Capital Expenditure 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.
Examples of Capital Expenditure
The following Capital expenditure (CAPEX) example provides an outline of the most types of capital investments. For an asset to qualify as a capital expenditure it doesn’t need to be directly associated to the production or service being provided by the entity, it could be an asset, that the entity has purchased for use, generally for a period of more than a year.
Most common examples of Capital Expenditure are as follows –
- Land
- Building
- Office Furniture
- Computers
- Office Equipment
- Machinery
- Vehicles
- Patents
- Copyrights
- Trademarks
- Licensing and rights
- Softwares
Let us now discuss capital expenditure examples in real life.
Top 4 Practical Examples of Capital Expenditure
Given below are the top examples of capital expenditure.
CAPEX Example #1
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 a period of more than a year.
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The increase in 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 would have brought efficiency in production or would have helped in reducing the waste from the factory, it would still classify as a capital expenditure, as the entity would be utilizing the benefits of the expenditure made by it.
CAPEX 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 value of the vehicle.
CAPEX 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 in order 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 budget of the company.
Source: Berrypetroleum.com
(Reference: Page 7 of Annual report of Berry Petroleum Company LLC for the year ended 31st December 2018)
The following picture provides key insights about the capital expenditures made by the company with the purposes for which those were made and the impact that had on the production of the company as well as EBITDA.
CAPEX Example #4
Capital expenditure trends and nature for GlaxoSmithKline (GSK)
GlaxoSmithKline is a science-led global healthcare company with an 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 on 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 is Pharmaceuticals pipeline and vaccines capacity, it is primarily driven by the fact that the demand for pharmaceutical is ever increasing globally and in order to serve the increasing demands, the capacity is required to be increased.
Source: www.gsk.com
Conclusion
The capital expenditure is required for expansion of the operations of the company, as well as to maintain the current levels of operations of the company. 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 intensive 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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