Table of contents:
- What is CapEx?
- How to Calculate CapEx?
- What is OpEx?
- How to Calculate OpEx?
- CapEx vs. OpEx
- CapEx vs. OpEx Comparison Table
CapEx (Capital Expenditures) and OpEx (Operating Expenses) are the most common categorizations that businesses prepare to simplify the cost of all their expenses. Both terms that are frequently encountered in business valuation evaluate the value of the business and how it has changed over time.
What is CapEx?
Investment / Capital Expenditures
Capital expenditures are the initial investment required to produce an asset that generates benefits in the future. They are major acquisitions that the company plans to use in the long run. Capital expenditures provide long-lasting benefits. *Cost of investing in a power plant without taking into account the financial costs (interest rates) or the structure of financing (WACC vs. debt).
The company’s capital expenditure includes funds to purchase, maintain and upgrade physical assets such as property, factories, buildings, equipment, technology. Capital expenditures on fixed assets include expenses such as purchasing equipment or building a new factory.
The main difference between OpEx and CapEx is that capital expenditures increase the scope of operation and provide economic benefits to the operation. OpEx expenditures vary depending on capital expenditures. Capital expenditures are not shown as expenses in the income statement. It includes payments for goods or services recorded and capitalized in the financial statement.
How to calculate CapEx?
CapEx= Net Increase in PP&E + Depreciation Expense
CapEx generally includes property, plant, and equipment (PP&E) assets. The most commons are;
- Production Facilities
- Structure Improvements
What is OpEx?
Operating Expenses are ordinary expenses to run a business. (Salary, electricity expenses, administrative expenses, production expenses…) Operating expenses are included in the income statement of the company.
How calculate OpEx?
OpEx= Revenues – Operating Income – COGS
Companies aim to maximize output according to OpEx. The most common OpEx expenses are as follows:
- Work travel
- Wage, Salaries, accounting, legal fees
- General expenses
- Interest paid on the loan
- COGS, R&D expenses
CapEx vs. OpEx
CapEx vs. OpEx Comparison
If we make a CapEx and OpEx comparison on the example of a solar power plant project, equipment and construction expenses such as the construction stand where the solar panels are placed, inverters, cables, field correction works, transformer room will be added as the initial investment expenses during the preparation of a feasibility file for the project.
Another detail is that the salaries of the personnel working during the installation phase of the power plant are included in the initial investment cost. All expenses that will not continue after the completion of the power plant are considered as the first investment cost are shown as CapEx.
In the project, OpEx is the operating expenses such as the maintenance and safety work of the power plant, the salaries of the employees after the operation of the power plant.
Also, the establishment of a nuclear power plant. The nuclear power plant has high investment costs. However, the fuel cost is lower than coal power plants which reduce operating expenses. The operating cost of renewable energy plants without fuel costs is much lower when we compare with renewable energy plants.
CapEx vs. OpEx Comparison Table
|CapEx (Capital Expenditures)||OpEx (Operating Expenses)|
|Purchased assets are expected to provide value over one year. Generally, there is a big estimated cost. CapEx assets are depreciated over the life of the asset. CapEx requires accurate budgeting which will complicate cost estimation quite a bit.||Purchased expense is fully consumed in the tax year. OpEx includes ongoing costs. (monthly/yearly)|
CapEx and OpEx are important in the cost analysis of projects. The main difference is that CapEx initial investment cost, OpEx is the operating expenses required for the project to be operational.
It is important to determine the initial investment and operating expenses and to determine the payback period of the project accordingly. CapEx and OpEx should be well known by engineers in national and international projects.
It is important to analyze the question of whether you should use Capital Expenditure and Operating Expense correctly. Purchasing CT hardware and spending capital will provide greater control over assets. But over the life of the asset, it might limit you to a certain capacity that is relatively difficult to replace. In order to decide which model is suitable for your business, it will be important to make accurate analyzes by considering your corporate policies, cash assets and other criteria.