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Capital costs include expenses for tangible goods such as the purchase of plants and machinery,
as well as expenses for intangibles assets such as trademarks and software development.
Capital costs are not limited to the initial construction of a factory or other business. Namely, the
purchase of a new machine to increase production and last for years is a capital cost. Capital
costs do not include labor costs (they do include construction labor). Unlike operating costs,
capital costs are one-time expenses but payment may be spread out over many years in financial
reports and tax returns. Capital costs are fixed and are therefore independent of the level of
output.
Example
For example, a fossil fuel power plant's capital costs include the following:
They do not include the cost of the natural gas, fuel oil or coal used once the plant enters
commercial operation or any taxes on the electricity that is produced. They also do not include
the labor used to run the plant or the labor and supplies needed for maintenance.
Capital expenditures (CAPEX or capex) are expenditures altering the future of the
business. A capital expenditure is incurred when a business spends money either to
buy fixed assets or to add to the value of an existing fixed asset with a useful life
extending beyond the taxable year.