Capital cost

Capital cost is a term used in the fields of business and economics to refer to the total cost of acquiring long term assets. These costs are not recurring and are often significant in nature. They are incurred when a business decides to start, expand, or improve its operations.

Definition

The term capital cost is used to describe the cost of long-term assets such as property, plant, and equipment (also known as PP&E). These costs are not considered to be operating expenses, but rather are capitalized, meaning they are recorded as assets on the balance sheet and depreciated over time.

Components

Capital costs typically include the following components:

• Purchase price: This is the initial cost of acquiring the asset. It includes the price paid to the seller and any taxes or fees associated with the purchase.

• Installation costs: These are the costs associated with getting the asset up and running. They can include costs for site preparation, delivery, and installation.

• Financing costs: These are the costs associated with borrowing money to purchase the asset. They can include interest payments and fees.

Calculation

The calculation of capital costs can be complex, as it involves estimating the future benefits of the asset and discounting them to their present value. This is often done using a discount rate, which reflects the time value of money.

Importance

Understanding capital costs is important for businesses as it helps them make informed decisions about investments. It is also used in the calculation of return on investment (ROI), which is a key measure of the profitability of an investment.

See also

• Operating cost
• Fixed cost
• Variable cost
• Depreciation
• Amortization