Question

Capital Expenditures Budget

On January 1, 20Y6, the controller of Omicron Inc. is planning capital expenditures for the years 20Y6–20Y9. The following interviews helped the controller collect the necessary information for the capital expenditures budget:

Director of Facilities: A construction contract was signed in late 20Y5 for the construction of a new factory building at a contract cost of $10,000,000. The construction is scheduled to begin in 20Y6 and be completed in 20Y9.

Vice President of Manufacturing: Once the new factory building is finished, we plan to purchase $1.5 million in equipment in late 20Y7. I expect that an additional $200,000 will be needed early in the following year (20Y8) to test and install the equipment before we can begin production. If sales continue to grow, I expect we'll need to invest another $1,000,000 in equipment in 20Y9.

Chief Operating Officer: We have really been growing lately. I wouldn't be surprised if we need to expand the size of our new factory building in 20Y9 by at least 35%. Fortunately, we expect inflation to have minimal impact on construction costs over the next four years. Additionally, I would expect the cost of the expansion to be proportional to the size of the expansion.

Director of Information Systems: We need to upgrade our information systems to wireless network technology. It doesn't make sense to do this until after the new factory building is completed and producing product. During 20Y8, once the factory is up and running, we should equip the whole facility with wireless technology. I think it would cost us $800,000 today to install the technology. However, prices have been dropping by 25% per year, so it should be less expensive at a later date.

Chief Financial Officer: I am excited about our long-term prospects. My only short-term concern is managing our cash flow while we expend the $4,000,000 of construction costs in 20Y6 and $6,000,000 in 20Y7 on the portion of the new factory building scheduled to be completed in 20Y9.

Use this interview information to prepare a capital expenditures budget for Omicron Inc. for the years 20Y6–20Y9.

Omicron Inc.
Capital Expenditures Budget
For the Four Years Ending December 31, 20Y6-20Y9
Item	20Y6	20Y7	20Y8	20Y9
	$	$		$
			$
Total	$	$	$	$

Answer 1

Omicron Inc.
Capital Expenditures Budget
For the Four Years Ending December 31, 20Y6-20Y9
Item	20Y6	20Y7	20Y8	20Y9
building	$4,000,000	$6,000,000		$3,500,000
equipment		$1,500,000	$200,000	$1,000,000
information system			$450,000
Total	$4,000,000	$7,500,000	$650,000	$4,500,000

All amounts are taken for the year they are estimated to occur in item-by-item.

2019: estimated to expand the factory building by 35%, meaning 35% capital expenditure estimated to incur

10,000,000 * 35% = $3,500,000

2018: Information system to be installed and estimated to cost 800000 in 2016 decreases by 25% per year. Therefore estimated cost in 2018 would be

800,000*75% *75% = 450000

( or 800000*75% = 600000 in 2017

600000*75% = 450000 in 2018)

{ capital expenditure is expenditure on acquisition of fixed assets which benefits us for more than a year.

capital expenditure budget is a plan, which estimates the amount and timing of the capital expenditure by the organization.}