Examples of Capital Expenditure
The most common examples of capital expenditure (CapEx) are as follows: –
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Top 4 Practical Examples of Capital Expenditure (Capex)
Given below are the leading examples of CapEx.
Example #1
The new production unit set up by ABC Ltd. would increase its production capacity by 300 MT.
ABC Ltd. is engaged in cement production. The company had an existing capacity of 500 MT. However, the market demand for cement has grown significantly due to the country’s increasing infrastructure and real estate activities. Given the increased market demand, ABC Ltd. decided to set up a new production unit in the same vicinity as the existing unit. As a result, a new unit is expected to increase the production capacity by 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 to increase the production capacity, the unit’s benefits 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 remained constant and the new unit brought efficiency in production or helped reduce the factory’s waste, it would still classify as a capital expenditure. So it is since the entity is still utilizing its cost benefits.
Example #2
The entity purchased the vehicle.
An entity engaged in running a manufacturing unit has purchased a vehicle to transport employees from home to office and office to home. Therefore, it falls under the definition of capital expenditure.
The amount spent on purchasing the vehicle shall be capitalized in the entity’s books, and depreciation shall be charged on the same, based on the expected useful life of the vehicle and the expected 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 the company’s 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.
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 into the capital expenditures made by the company, along with their purposes and impacts on the production of the company as well as EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business’s performance with that of its competitors.read more.
Example #4
Capital expenditure trends and nature for GlaxoSmithKline (GSK)
GlaxoSmithKline is a science-led global healthcare company to help people do more, feel better, and live longer. The company does a lot of research, development, and manufacturing in primarily three segments, which are:
- Pharmaceutical medicinesVaccines andConsumer healthcare products
The company invests significantly in research and development activity and 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 company’s key priorities for capital are pharmaceuticals pipeline and vaccines capacity. Its primarily driving force is that the demand for pharmaceuticals is ever-increasing globally. Therefore, to serve the increasing needs, an increase in capacity is required.
Conclusion
Capital expenditure is required to expand operations and maintain the company’s current operation levels. The amount of capital expenditure that a company makes depends on the nature of the company’s business. Certain businesses 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, capital expenditure is usually driven by a business company’s nature.
Recommended Articles
This article has been a guide to Capital Expenditure Examples. Here, we discuss the top 4 practical examples of CapEx (capital expenditure) with a detailed explanation. You can learn more about accounting from the following articles: –
- Autonomous ExpenditureCalculate CapexCapex vs. OpexRevenue Expenditure
