How To Value Capital Expenditures

Capital Expenditures pose a challenge to Investors while valuing a business. The puzzle is to figure out what would be the return on these investments and when they will be realized. Following is a basic example that tries to explain  how we need to differentiate the two main types of Capital expenditures and how to value them:

1. Capital Expenditures that maintain current earning power.
2. Capital Expenditures that increase the earning power.

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EXAMPLE – Hotel sea view is a nice hotel. It has 50 rooms. The hotel generates a net profit of $25 per room per night. The average occupancy rate is 75%.

Thus...