What are Capital Expenditures?

Capital expenditures refer to funds that are used by a company for the
purchase, improvement, or maintenance of long-term assets to improve the
efficiency or capacity of the company. Long-term assets are usually
physical, fixed and non-consumable assets such as property, equipment, or
infrastructure, and that have a useful life of more than one accounting period.

Also known as CapEx or capital expenses, capital expenditures include the

purchase of items such as new equipment, machinery, land, plant, buildings or
warehouses, furniture and fixtures, business vehicles, software, or intangible
assets such as a patent or license.

IMPORTANCE OF CAPITAL EXPENDITURE

1. Effects in the long Run: the consequences of capital expenditure decisions extend into
the feature. The scope of current manufacture activities of a company governed largely
by capital expenditures in the past. Likewise, current capital expenditure decisions
provide the frame work for future activities. Capital investment decisions have an
enormous bearing on the basic character of a company.
2. Irreversibility: The market for used capital equipment in general is ill-organized. Further,
for some types of capital equipment, custom-made to meet specific requirement, the
market virtually be non-existent. Once such equipment is acquired, reversal of decision
may mean scrapping the capital equipment. Thus, a wrong capital investment decision
cannot be reversed without incurring a substantial loss.
3. Substantial outlays: Capital expenditures usually involve substantial outlays. An
integrated steel plant, for example, involves an outlay of several thousand millions.
Capital costs tend to increase with advanced technology

DIFFICULTIES OF CAPITAL EXPENDITURE:-

1. Measurement problems: Identifying and measuring the costs and benefits of a capital
expenditure proposal tends to be difficult. This is more so when a capital expenditure
has a bearing o some other activities of the company like cutting into sales of some
existing product or has some intangible consequences like improving the morale of
workers.
2. Uncertainty: A capital expenditure decision involves costs and benefits that extend for
into future. It is impossible to predict exactly what will happen in future. Hence, there is
usually a great deal of uncertainty characterizing the costs and benefits of a capital
expenditure decision.
3. Temporal Spread: The costs and benefits associated with a capital expenditure decision
are spread out over a long period of time, usually 10-20 years for industrial projects and
20-50 years for infrastructural projects. Such a temporal spread creates some problems
in estimating discount rates and establishing equivalence.