Capital Risk
Take a risk. Get a reward. That's the dance of the capital markets limbo.
You worked hard to accumulate your own capital, which is then used for investment in your future. Take a lot of risk, and the capital could all but disappear in the limbo (how low can you go?), or it can return some huge swonk of dough. Had you invested $10,000 in Amazon two weeks after its IPO, today that'd be worth some $50 million.
Capital is risked 'everywhere'...stocks, real estate, commodities, bonds, etc. Any type of investment you make will come with a disclosure that you are assuming capital risk when you buy the securities. Think: Caveat Emptor.
Companies also risk their capital any time they make an investment in new equipment, new buildings, or a new product introduction. Analyses are done to determine the return on investment. Or, in other words, will the capital spent result in higher sales or other benefits? They need to determine the minimum return that a company expects to earn when investing in a project.
We Design Anything Inc. wants to expand their product offerings to include 3-D printing. They need to predict the amount of capital required to buy the 3-D printer and expand their current space. The capital they decide to risk totals, say, $50,000 that can be paid over 5 years. The sales people project they could sell $40,000 worth of 3-D products per year, generating $20,000 in profits. So if they are correct, We Design Anything will probably green light the purchase.
Assuming zero cost of capital (which you shouldn't do, but we'll do here, for simplicity's sake), then the company makes back all of its capital outlay in just 2 1/2 years. If you added in very high cost of capital, maybe it'd take three years to make all the dough back. Regardless, this purchase feels like a no brainer. So...maybe the next printer can print a brain. (And then give out 300 to Congress.)
Related or Semi-related Video
Finance: What is Capital Expenditure, i....56 Views
finance- a la shmoop. what is capex ?funny name kind of sounds like group therapy
for men trying to quit wearing hats or maybe it's a Space Age head cover [men sit in a circle]
Michael Phelps will wear on his comeback tour. sadly it's neither of those. capex
is short for capital expenditure and it simply refers to the spending of capital
to buy stuff. you know what an expenditure is ie an expense, for example
when famed surgical glove manufacturer all you need is glove spends money on [man smiles in front of warehouse]
synthetic rubber for its products, well, the buying of the gallons and gallons of
rubber is an expense. they generally use that rubber within a short timeframe of
when they bought it- a month a quarter certainly within the year. so the buckets
of rubber they buy for their raw material are just a normal expenditure
or expense. so what makes something a capital expense? well think about it like
a petty crime versus a capital crime. in a petty crime the criminal will do time
and be done and move on in life. a capital crime means someone was killed [man walks out of jail]
whole different level of serious -versus that jaywalking thing -so when a capital
expenditure comes around well its costs are taken or allocated or amortized over
long periods of time like years or even decades. you know like a prison sentence.
so when all you need is glove buys a new robotic rubber gloves machine so that [assembly line shown]
they no longer have to sew the gloves by hand, that is a capital expense. why
because it costs a lot of money 10 million bucks in fact ,and because they
expect to be able to use that thing for 20 years before it wears out and is
worthless. so they'll spend 10 million dollars in
cash today of their capital to buy it and then reduce that value by 500 grand
a year on their balance sheet each year for 20 years. the value of their capital [balance sheet shown]
expenditure will slowly decline to nothing on their books but it will
presumably more than pay for itself in saved costs applied to human labor in
making the gloves. as for actually using the [robot holds up hand]
however well it'll be a while until we can trust robots with that.
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