Capital Expenditure Examples for Manufacturing and How to Save With Controls Engineering

Decisions about capital expenditures (CapEx) in manufacturing are complex. There are many variables to consider, some of which are outside your control. For example, while you can demonstrate that adding automation to your workflow reduces labor costs and increases output, it is much more difficult to anticipate customer demand amid an uncertain economy.

However, there are ways to anticipate the different factors that go into purchasing decisions and objectively evaluate the impact of your spending. In this guide, we will explain the various manufacturing capital expenditure formulas and answer some key questions such as:

• What is CapEx in simple terms?
• What are 4 examples of expenditure for manufacturing?
• How do I evaluate CapEx spending?
• What is the rule of thumb for capex in manufacturing?
• What is the formula for calculating capex in manufacturing?
• How can controls engineering save you money?

Let’s start with an explanation.

What Is CapEx in Simple Terms?

Capital expenditure (CapEx) in manufacturing is the money you spend to buy new equipment, upgrade or modernize your operation, or maintain your physical assets. Think of it as a one-time investment in items that are expected to provide long-term benefits. Often, CapEx is used to replace aging equipment, improve efficiency, or take on new projects.

Examples of Capital Expenditures in Manufacturing

Examples of capital expenditures in manufacturing include:

• Purchasing new manufacturing equipment to increase production capacity or throughput.
• Building new manufacturing facilities to grow the company.
• Automating production lines with robotics, automation, and other controls engineering options to streamline processes and reduce labor costs.
• Acquiring specialized tools or molds for specialized products.

CapEx purchases are generally expensive. While providing long-term benefits, they may require a significant upfront investment, so organizations have to carefully evaluate the impact of such a purchase. There are several manufacturing capital expenditure formulas to help with an assessment.

Manufacturing Capital Expenditure Formulas

In manufacturing, the capital expenditure calculation can be viewed from various angles.

The Capital Expenditure (CapEx) formula is a straightforward calculation, requiring data from your company’s financial statements. Typically computed annually during the budgeting process, it involves determining the change in fixed assets from the prior year and factoring in current depreciation.

The CapEx Formula

Capital Expenditures=PP&E (current period)−PP&E (prior period)+depreciation (current period)

PP&E represents property, plant, and equipment. To find the current depreciation, subtract accumulated depreciation from prior years. This calculation reveals the investment in new or existing fixed assets. For instance, consider a manufacturing company investing substantially in new automation and control engineering to optimize production flows. Examining their financial statements, you determine that:

• Prior year PP&E = $5 million
• Current year PP&E = $7 million
• Current year depreciation =$1 million
• Accumulated depreciation from prior years = $2 million

Therefore, capital expenditures = $7 million – $5 million + ($1 million – $2 million) = $1 million. This indicates a $1 million CapEx for the year for automation equipment and engineering, measuring the true fixed asset investment made.

The Capital Expenditures Ratio (CapEx Ratio)

The CapEx Ratio helps assess whether sufficient capital is available for CapEx.

The CapEx Ratio Formula is:
CapEx Ratio = Operating Cash /  CapEx

A ratio greater than 1 indicates enough capital for capital purchases, while a ratio less than 1 may prompt consideration of financing options. Continuing the example, the manufacturer checks their cash flow statement, revealing an operating cash flow of $2 million.

CapEx Ratio = $2 million / $1 million. This yields a CapEx Ratio of 2.0, signaling that the manufacturing company possesses a strong cash position, generating enough cash to support capital spending without financing if they choose.

Payback Period Formula

Payback Period = Initial Investment / Annual Cash Inflows

The payback period formula measures how long it will take to recover the initial cost of an investment. For example, if installing a new distributed control system (DCS) costs $2 million and is expected to reduce operating expenses by $500,000 each year, the payback period would be $2,000,000 / $500,000 = 4 years.

Return on Investment (ROI) Formula

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

The ROI formula measures the percentage return generated by an investment. For instance, if the $2m DCS investment is expected to provide $3m in net profit over its lifespan, the ROI would be ($3,000,000 – $2,000,000) / $2,000,000 = 50%.

Net Present Value (NPV) Formula

NPV = Present Value of Cash Inflows – Initial Investment

NPV helps determine the current value of an investment by discounting future cash flows based on the cost of capital. The cost of capital might be the interest (discount) rate you have to pay for financing or the lost opportunity cost for investing elsewhere.

If a $2 million controls upgrade is projected to save $500,000 in operating expenses annually for 5 years, and the discount rate is 5%, the NPV would be:

Present Value of Cash Inflows:

Year 1: $500,000 / (1+0.05)^1 = $476,190
Year 2: $500,000 / (1+0.05)^2 = $453,514
Year 3: $500,000 / (1+0.05)^3 = $431,918
Year 4: $500,000 / (1+0.05)^4 = $411,351
Year 5: $500,000 / (1+0.05)^5 = $391,763
Total = $2,164,738

Initial Investment = $2,000,000

NPV = $2,164,738 – $2,000,000 = $164,738

A positive NPV indicates the projected savings exceed the costs, suggesting the project would be profitable.

Internal Rate of Return (IRR) Formula

IRR = Discount Rate That Makes NPV = 0

IRR sets NPV to 0 to find the break-even discount rate. The higher the IRR, the better. While the formula looks simple, the calculations can be complex and take trial and error to determine the appropriate discount. An IRR calculator helps.

With a $2 million investment and $500k savings per year, the IRR is 7.931%.

Keep in mind that returns rarely stay equal each year, so estimations need to be adjusted accordingly.

Optimizing Your Capital Expenditures (CapEx) in Manufacturing

While manufacturing capital expenditure formulas like ROI and NPV can provide valuable quantitative comparisons, it is important to look beyond the numbers.

