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Capital costs are fixed, one-time
expenseExpenditure is an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. For students or parent ...
s incurred on the purchase of
land Land is the solid surface of Earth that is not permanently submerged in water. Most but not all land is situated at elevations above sea level (variable over geologic time frames) and consists mainly of Earth's crust, crustal components such a ...
,
building A building, or edifice, is a structure with a roof and walls standing more or less permanently in one place, such as a house or factory. Buildings come in a variety of sizes, shapes, and functions, and have been adapted throughout history for a ...

building
s,
construction Construction is a general term meaning the and to form , , or ,"Construction" def. 1.a. 1.b. and 1.c. ''Oxford English Dictionary'' Second Edition on CD-ROM (v. 4.0) Oxford University Press 2009 and comes from ''constructio'' (from ''com-' ...

construction
, and equipment used in the production of
goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...
or in the rendering of
services Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of Faculty (academic staff), university faculty * Civil service, the body of employees of a governm ...
. 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 or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
,
tax law Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules and procedures (laws) to assess and collect tax A ...
s, 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 A trademark (also written trade mark or trade-markThe styling of ''trademark'' as a single word is predominantly used in the United States and Philippines only, while the two-word styling ''trade mark'' is used in many other countries around ...
and
software development Software development is the process of conceiving, specifying, designing, programming, documenting, testing, and bug fixing involved in creating and maintaining applications Application may refer to: Mathematics and computing * Application ...
. Capital costs are not limited to the initial construction of a
factory A factory, manufacturing plant or a production plant is an Industry (manufacturing), industrial site, often a complex consisting of several buildings filled with Outline of industrial machinery, machinery, where workers manufacturing, manufactu ...

factory
or other business. Namely, the purchase of a new
machine A machine is any physical system with ordered structural and functional properties. It may represent human-made or naturally occurring device molecular machine that uses Power (physics), power to apply Force, forces and control Motion, moveme ...

machine
to increase production and last for years is a capital cost. Capital costs do not include
labor Labour or labor may refer to: * , the delivery of a baby * , or work ** , physical work ** , a socioeconomic relationship between a worker and an employer Literature * , an American quarterly on the history of the labor movement * ', an academic ...
costs (they do include construction labor). Unlike
operating cost Operating costs or operational costs, are the expenseExpenditure is an outflow of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose ...
s, 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 A fossil fuel power station is a thermal power station which burns a fossil fuel A fossil fuel is a fuel formed by natural processes, such as anaerobic decomposition of buried dead organism In biology, an organism (from Ancient ...
'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 Natural gas (also called fossil gas; sometimes just gas) is a naturally occurring hydrocarbon gas mixture consisting of methane and commonly including varying amounts of other higher alkanes, and sometimes a small percentage of carbon dioxid ...

natural gas
,
fuel oil Fuel oil (also known as heavy oil, marine fuel, bunker, furnace oil, or gasoil) is a fraction A fraction (from Latin ', "broken") represents a part of a whole or, more generally, any number of equal parts. When spoken in everyday English, a fr ...
or
coal Coal is a combustible , Germany ) , image_map = , map_caption = , map_width = 250px , capital = Berlin , coordinates = , largest_city = capital , languages_type = Official language , languages = German language, German , ...

coal
used once the plant enters commercial operation or any
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
es on the
electricity Electricity is the set of physical Physical may refer to: *Physical examination, a regular overall check-up with a doctor *Physical (album), ''Physical'' (album), a 1981 album by Olivia Newton-John **Physical (Olivia Newton-John song), "Physi ...

electricity
that is produced. They also do not include the labor used to run the plant or the labor and supplies needed for
maintenance Maintenance may refer to: Biological science * Maintenance of an organism * Maintenance respiration Non-technical maintenance * Alimony, also called ''maintenance'' in British English * Champerty and maintenance, two related legal doctrines ...
.


Funding

Government generally provides
subsidies A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the term ...
through
investment Investment is the dedication 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 Finance is the study of financial institution ...

investment
s and
partnership A partnership is an arrangement where parties, known as business partner A business partner is a commercial entity with which another commercial entity has some form of Business alliance, alliance. This relationship may be a contractual, exclus ...

partnership
s in the initial capital costs of
research Research is "creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization and analysis of information to increase understanding of a topic or issue. A research project may be an expa ...

research
and manufacturing infrastructure that cannot be matched by investor-owned companies.


See also

*
Capital expenditure Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
(capex) *
Capital recovery factorA capital recovery factor is the ratio of a constant annuity An annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities ar ...
*
Capital Cost AllowanceCapital Cost Allowance (CCA) is the means by which Canadian Canadians (french: Canadiens) are people identified with the country of Canada. This connection may be residential, legal, historical or cultural. For most Canadians, many (or all) of ...
(CCA) *
Cost of capital In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant l ...
*
Cost overrun A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred cost In production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in ...


References


Illinois Institute of TechnologyCCP Exam QuestionsThe Center for International Environmental Law
(PDF)
United States Environmental Protection Agency
(PDF) Financial capital {{econ-stub