What is CAPEX?

Sarita Chhetri Sarita Chhetri 1 year ago Cloud Computing
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Rajiv Shah Rajiv Shah 1 year ago
#### What is CAPEX? Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof (if the useful life of the roof is extended), purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some future economic benefit to the operation. #### What is useful life? When calculating capital expenditures, it’s critical to understand the concept of “useful life.” Useful life refers to the estimated and generally agreed upon shelf life of a specific business asset. Because capital expenditures are long-term investments, for assets to fall under the CapEx destination, the investments must have a useful life of one year or more. A CapEx is amortized, or its value is deducted a little each year based on the total cost and its expected useful life. A car’s useful life is now considered to be five years, according to the IRS, while a new building’s is 39. So the cost of those assets is divided by their useful life to determine how much your business can deduct each year as depreciation. That doesn’t mean a car is expected to stop working in year six or that a building will crumble in year 40, only that, for the IRS’ purposes, the value can be depreciated in that time span. #### How to calculate capital expenditures? Referencing your businesses income statement and balance sheet, you can calculate capital expenditures using the following formula: CapEx = PPE (current period) – PPE (prior period) + Depreciation (current period) PPE refers to “property, plant, and equipment.” While the formula is relatively straightforward, it's highly recommended to seek the guidance of both a tax and financial professional to ensure you are calculating your capital expenditures properly.

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