Planning Capital Expenditure over the Life of the Purchased Item – Better Perspective!
Published on Friday, 30 August 2013 12:20:18 Written by Marc
Large and well-established companies such as pension funds at times plan their [tag]capital expenditures[/tag] according to the lifespan of the items they purchase whereas smaller companies plan for much shorter designated periods. In a previous work environment, one of my responsibilities was to plan purchases based on the expected lifespan established by the manufacturer, which could range from 10 to 25 years. Now 25 years may seem a little long to plan ahead, but the logic is that if you replace a major component in a building such as an elevator and you know that the estimated average lifespan is let’s say 25 years, you can already budget the estimated price of a new elevator in 25 years. Of course, the price will fluctuate over this period and we will estimate the future pricing. Since there is no way of knowing if you will need to replace the item in 20, 22, 25 or even 30 years, the general mindset is to have an general idea over time of what will be coming. When you add up all the required capex projects for the years to come, you begin to get a good feeling of what years you might need more funding, and what years you might need less. A good strategy is to revise these projections occasionally and smoothen out the curve by refining your capital expenditure schedule where you might accelerate some, delay others so that each year you spend according to your budget, which is often similar amounts year after year factoring in standard inflation. This gives a much better perspective on overall capital expenditures than simply electing to plan over a three to five year period. Of course, the data you gather on what you plan to replace in the next three to five years will always be more relevant than the data you will collect on what you think you will spend in year 15 of a 20 or 25-year plan. Nevertheless, in essence, looking further in time can add value and avoid forgetting about something in the process. It also makes life a little easier when selling a building, as these types of forecasts inspire confidence in future buyers and gives a better perspective on things in general.
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