Definition: Capital equipment is a good with a useful life of longer than 1 year used in the productive operations of a company. It is an investment made by a company to carry on or support its manufacturing activities.
What Does Capital Equipment Mean?
Capital equipments are physical items acquired for a productive activity. Companies are frequently investing in these items to expand their operations or to keep up with new techniques or technological advances. From an accounting perspective they are normally recorded as fixed assets, but in order to be classified as such, according to U.S. accounting rules, they must worth more than $5,000 and have an expected life spam of more than 1 year. Some industries spend much more than others when it comes to capital equipment.
Capital intensive businesses such as airlines are an example of this, since most of its business comes from the operation of aircrafts (equipments) the level of capital equipment investments is frequently higher than other industries. On the other hand, manufacturing businesses are also more capital intensive than service businesses. An example of these items would be machinery, trucks, lifting systems, inventory transportation equipment or warehouse racks, among others.
Example
Plastic Pipes Co. is a company that manufactures water pipes for the construction and domestic market. Currently, the company’s Board of Directors is reviewing next year’s investment plan. The plan contemplates a total investment of $5,400,000 that will be divided between the following programs: $1,400,000 for the construction of a new building, $2,000,000 for capital equipment, $1,500,000 for stock investments and $500,000 for new cafeteria facilities for employees.
The capital equipment investment contemplates the acquisition of new machinery to set up 3 new lines of productions, the purchase of new packaging equipments and a modernization of the raw material warehouse. The company expects that this investment program increases its earnings per share by 50% for the next fiscal year.
