Capital cost

Capital cost

Capital costs are costs incurred on the purchase of land, buildings, construction and equipment to be used in the production of goods or the rendering of services. In other words, the total cost needed to bring a project to a commercially operable status. However, capital costs are not limited to the initial construction of a factory or other business. For example, the purchase of a new machine that will increase production and last for years is a capital cost. Capital costs do not include labor costs except for the labor used for construction. Unlike operating costs, capital costs are one-time expenses, although payment may be spread out over many years in financial reports and tax returns. Capital costs are fixed and are therefore independent of the level of output.

A fossil fuel power plant's capital costs include the purchase of the land the plant is built on, permitting and legal costs, the equipment needed to run the plant, the cost of the plant's construction, the cost of financing and the cost of commissioning the plant incurred prior to commercial operation of the plant. They do not include the cost of the natural gas, fuel oil or coal used to fire the plant once the plant enters commercial operation or any taxes on the electricity that is produced. They also do not include the labor used to run the plant or the labor and supplies needed for maintenance.

Government generally provides subsidies through investments and partnerships in the initial capital costs of research and manufacturing infrastructure that cannot be matched by investor owned companies.

References

* [http://www.iit.edu/~ipro304f/Economic%20Analysis.htm Illinois Institute of Technology]
* [http://darwin.nap.edu/books/030908461X/html/70.html National Academies Press]
* [http://www.ciel.org/Publications/climatechangeglossary.pdf The Center for International Environmental Law] (PDF)
* [http://www.epa.gov/ne/students/pdfs/activ17.pdf United States Environmental Protection Agency] (PDF)

See also

*Capital recovery factor
*Capital Cost Allowance
*Cost of capital
*Cost overrun


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