A capital expenditure (CAPEX) is the expenditure of funds or assumption of a liability in order to obtain physical assets that are to be used for productive purposes for at least one year. Depreciation is used to expense the fixed asset over its useful life. For example if an asset cost $10,000 and is to be used for five years, $2,000 may be charged to depreciation in each year of the next five years. There are several methods used to calculate depreciation. The full value of costs that are not CAPEX spending must be deducted in the year they are incurred.
There are capitalization limits, which the price of assets must be greater than to be depreciated over time rather than charged entirely as an expense in the current year. The cost of record keeping associated with depreciation causes capitalization limits to be put into effect. Costs that are not depreciated and are associated strictly with operational matters are known as operational expenditures.
Examples of common types of CAPEX spending include:
Purchase of a Building or Property
A building or property serves a useful purpose for many years and is often purchased using secured debt or a mortgage. The actual payments for the asset are made over a long period of time. Expenses associated with the debt financing of the asset such as interest and other fees may also be depreciated; costs incurred with an issue of stock would not qualify for depreciation.
Upgrades to Equipment
In the manufacturing industry and other industries, machinery used to produce goods may become obsolete or simply wear out. Once machinery has served its purpose and is no longer useful, upgrades are necessary. If these upgrades are higher than the capitalization limit that is in place, the costs should be depreciated over time. Similar to buildings or property, equipment upgrades are often financed. The cost of this financing may depreciated as well.
Large companies spend a great deal of money to maintain current software that serves a useful purpose for many years. Because it has a long useful life, costs to upgrade or purchase software may be depreciated over its useful life and are considered CAPEX spending.
Successful technology companies regularly invest in and expand the capabilities of their computer equipment, including servers, laptop and desktop computers, and peripherals. Computer equipment serves a useful purpose for many years, and if the cost is above the amortization limit it should be depreciated over its useful lifespan.
Some industries make heavy use of vehicles in order to carry out business. Mining and resource companies often require workers to travel into remote rural areas, which requires the use of dependable vehicles. These vehicles serve a useful purpose for several years and generally cost more than capitalization limits, and they should be depreciated as CAPEX spending. Costs for leasing vehicles are treated as operational expenses.