Large and well-established companies such as pension funds normally plan their capital expenditures according to lifespan. That is, the number of years the items they purchase will last. They often plan purchases based on the expected lifespan established by the manufacturer. This can range from 10 to 25 years and more.
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 letâ€™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 a 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.
Revise the projections
A good strategy is to revise these projections occasionally and smoothen out the curve. You can do this by refining your capital expenditure schedule. For some expenses you might accelerate them. Others, you could delay in time. The idea is that each year you spend according to your budget, which is often similar amounts year after year factoring in standard inflation.
This gives a good perspective on overall capital expenditures. Much better 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. On of the reason is that these types of forecasts inspire confidence in future buyers and give a better perspective on things in general.