Capital costs are fixed, one-time
expense
An expense is an item requiring an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...
s incurred on the purchase of
land
Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various isla ...
,
building
A building, or edifice, is an enclosed structure with a roof and walls standing more or less permanently in one place, such as a house or factory (although there's also portable buildings). Buildings come in a variety of sizes, shapes, and fu ...
s,
construction
Construction is a general term meaning the art and science to form Physical object, objects, systems, or organizations,"Construction" def. 1.a. 1.b. and 1.c. ''Oxford English Dictionary'' Second Edition on CD-ROM (v. 4.0) Oxford University Pr ...
, and equipment used in the production of
goods
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not t ...
or in the rendering of
services
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a p ...
. In other words, it is the total cost needed to bring a project to a commercially operable status. Whether a particular cost is capital or not depend on many factors such as
accounting,
tax law
Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules and procedures (laws) to assess and collect taxes in a ...
s, and
materiality.
Categories
Capital costs include expenses for tangible goods such as the purchase of plants and machinery, as well as expenses for intangibles assets such as
trademarks
A trademark (also written trade mark or trade-mark) is a type of intellectual property consisting of a recognizable sign, design, or expression that identifies products or services from a particular source and distinguishes them from othe ...
and
software development.
Capital costs are not limited to the initial construction of a
factory
A factory, manufacturing plant or a production plant is an industrial facility, often a complex consisting of several buildings filled with machinery, where workers manufacture items or operate machines which process each item into another. ...
or other business. Namely, the purchase of a new
machine to increase production and last for years is a capital cost. Capital costs do not include
labor
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the la ...
costs (they do include construction labor). Unlike
operating cost
Operating costs or operational costs, are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to main ...
s, capital costs are one-time expenses but payment may be spread out over many years in financial reports and tax returns. Capital costs are fixed and are therefore independent of the level of output.
Example
For example, a
fossil fuel power plant
A fossil fuel power station is a thermal power station which burns a fossil fuel, such as coal or natural gas, to produce electricity. Fossil fuel power stations have machinery to convert the heat energy of combustion into mechanical energy, wh ...
's capital costs include the following:
* Purchase of the land upon which the plant is built
* Permits and legal costs
* Equipment needed to run the plant
* Costs involving the construction of the plant
* Financing and commissioning the plant (prior to commercial operation)
They do not include the cost of the
natural gas
Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbo ...
,
fuel oil or
coal
Coal is a combustible black or brownish-black sedimentary rock, formed as rock strata called coal seams. Coal is mostly carbon with variable amounts of other elements, chiefly hydrogen, sulfur, oxygen, and nitrogen.
Coal is formed when ...
used once the plant enters commercial operation or any
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
es on the
electricity
Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as describ ...
that is produced. They also do not include the labor used to run the plant or the labor and supplies needed for
maintenance
Maintenance may refer to:
Biological science
* Maintenance of an organism
* Maintenance respiration
Non-technical maintenance
* Alimony, also called ''maintenance'' in British English
* Champerty and maintenance, two related legal doct ...
.
Funding
Government generally provides
subsidies
A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the ter ...
through
investments and
partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments ...
s in the initial capital costs of
research
Research is " creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization and analysis of evidence to increase understanding of a topic, characterized by a particular attentiveness ...
and manufacturing infrastructure that cannot be matched by investor-owned companies.
See also
*
Capital expenditure
Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
(capex)
*
Capital recovery factor A capital recovery factor is the ratio of a constant annuity to the present value of receiving that annuity for a given length of time. Using an interest rate ''i'', the capital recovery factor is:
CRF = \frac
where n is the number of annuities ...
*
Capital Cost Allowance Capital Cost Allowance (CCA) is the means by which Canadian businesses may claim depreciation expense for calculating taxable income under the ''Income Tax Act'' (Canada). Similar allowances are in effect for calculating taxable income for provincia ...
(CCA)
*
Cost of capital
*
Cost overrun
A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known ...
References
Illinois Institute of TechnologyCCP Exam QuestionsThe Center for International Environmental Law
(PDF)
United States Environmental Protection Agency
(PDF)
Financial capital
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