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Capital Costs

All expenditures the company incurs in order to finance its operations and growth. Capital costs include interest on debt, taxes and profits. (See also Building Block Costs, People Costs, Purchases Costs)

Example 1:

By following a strict policy of cost containment, Cooper has managed to add capacity at 7% of the cost of its larger competitors, paying roughly $30 million for a used plant in the same year that Goodyear spent $430 million for a new plant. (Year 1994-SIC 3011)

Explanation: Cooper has lower Capital Costs than its competitors because it adds capacity so inexpensively compared to the rest of the industry.

Example 2:

The Port of Oakland had seven times as much business as San Francisco in 1984, despite the fact that wages in Oakland are 10% higher than in San Francisco. Oakland has invested in extensive automation to increase the productivity of its longshoremen. (Year 1986-SIC 4400)

Explanation: Automation implies the investment of Capital Costs in machinery that substitutes for the people costs of longshoremen.

Example 3:

The most price conscious retailers often push responsibility for managing inventory and logistics on to vendors. (Year 1996 - SIC 5900)

Explanation: These retailers reduce their Capital costs by requiring vendors to carry much of the inventory and to keep the retailers’ in-store inventories very low.

Example 4:

Component maker, Android Industries, moved machinery into a GM parts factory. Android took charge of twenty GM workers at the plant to show them how to assemble doors. GM continued to pay the workers but Android ran that part of the factory. (Year 1992 - SIC 3714)

Explanation: GM saved on Capital costs because Android brought its own machinery into the GM parts factory.

Example 5:

Walgreens realized that the cost of carrying inventory accounted for 25% of its total inventory costs. It reduced inventory levels by a third by giving suppliers the choice to participate in a just-in-time delivery program or to stop supplying the Company. (Year 1986 - SIC 5912)

Explanation: The just-in-time delivery program reduced Walgreen’s inventories and cut its Capital costs by reducing the total Net Capital Employed required to run the business.

Example 6:

Kohlberg Kravis arranged an interest rate cap. It paid a fee in exchange for a promise that if interest rates exceeded a certain level, the bank would pay the excess interest to Kohlberg Kravis. (Year 1989 - SIC 6200)

Explanation: This arrangement reduced the Capital costs for the firm when interest rates rose to high levels.

Example 7:

In the U.S., utilities reduce electricity demand peaks through pricing schemes and incentives for consumers to cool and heat their homes at off-peak hours. (Year 1996 - SIC 4911)

Explanation: By reducing peak demand, utilities are able to reduce their Capital costs of providing total demand.