Lesson 1 of 7 · 12 min
Types of capital investments
Capital investments are long-lived assets bought to keep the business running or to grow it, and their risk rises as the project moves further from what the company already does.
In short
- A capital investment (capital project) lasts a year or more and is recorded as a long-term asset at cost, then expensed gradually through depreciation or amortisation.
- Four types: going concern (maintenance), regulatory/compliance, expansion of existing business and new lines of business and other.
- Maintenance and compliance projects maintain the business and are lower risk; expansion and new lines grow it and carry more risk, with new lines the riskiest.
- Analysts often proxy maintenance capex by depreciation and amortisation; total capex minus that estimate approximates growth (expansion) capex.
- Match funding finances an asset with debt of a similar life, avoiding rollover risk.
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