, it would still classify as a capital expenditure. It is since the entity is still utilizing the benefits of the expenditure made by it.
Example #2
Transportation vehicle purchased by the entity;
An entity engaged in running a manufacturing unit has purchased a vehicle for the transportation of employees from home to office and office to home. It falls under the definition of capital expenditure.
The entity shall be using the vehicle for a period much longer than a year. The amount spent on purchasing the vehicle shall be capitalized in the books of the entity, and depreciation shall be charged on the same, based on the expected useful life of the vehicle and expected the residual valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed.read more of the vehicle.
Example #3
Capital expenditure trend of Berry Petroleum Company LLC:
Berry Petroleum Company LLC is one of the oldest companies in the USA; it has been in operation since 1909. Berry expanded its presence in areas outside of California beginning in 2003 as the company observed the opportunities to acquire natural gas and light oil to increase its portfolio.
Since the company is an upstream energy company, which is engaged primarily in the development and production of conventional oil reserves, the below extracts from the Annual report of Berry Petroleum Company LLC provides on the capital budgetCapital BudgetCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds.read more of the company.
Source: Berrypetroleum.com
(Reference: Page 7 of Annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more of Berry Petroleum Company LLC for the year ended 31st December 2018)
The following picture provides vital insights about the capital expenditures made by the company, along with their purposes and impacts it had on the production of the company as well as EBITDA.
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Example #4
Capital expenditure trends and nature for GlaxoSmithKline (GSK)
GlaxoSmithKline is a science-led global healthcare company with the objective of helping people do more, feel better, live longer. The company does a lot of research, development, and manufacturing in primarily three segments, which are:
- Pharmaceutical medicines
- Vaccines and
- Consumer healthcare products
The company invests significantly in the research and development activity as well as in manufacturing facilities.
The capital allocation decided by the company in the year ended 31st December 2018 is as under:
Source: www.gsk.com
The following table provides further insights into the capital allocation framework of the company, along with details of the business that gets the capital on top priority. It is evident from the below extract that the key priorities of the company for capital are Pharmaceuticals pipeline and vaccines capacity. Its primarily driving force is the fact that the demand for pharmaceuticals is ever-increasing globally, and for serving the increasing demands, the increase in the capacity is required.
Source: www.gsk.com
Conclusion
Capital expenditure is required for the expansion of operations as well as to maintain the current operation levels of the company. The amount of capital expenditure that a company makes depends on the nature of business the company is into. There are certain businesses, which are more capital intensiveCapital IntensiveCapital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read more as compared to the others. Thus, the amount of capital expenditure is usually driven by the nature of a business company is engaged in.
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