Definition

Also
known as
Accountin
g
treatment

Capital expenditures
Capital
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 asset with
a useful life that extends
beyond the tax year.
Capital Expenditure, Capital
Expense

Operational expenditure
OpEx (Operational expenditure)
refers to expenses incurred in the
course of ordinary business, such
as
sales,
general
and
administrative expenses (and
excluding cost of goods sold - or
COGS, taxes, depreciation and
interest).
Operating Expense, Operating
Expenditure,
Revenue
Expenditure
Operating expenses are fully
deducted in the accounting
period during which they were
incurred.

Cannot be fully deducted in

the period when they were
incurred. Tangible assets are
depreciated and intangible
assets are amortized over
time.
Money spent on inventory falls The
money
spent
turning
under capex.
inventory into throughput is opex.

In
throughp
ut
accountin
g
In
real Costs incurred for buying the Costs
associated
with
the
estate
income producing property.
operation and maintenance of an
income producing property.
Examples Buying machinery and other Wages, maintenance and repair
equipment,
acquiring of machinery, utilities, rent, SG&A
intellectual property assets expenses
like patents.

Building a real estate project could be an easy example.

Mutually exclusive: Do I build a 50 story building or a 100 story building? That is a mutually exclusive
decision. You can't build both on the same sight.

Independent: Do I dedicate the ground floor to retail? That decision is (at least largely) independent of
whether you build 50 or 100 stories.

Capital Rationing
For example, suppose ABC Corp. has a cost of capital of 10% but that the company
has undertaken too many projects, many of which are incomplete. This causes the
company's actual return on investment to drop well below the 10% level. As a
result, management decides to place a cap on the number of new projects by
raising the cost of capital for these new projects to 15%. Starting fewer new projects
would give the company more time and resources to complete existing projects.
Unconventional Cash Flow
In real-life situations, examples of unconventional cash flows are abundant,
especially in large projects where periodic maintenance may involve huge outlays of
capital. For example, a large thermal power generation project where cash flows are
being projected over a 25-year period may have cash outflows for the first three
years during the construction phase, inflows from years four to 15, an outflow in
year 16 for scheduled maintenance, followed by inflows until year 25.
Conventional Cash Flow
A mortgage is a good example of a typical conventional cash flow. For example, a
financial institution lends $300,000 to a homeowner or real estate investor at a
fixed interest rate of 5% for 30 years. The lender then receives approximately
$1,610 per month (or $19,325 annually) from the borrower towards mortgage
principal repayment and interest.
Sunk Cost
A cost that has already been incurred and thus cannot be recovered. A sunk cost
differs from other, future costs that a business may face, such as inventory costs or
R&D expenses, because it has already happened.
A company that has spent $5 million building a factory that is not yet complete, has
to consider the $5 million sunk, since it cannot get the money back. It must decide
whether continuing construction to complete the project will help the company
regain the sunk cost, or whether it should walk away from the incomplete project.
Opportunity Cost of Capital
The difference in return between an investment one makes and another that one
chose not to make. This may occur in securities trading or in other decisions. For
example, if a person has $10,000 to invest and must choose between Stock A and
Stock B, the opportunity cost is the difference in their returns. If that person
invested $10,000 in Stock A and received a 5% return while Stock B makes a 7%
return, the opportunity cost is 2%. One way of conceptualizing opportunity cost is as
the amount of money one could have made by making a different investment

decision. Importantly, opportunity cost is not a type of risk because there is not a
chance of actual loss.
Fixed Asset
A long-term tangible piece of property that a firm owns and uses in the production
of its income and is not expected to be consumed or converted into cash any sooner
than at least one year's time.
Buildings, real estate, equipment and furniture are good examples of fixed assets.
Generally, intangible long-term assets such as trademarks and patents are not
categorized as fixed assets but are more specifically referred to as "fixed intangible
assets".