Capital
Expanditure (Capex)
Definitions
The term investment
covers many different elements according to
the point of view which one adopts. Investments
can be analysed from three different points
of view.
• From
a macroeconomic point of view,
investment represents fixed capital.
•
From a financial point of view,
the investment decision implies a current
expenditure with the goal of realising gains
over several periods. This concept of investment
applies not only to the purchase of fixed
assets, but to all sorts of expenses which
do not involve current operations: staff training,
research and development, etc.
•
From the point of view of accounting,
amounts invested can be debited to the following
accounts: organization costs, goodwill, patents
or copyrights (when they are purchased), and
fixed assets. With the exception of land and
financial assets, all long term assets should
be depreciated or amortized (the word used
for expensing intangible assets.)
Investment
classification
According
to the type of investment, the following categories
can be identified:
- investment in assets with
a physical dimension
- financial investments which
can take the form of shares or long term loans
- intangible investments which
can include purchased intangibles (goodwill,
copyrights, patents). Under certain circumstances,
research and development or training expense
can be capitalized. The problem here is one
of objective valuation.
Investments can also
be classified according to objective:
- investments for expansion
where the objective is to increase the firm's
production or distribution capacity in response
to growing demand
- replacement investments
which just maintain capacity at current levels
- modernisation or innovation
– often confused with replacement investments
– which have the objective of increasing
productivity
- trophy investments
which are concerned with boosting the company's
image
- investments with a
social mission which help to increase
the quality of life (protection of the environment);
the financial return on such investments is
not always directly measurable
It is not always possible to
determine with precision into which category
a given investment falls. For instance, an investment
for expansion could at the same time fit into
the category of modernisation. In the same way,
due to technological progress, a replacement
investment should also contribute to the modernisation
of the company.
An important investment criterion
is size. A company will not adopt the same attitude
towards a project worth € 50,000.–
as it would towards a project costing millions.
The future consequences for the company are
not comparable. The level of risk is closely
related to the size of an investment project.
© ECOFINE.COM, Bernard Jaquier, Professor
in Economics & Finance, Switzerland, 2018