The unique expertise of controls engineers gives important qualitative insights. By involving them early when evaluating investments, they can help identify the latest technologies, optimize workflows, and integrate existing assets to reduce expenditures.

Rather than using CapEx formulas as the sole decision-making criteria, view them as tools to standardize analysis. Combine quantitative results with the qualitative guidance of your controls engineering team for a holistic approach. Their hands-on experience and deep process knowledge are equally vital to making optimal capital investment decisions.

The numbers only tell part of the story. Other factors may be just as important—or more important.

For example, controls engineering projects can greatly improve safety by automating hazardous manual tasks. The value of reducing accident risks is not captured in ROI calculations. CapEx may be needed to replace equipment at the end of its service life. The losses avoided by proactive upgrades are not quantified by these formulas either.

In some cases, investments are necessary to remain competitive, comply with regulations, or enable future growth. The strategic value of these projects goes beyond financial returns.

The key is to view CapEx formulas as useful tools, not definitive answers. Consider both quantitative and qualitative factors when evaluating capital investments.

What Is the Rule of Thumb for CapEx in Manufacturing?

There is no agreed rule that applies universally. The optimal CapEx spending levels and mix will depend on your company’s strategy, industry, business maturity, competition, demand, and other evolving factors. You need to conduct a thorough evaluation of your specific situation.

However, some guidelines are generally accepted and can be used as a starting point. Companies often use these to evaluate their situation:

Reinvestment Percentage

Reinvest a conservative 3–5% of annual revenue into new equipment and upgrades to sustain and foster operational growth over time.

CapEx Limitation

Set a cap on annual capital expenditures at 10–15% of total revenue to prevent potential overinvestment, ensuring financial stability.

Payback Period Targets

Establish target payback periods of 2–5 years for major CapEx projects to manage risk effectively; longer payback periods may entail increased risk.

ROI Objectives

Aim for a robust return on investment (ROI) of 10–30% or more on equipment investments to justify costs and enhance overall profitability.

Project Allocation

Allocate 50–75% of the CapEx budget to sustaining and replacement projects, prioritizing the maintenance and optimization of existing assets.

Growth Initiatives Allocation

Devote 25–50% of the CapEx budget to growth initiatives, such as new product development and capacity expansions, to support strategic business expansion.

Depreciation Management

Maintain depreciation levels below CapEx to prevent long-term capital erosion, ensuring a healthy balance between ongoing operational costs and strategic asset investments.

Keep in mind that your percentages and numbers can vary greatly. Emerging sectors and new lines of business may make these guidelines irrelevant. For example, there is significant capital investment right now in the semiconductor industry that defies these guidelines. However, companies are building at a frantic pace to meet demand and reduce reliance on China for microchips. While CapEx spending as a percentage of revenue has averaged 23% since the 1980s, domestic spending in the U.S. and E.U. today far outpaces any of these guidelines.

Likewise, companies investing in AI solutions are spending at a record pace now as the marketplace develops to try to gain first-mover advantages.

How to Save With Controls Engineering

Controls engineering requires specialized expertise to streamline production in manufacturing and produce significant improvements both in quality and cost savings. Both in planning CapEx and impacting current operations, an experienced controls engineering firm like Pacific Blue Engineering can help you achieve your goals in several areas.

Optimize Assets In-Place

Rather than purchasing costly new equipment, controls engineers can help manufacturers get more output, efficiency, and extended lifespan from existing assets. Upgrading automation systems, adding sensors, improving integrations, and optimizing control logic are lower-cost ways to increase capacity without large capital outlays.

If you are adding new equipment to your current workflow, controls engineers can help you identify the optimal integration to leverage your current equipment for cost reductions and capacity.

Identify Lower-Cost Technical Alternatives

With their specialized expertise, controls engineers may be able to find more affordable technology options that still meet your production needs. This includes evaluating lower-cost suppliers, less complex solutions, and more incremental improvements versus wholesale replacements.

Controls engineers know where expenditures can be reduced without sacrificing critical capabilities.

Enhance Energy Efficiency

Optimizing the controls of motors, compressors, HVAC systems, and other plant energy consumers can significantly reduce energy costs. This has a direct impact on lowering operating expenses and GHG emissions.

Controls engineers can apply techniques like variable frequency drives, sequencing, scheduling, and predictive algorithms to minimize waste and maximize efficiency.

Reduce Downtime

Controls improvements that increase overall equipment effectiveness by minimizing unplanned downtime events allow for maximizing production without big CapEx investments. Techniques like predictive maintenance, condition monitoring, reliability-centered maintenance, and redundancy management help avoid failures and downtime.

Enable Predictive Maintenance

Smart sensors and advanced analytics help detect emerging control issues early so that maintenance can be scheduled proactively before failures occur. This extends equipment lifetimes while avoiding disruptive downtime.

Standardization and Consolidation

Controls engineers are experts at finding opportunities to standardize machines and processes while consolidating control systems. Standardization simplifies maintenance activities and reduces spare part inventories. Maintaining fewer unique components reduces costs.

Conduct Digital Simulation Before Purchase

Controls engineers can simulate machine designs, control logic, and other factors digitally before purchase. This can demonstrate the impact of capital expenditures in advance and avoid costly rework after the fact.

Talk to the Controls Engineering Experts at Pacific Blue Engineering

Pacific Blue Engineering is an industry leader in industrial automation solutions in manufacturing. Pacific Blue Engineering provides custom solutions, legacy control modernization, and functional safety services for the most demanding projects.

With a deep understanding and experience in implementing complex automation solutions on time and on budget, Pacific Blue Engineering is a trusted control system integrator that can guide you through capital expenditures (CapEx) in manufacturing planning to find optimal solutions.

Request a consultation today.