Question

Capital Expenditures

Capital expenditures include any investments a company makes to replace, improve, or acquire assets to help improve efficiency and profitability. Typically these are physical expenses such as machinery or buildings. The same analysis capital budget analysis can be applied to HRM and marketing. In your HR metrics class you’ll spend more time conducting in-depth analysis of HR functions using these valuation tools. For now, we’ll be focusing on investments which might involve purchasing new or better equipment, developing a new product, or increasing production. Since capital expenditures are oftentimes very expensive, it is important that they are prioritized and budgeted appropriately. Often departments within organizations compete for limited resources. As an HR manager, you will be better prepared by utilizing these valuation techniques as you aim to secure limited resources towards for HR initiatives.

1. Present this concept in your own words in such a way that someone without a financial background could understand your explanation.

2. Describe how this concept would be used in analyzing capital expenditures. Provide at least two examples of its use to you as an HR Manager

• How would this concept be used in a long-term strategy? What would be the concerns of failing to use this concept when considering capital expenditures? What are some of the concerns you see in applying these techniques to analyzing investments within the HR function?

Answer 1

1. Capital expenditure is an expenditure that is incurred to purchase a property which is of long term use, such as a building or a machinery. Also, if we incur expenditure in improving a property which would give additional or long term benefits, that expenditure is also termed as capital expenditure. Such as, increasing the capacity of a machinery from producing 100 products to producing 200 products, or constructing an additional floor in a building for business use, etc..
Such kind of expenses generally involve huge amount of money, so they should be incurred with great caution and only after evaluating the cost against the benefits that they are expected to produce. Only when a capital expenditure is expected to give more benefits than the cost incurred, it should be incurred. Otherwise the expenditure may become a loss to the company.

2. The above concept can be used to prioritize capital expenditure. For examples:

a. If we are planning to buy a machine that would produce 100 units of a product, we need to compare the cost of the machine with the revenue it would generate and contribution margin. That means, if the contribution margin (sales - variable cost) is more than the cost of the machine (fixed cost), the expenditure can be incurred.

b. If there are more than 1 machine available but can buy only one then we need to first see which machine cost fits in our budget. After that we can compare the contribution margins of the selected machines. The one with the highest contribution margin should be purchased.