Legal Definitions - capital expenditure

Capital expenditure, often abbreviated as CapEx, refers to the funds a business uses to acquire, upgrade, or maintain long-term assets that are expected to provide economic benefits for more than one year. These assets are typically significant investments, such as buildings, machinery, vehicles, or specialized equipment, which are crucial for the business's operations and its ability to generate income over an extended period, rather than being for immediate sale or consumption.

• Example 1: Acquiring a New Asset

  A growing logistics company decides to purchase a brand new fleet of electric delivery vans to expand its service area and reduce its carbon footprint. This investment involves a substantial outlay of cash for assets that will be used for many years to transport goods and generate revenue.

  This is a capital expenditure because the company is acquiring new, long-term assets (the electric vans) that will contribute to its operations and profitability for an extended period.

• Example 2: Upgrading an Existing Asset

  A popular restaurant chain undertakes a major renovation of its oldest location, adding a modern kitchen with state-of-the-art cooking equipment, expanding the dining area, and installing a new energy-efficient HVAC system. This project significantly improves the property's functionality, capacity, and appeal.

  This constitutes a capital expenditure because the restaurant is upgrading and significantly improving its existing long-term asset (the building and its fixed equipment), thereby extending its useful life and enhancing its ability to generate income.

• Example 3: Major Maintenance or Replacement of an Asset

  A manufacturing plant replaces its aging, inefficient production line machinery with advanced robotic systems. This replacement is a large-scale project designed to increase output, improve product quality, and reduce long-term operational costs.

  This is a capital expenditure because it involves a significant investment in new machinery that effectively replaces and upgrades a core capital asset, ensuring the plant's continued operation and enhancing its productive capacity for many years to come.