Capital costs are fixed, one-time
expenses incurred on the purchase of
land,
buildings,
construction, and equipment used in the production of
goods or in the rendering of
services. In other words, it is the total cost needed to bring a project to a commercially operable status. Whether a particular cost is capital or not depend on many factors such as
accounting
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
,
tax laws, and
materiality.
Categories
Capital costs include expenses for tangible goods such as the purchase of plants and machinery, as well as expenses for intangibles assets such as
trademarks and
software development
Software development is the process of conceiving, specifying, designing, programming, documenting, testing, and bug fixing involved in creating and maintaining applications, frameworks, or other software components. Software development invol ...
.
Capital costs are not limited to the initial construction of a
factory or other business. Namely, the purchase of a new
machine
A machine is a physical system using Power (physics), power to apply Force, forces and control Motion, movement to perform an action. The term is commonly applied to artificial devices, such as those employing engines or motors, but also to na ...
to increase production and last for years is a capital cost. Capital costs do not include
labor costs (they do include construction labor). Unlike
operating costs, capital costs are one-time expenses but payment may be spread out over many years in financial reports and tax returns. Capital costs are fixed and are therefore independent of the level of output.
Example
For example, a
fossil fuel power plant's capital costs include the following:
* Purchase of the land upon which the plant is built
* Permits and legal costs
* Equipment needed to run the plant
* Costs involving the construction of the plant
* Financing and commissioning the plant (prior to commercial operation)
They do not include the cost of the
natural gas,
fuel oil
Fuel oil is any of various fractions obtained from the distillation of petroleum (crude oil). Such oils include distillates (the lighter fractions) and residues (the heavier fractions). Fuel oils include heavy fuel oil, marine fuel oil (MFO), bun ...
or
coal used once the plant enters commercial operation or any
taxes on the
electricity that is produced. They also do not include the labor used to run the plant or the labor and supplies needed for
maintenance.
Funding
Government generally provides
subsidies through
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
s and
partnerships in the initial capital costs of
research and manufacturing infrastructure that cannot be matched by investor-owned companies.
See also
*
Capital expenditure (capex)
*
Capital recovery factor
*
Capital Cost Allowance (CCA)
*
Cost of capital
In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate new ...
*
Cost overrun
References
Illinois Institute of TechnologyCCP Exam QuestionsThe Center for International Environmental Law
(PDF)
United States Environmental Protection Agency
(PDF)
Financial capital
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