Capital costs are fixed, one-time
expense
An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition ...
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 isl ...
,
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 funct ...
s,
construction
Construction is a general term meaning the art and science to form 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 Press 2009 and ...
, 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 ...
or in the rendering of
services. 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 ot ...
and
software development
Software development is the process of conceiving, specifying, designing, programming, documenting, testing, and bug fixing involved in creating and maintaining applications, frameworks, or other software components. Software development inv ...
.
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
Manufacturing is the creation or production of goods with t ...
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 labour ...
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'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 carbon ...
,
fuel oil
Fuel oil is any of various fractions obtained from the distillation of petroleum (crude oil). Such oils include distillates (the lighter fractions) and residues (the heavier fractions). Fuel oils include heavy fuel oil, marine fuel oil (MFO), bu ...
or
coal
Coal is a combustible black or brownish-black sedimentary rock, formed as stratum, rock strata called coal seams. Coal is mostly carbon with variable amounts of other Chemical element, elements, chiefly hydrogen, sulfur, oxygen, and nitrogen ...
used once the plant enters commercial operation or any
taxes 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.
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 t ...
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
*
Capital Cost Allowance (CCA)
*
Cost of capital
In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate n ...
*
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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