Capital Costs

Introduction

When people say that “time is money”, they are usually referring to the costs associated with paying staff for the time they work on productive activities or ‘waste’ on personal business. However, we also know that the value of money is dependent upon time. For example, consider the following situation:

If you were offered $ 1,000 today or the same amount in ten years’ time, which would you take?

Most of us would realise that, because of inflation, the value of the money would decrease over the period so that the $ 1,000 would not buy as much in ten years’ time as it does today. Seen from another perspective, if you take the money today, you can put it in the bank and earn interest, so that the actual amount increases over the period. This simple example illustrates the need for us to treat for capital and operating expenditure differently, and this forms the content of this unit.

Objectives

After completing this unit, you will be able to: describe the difference between operating expenditure and capital expenditure, and classify costs based on this distinction; explain the reasons for treating capital costs differently than operating expenditure; list three approaches to depreciating capital costs; demonstrate how to calculate simple depreciation; explain the difference between simple depreciation and annualization; discuss when it is more appropriate to use the simple depreciation method.