Project Management

1. Project Management

2. UNIT -1
Capital Expenditure (Cap-Ex)
What Are Capital Expenditures – CapEx?
Capital expenditures, commonly known as CapEx are funds used by a company to
acquire,
upgrade,
and maintain physical assets such as property, buildings, an industrial plant, technology,
or equipment.
CapEx is often used to undertake new projects or investments by the firm.
Making capital expenditures on fixed assets can include everything from repairing a roof
to building, to purchasing a piece of equipment, to building a new factory. This type of
financial outlay is also made by companies to maintain or increase the scope of their
operations.

3. CapEx or capital expenses, capital expenditures include the purchase of
items such as-
new equipment,
machinery,
land,
plant,
buildings
warehouses,
furniture
fixtures,
business vehicles,
software,
intangible assets such as a patent or license.

4. - Land
- Land improvements
- Building
- Legal Costs = Registering and constructing a fixed assets.
- Computers = Data storage or Network devices
- Equipment = combine harvester for a farm.
- Machinery = Such as Industrial robot
- Vehicles = Such as electric truck and aircraft
- Installation= cost of installing solar panel system
- Software
- Capital improvements= Office renovation and equipment refit
- Maintenance
- Merger & Acquisitions
- Intangible Assets= Legal fees for registering a plant,

6. The expenditure amounts for an accounting period are usually stated in
the cash flow statement.
Capital expenditures normally have a substantial effect on the short-term
and long-term financial standing of an organization.
Therefore, making wise CapEx decisions is of critical importance to the
financial health of a company.
Many companies usually try to maintain the levels of their historical capital
expenditure to show investors that the managers of the company are
investing effectively in the business.

7. The Formula for Cap-Ex Is-
Capital Expenditure= PP&E + Current Depreciation
Where:
Cap-Ex = Capital expenditure
PP&E = Property, Plant and Equipment

8. Types of Capital Expenditures
There are normally two forms of capital expenditures:
(1) expenses for the maintenance of levels of operation present within the
and
(2) expenses that will enable an increase in future growth.
A capital expense can either be tangible, such as a machine, or intangible, such
as a patent. Both intangible and tangible capital expenditures are usually
considered assets since they can be sold when there is a need.

9. Importance of Capital Expenditures
Decisions how much to invest in capital expenditures can often be extremely vital decisions made by an
organization. They are important because of the following reasons:
1. Long-term Effects
The effect of capital expenditure decisions usually extends into the future. The range of current production
manufacturing activities is mainly a result of past capital expenditures. Similarly, the current decisions on
capital expenditure will have a major influence on the future activities of the company.
2. Irreversibility
Capital expenditures can hardly be undone without the company incurring losses. Once the capital
is purchased, there is little room to reverse the decision since the cost can often not be recouped. For this
reason, wrong capital investment decisions are often irreversible, and poor ones lead to substantial losses
being incurred. Once acquired, they need to be employed for use.

10. 3. High Initial Costs
Capital expenditures are characteristically very expensive, especially for companies in industries such as
production, manufacturing, telecom, utilities, and oil exploration. Capital investments in physical assets like
buildings, equipment, or property offer the potential of providing benefits in the long run but will need a huge
monetary outlay initially, and much greater than regular operating outlays. Capital costs often tend to rise with
advanced technology.
4. Depreciation
Capital expenditures lead to an increase in the asset accounts of an organization. However, once capital assets
start being put in service, their depreciation begins, and they continue to decrease in value throughout their
useful lives.

11. Challenges with Capital Expenditures:
Capital expenditure decisions are very critical, they can also be a source of difficulties:
1. Measurement Problems
The process of identifying, measuring, and estimating the costs relating to capital expenditures may be quite
complicated. Moreover, some effects, such as the improvement of employee morale because of a new facility,
cannot be captured fully in a spreadsheet.
2. Unpredictability
Organizations making large investments in capital assets do so expecting predictable outcomes. However, such
predictions are not guaranteed and may not happen as expected. The costs and benefits of capital expenditure
decisions are usually characterized by a lot of uncertainty. Even the best forecasters sometimes make mistakes.

12. Costs, as well as benefits related to the capital expenditure, are usually stretched over a relatively long
of time for both industrial projects and infrastructural projects. Such as temporal spread leads to problems
discount rate estimation and the establishment of equivalence.
Efficient Capital Expenditure Budgeting Practices:
2. Think long- term
3. Use good budgeting software
4. Capture accurate data
5. Detail level should be optimal(don’t take too much time)
6. Form clear policies

13. 1. Structure before you start
Capital expenditure budgets need adequate preparations before commencement. Otherwise, they might get out
of control. Before starting a project, you need to find the scope of the project, work out realistic deadlines, and
ensure that the whole plan is approved.
2. Think long- term
At the start of your capital expenditure project, you need to decide whether you will purchase the capital asset
with debt or set aside existing funds for the purchase. Saving money for the purchase usually implies that you will
have to wait for a while before getting the asset you need.
3. Use good budgeting software

14. Any query?