What is Capital Expenditure (CAPEX) Formula?
Capital Expenditure (Capex) Formula 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.
It can be represented as-
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.
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.
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
Consequently,
Capital Expenditure (capex) Formula = Net increase in PP&E + Depreciation expense
Therefore, the calculation of Capital Expenditure incurred during 2018 is $16,000.
Example #2
Let us take the example of Apple Inc. and calculation of capital expenditure in 2017 and 2018 based on the following information:
Net increase in PP&E in 2017 = $33,783 – $27,010
Depreciation in 2017 = $41,293 – $34,235
Consequently,
The Calculation of Capital expenditure in 2017 = $6,773 + $7,058
Again,
Net increase in PP&E in 2018 = $41,304 – $33,783
Depreciation in 2018 = $49,099 – $41,293
Consequently,
The Calculation of Capital Expenditure in 2018 = $7,521 + $7,806
Capital Expenditure 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
Capital Expenditure (Capex) Formula is used for calculating total purchases of assets made by the company during a given period of time and it is calculating by adding the net increase in the value of Plant, property and equipment and Deprecation expense during the particular fiscal year. The understanding of Capex 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) 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.
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