Capital cost
Encyclopedia
Capital costs are costs incurred on the purchase of land
, building
s, construction
and equipment to be used in the production of goods
or the rendering of services, in other words, the total cost needed to bring a project to a commercially operable status. However, capital costs are not limited to the initial construction of a factory
or other business. For example, the purchase of a new machine
that will increase production and last for years is a capital cost. Capital costs do not include labor costs except for the labor used for construction. Unlike operating cost
s, capital costs are one-time expenses, although 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.
A fossil fuel power plant
's capital costs include the purchase of the land the plant is built on, permitting and legal costs, the equipment needed to run the plant, the cost of the plant's construction, the cost of financing and the cost of commissioning the plant incurred prior to commercial operation of the plant. They do not include the cost of the natural gas
, fuel oil
or coal
used to fire the plant once the plant enters commercial operation or any tax
es 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
.
Government generally provides subsidies through investment
s and partnership
s in the initial capital costs of research
and manufacturing infrastructure that cannot be matched by investor-owned companies.
Essentially Capital Cost is all the current / future cash outflows which are necessary to produce and sell goods or services. It can be towards tangible items like plant and machinery, buildings, structures etc. or it can be towards intangibles like acquisition of trademarks, development of software etc. Whether a particular cost is capital or not would be dependent on many factors like local accounting / taxation laws, materiality etc.
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
, building
Building
In architecture, construction, engineering, real estate development and technology the word building may refer to one of the following:...
s, construction
Construction
In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking...
and equipment to be used in the production of goods
Good (economics and accounting)
In economics, a good is something that is intended to satisfy some wants or needs of a consumer and thus has economic utility. It is normally used in the plural form—goods—to denote tangible commodities such as products and materials....
or the rendering of services, in other words, the total cost needed to bring a project to a commercially operable status. However, capital costs are not limited to the initial construction of a factory
Factory
A factory or manufacturing plant is an industrial building where laborers manufacture goods or supervise machines processing one product into another. Most modern factories have large warehouses or warehouse-like facilities that contain heavy equipment used for assembly line production...
or other business. For example, the purchase of a new machine
Machine
A machine manages power to accomplish a task, examples include, a mechanical system, a computing system, an electronic system, and a molecular machine. In common usage, the meaning is that of a device having parts that perform or assist in performing any type of work...
that will increase production and last for years is a capital cost. Capital costs do not include labor costs except for the labor used for construction. Unlike operating cost
Operating cost
Operating costs can be described as the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility.-Business operating costs:...
s, capital costs are one-time expenses, although 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.
A fossil fuel power plant
Fossil fuel power plant
A fossil-fuel power station is a power station that burns fossil fuels such as coal, natural gas or petroleum to produce electricity. Central station fossil-fuel power plants are designed on a large scale for continuous operation...
's capital costs include the purchase of the land the plant is built on, permitting and legal costs, the equipment needed to run the plant, the cost of the plant's construction, the cost of financing and the cost of commissioning the plant incurred prior to commercial operation of the plant. They do not include the cost of the natural gas
Natural gas
Natural gas is a naturally occurring gas mixture consisting primarily of methane, typically with 0–20% higher hydrocarbons . It is found associated with other hydrocarbon fuel, in coal beds, as methane clathrates, and is an important fuel source and a major feedstock for fertilizers.Most natural...
, fuel oil
Fuel oil
Fuel oil is a fraction obtained from petroleum distillation, either as a distillate or a residue. Broadly speaking, fuel oil is any liquid petroleum product that is burned in a furnace or boiler for the generation of heat or used in an engine for the generation of power, except oils having a flash...
or coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...
used to fire the plant once the plant enters commercial operation or any tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es on the electricity
Electricity
Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
that is produced. They also do not include the labor used to run the plant or the labor and supplies needed for maintenance
Maintenance, Repair and Operations
Maintenance, repair, and operations or maintenance, repair, and overhaul involves fixing any sort of mechanical or electrical device should it become out of order or broken...
.
Government generally provides subsidies through investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
s and partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
s in the initial capital costs of research
Research
Research can be defined as the scientific search for knowledge, or as any systematic investigation, to establish novel facts, solve new or existing problems, prove new ideas, or develop new theories, usually using a scientific method...
and manufacturing infrastructure that cannot be matched by investor-owned companies.
See also
- Capital recovery factor
- Capital Cost AllowanceCapital Cost AllowanceCapital Cost Allowance is effectively the means by which Canadian businesses may claim depreciation expense. Depreciable items are deemed to belong to different classes which depreciate at different rates and are subject to different rules...
- Cost of capitalCost of capitalThe cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds , or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities"...
- Capital expenditureCapital expenditureCapital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year...
(capex) - Cost overrunCost overrunA cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting...
Essentially Capital Cost is all the current / future cash outflows which are necessary to produce and sell goods or services. It can be towards tangible items like plant and machinery, buildings, structures etc. or it can be towards intangibles like acquisition of trademarks, development of software etc. Whether a particular cost is capital or not would be dependent on many factors like local accounting / taxation laws, materiality etc.