Updated Mar 23, 2022

What is Capex?

What is Capex?

Introduction

Capex is another term used for capital expenditures. These are the funds applied by a company to obtain, update and preserve physical assets like plants, property, technology, equipment or buildings. Capital expenditures are generally applied by a company when the company is to undertake new projects or investments for their business.

The fixed assets need capital expenditures for the purposes like- repairing, purchasing some equipment or constructing a new factory. The companies go with outlays like these to help companies increase the scope of their operations or let operations have more economic benefit.

Types of Capital Expenditures

Capex is generally seen to be of two types:

• As the expenses that are used to maintain levels of operation that are in existence in the company.

• Or, business expenses which are important as these are required for enabling future growth. The capital expenditures or CAPEX might be tangible or intangible. Both of these expenses are taken as assets for that company or business as they give the power to sell them in times of need.

Tangible expenses include the expenditures on assets like land, machinery, buildings, furniture, warehouses, software, vehicles, equipment etc.

On the other hand, the intangible expenses include the expenses on assets like licences, trademarks, patents etc. The purchase of tangible or intangible assets and expenditure incurred is a type of capital expenditure. So expenses taking place on the maintenance of such assets also are a type of CAPEX.

Importance of Capital Expenditure

When taking decisions relating to capital expenditures, companies consider CAPEX  to be very important because of the following reasons:

• Long term Effects

The effects of the capital expenditures stay on the company for a very long time and tend to stretch to the future. The production activities of a company are the result of the past expenditures. These expenses are made either on the purchase of assets to perform such activities or on maintenance of assets. The long-term goals are mainly the strategic budgeting process of a company or business before authorising capital expenditures or CAPEX.

• Irreversibility

Capital Expenditures taken by a company are hard to reverse as reversing them would eventually lead the company to face loss. The capital equipment is customised to fulfil the company's requirements, so the equipment, therefore, isn't of really any use to any other company or business.

• Initial costs

The capital expenditure is very expensive. It is especially due to the companies' involvement in dealing with production, manufacturing, telecom, utilities and oil exploration. The capital expenditures are found to provide profits and benefits in the long run. However, when done on assets like buildings or patents, the initial money requirement is huge. In fact, the expenditure is way more than the regular money outlays. As the technology for the company is bound to rise, the cost of capital is also bound to rise with the advancement.

• Depreciation

The use of capital assets in the service are initially found to be increasing the company's assets.As a financial accounting approach, depreciation allocates a tangible or physical asset's cost over its expected useful life. Depreciation is a measure of how much of an asset's value has been depleted over time.

Complexities with Capital Expenditures

• Measurement

The capital expenditure comes with the duty of identifying, measuring, and estimating the costs in connection to capital expenditures, which might be very complex and complicated.

• Unpredictability

The large capital expenditures are made in the hope of getting predictable outcomes. But such outcomes are not guaranteed, and there are chances of facing losses for the company. Thus, the decisions relating to capital expenditures' costs and benefits are uncertain, and the forecasters are likely to make mistakes.

• Period

The costs and benefits of capital expenditure or CAPEX are expanded for a long time, either industrial or infrastructure projects. The long periods might create problems and difficulties in discount rate estimation and the equivalence's establishment.

Conclusion

Capital expenditure or CAPEX is the fund businesses apply for the buying, advancement or upholding of long term assets. These assets are responsible for improving the company's efficiency as these assets are involved in the production procedures for the company.