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Capital Expenditure Formula

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What is Capital Expenditure (CAPEX) Formula?

Capital Expenditure Formula (Capex) calculates the total purchase of assets by the company in the given fiscal year and can be easily found by adding a net increase in PP&E value during the year to the depreciation expense for the same year.

Capex Formula can be represented as-

CAPEX Formula = Net Increase in PP&E + Depreciation Expense

The net increase in PP&E during a year can be calculated by deducting the PP&E value at the beginning of the year from the PP&E value at the end of the year as,

 Net Increase in PP&E = PP&E at the end of the year – PP&E at the Beginning of Year

On the other hand, the depreciation expense during the year can be calculated by deducting the accumulated depreciation at the beginning of the year from the accumulated depreciation at the end of the year which is represented as,

Depreciation Expense = Accumulated Depreciation at the end of the year – Accumulated Depreciation at the Beginning of Year

So, the formula for Capital Expenditure can be expanded as,

Capital Expenditure Formula = (PP&E at the end of the year – PP&E at the Beginning of year) + (Accum. dep. at the end of the year – Accum. dep. at the Beginning of year)

Or

Capital Expenditure Formula = (PP&E at the end of the year – PP&E at the Beginning of year) + Depreciation Expense

Steps to Calculate Capital Expenditure (CAPEX)

The calculation of capital expenditure formula can be done by using the following three steps:

Step #1: Firstly, the PP&E value at the beginning of the year and at the end of the year is collected from the asset side of the balance sheet. Then, the net increase in PP&E value is calculated by deducting the PP&E value at the beginning of the year from the PP&E value at the end of the year.

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Net increase in PP&E = PP&E at the end of the year – PP&E at the beginning of the year

Step #2: Next, the accumulated depreciation at the beginning of the Year and the end of the year is collected from the balance sheet. Then, the depreciation expense during the year is calculated by deducting the accumulated depreciation at the beginning of the year from the accumulated depreciation at the end of the year. Conversely, the depreciation expense incurred during the year can also be directly collected from the income statement where it is captured as a separate line item.

Dep. expense = Accum. dep. at the end of the year – Accum. dep. at the beginning of the year

Step #3: Finally, the capital expenditure incurred during the year can be calculated as either,

Capital Expenditure (Capex) Formula = (PP&E at the end of the year – PP&E at the Beginning of year) + (Accum. dep. at the end of the year – Accum. dep. at the Beginning of year)

or

Capital Expenditure (Capex) Formula= (PP&E at the end of the year – PP&E at the beginning of the year) + Dep. expense

Examples of Capital Expenditure Formula (with Excel Template)

Let’s see some simple to advanced examples to understand the calculation of Capital Expenditure Formula.

You can download this Capital Expenditure Formula Excel Template here – Capital Expenditure Formula Excel Template

Capital Expenditure Formula – Example #1

Let us take the example of a company ABC Ltd and calculation of capital expenditure in 2018 based on the following information:

  • Depreciation expense is $10,500 in the income statement
  • PP&E value at the end of 2018 is $45,500 in the balance sheet
  • PP&E value at the beginning of 2018 is $40,000 in the balance sheet

Therefore,

Net increase in PP&E = PP&E value at the end of 2018 – PP&E value at the beginning of 2018

capital expenditure 1

Consequently,

Capital Expenditure (capex) Formula = Net increase in PP&E + Depreciation expense

capital expenditure 1.2

Therefore, the calculation of Capital Expenditure incurred during 2018 is $16,000.

Capital Expenditure Formula – Example #2

Let us take the example of Apple Inc. and calculation of capital expenditure in 2017 and 2018 based on the following information:

capital expenditure 2-1

Net increase in PP&E in 2017 = $33,783 – $27,010

capital expenditure 2-1

Depreciation in 2017 = $41,293 – $34,235

capital expenditure 2-2

Consequently,

The Calculation of Capital expenditure in 2017 = $6,773 + $7,058

capital expenditure 2-3

Again,

Net increase in PP&E in 2018 = $41,304 – $33,783

capital expenditure 2-4

Depreciation in 2018 = $49,099 – $41,293

capital expenditure 2-5

Consequently,

The Calculation of Capital Expenditure in 2018 = $7,521 + $7,806

capital expenditure 2-6

Capital Expenditure Formula Calculator

you can use the following CAPEX Formula calculator-

Net Increase in PP&E
Depreciation Expense
Capital Expenditure Formula =
 

Capital Expenditure Formula = Net Increase in PP&E + Depreciation Expense
0 + 0 = 0

Relevance and Use of Capital Expenditure (CAPEX) Formula

The understanding of (capital expenditure) CAPEX Formula is very important from the point of view of business since it is usually very expensive, especially for companies in the manufacturing sector.

Capital expenditures (CAPEX) formula signify the fund that is being utilized by a company for the purchase or improvement of long term assets with an intention to improve the production capacity of the company.

A CAPEX formula basically offers the potential to reap benefits in the future as a part of long term strategic goals. However, the biggest challenge associated with the decision of capital expenditure is that it cannot be undone in the future without incurring losses given the huge initial outlay. As such, wrong capital investment can be detrimental to a company’s growth. Nevertheless, capital expenditure has to be incurred either in the form of new setup or up-gradation of the existing setup in order to ensure that the company is operating with the state-of-the-art technology. It is to be noted that if the capital expenditure incurred during the year is higher than the depreciation expense during the year then it indicates growing asset base of the company, otherwise it is a shrinking asset based company.

Recommended Articles

This has been a guide to Capital Expenditure (CAPEX) Formula. Here we discuss how to calculate Capital Expenditure along with practial examples and downloadable excel template. You can learn more about financial analysis from the following articles –

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