Question

When considering a potential capital expenditure, a spreadsheet may assist as tool for evaluating risk based on prioritization needs such as whether it is needed for continued licensure or certification, new construction, required to implement an approved objective, or for some other reason. What type funds may be available for the decision makers when considering capital expenditures? (e.g. profits, donations, etc.)?

Answer 1

Capital expenditures (CapEx) are amounts required to upgrade, maintain ,upgrade and acquire any physical property like land , building ,machine, industrial plant ,project, technology, license , patent, copyrights and equipment for profit earning or business growth. CapEx are shown as an investment in balance sheet of company.

Put differently, CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure.

CapEx = Change in property Plant and equipments + Current Depreciation

Importance characteristics of CapEx:

• Generally Long term
• Irreversible
• Concept of depreciation
• Cost of capital

In calculation for capital expenditure,

First step would be calculate Free cash flow as

Free cash flow to equity=Earnings – Depreciation –Tax – change in working capital.

Second Step would be calculating PV of net free cash flow on WACC.