The portion of total expenditures Fixed Capital Investment (v2170.01), for the capacity expansion necessary to support incremental (increased) sales. It is defined as capital expenditures in excess of depreciation expense and net capitalized interest. Depreciation expense is assumed to approximate the cost of replacing equipment to maintain the plant without adding capacity. As part of the financing decision, not the investment decision, Interest Capitalized (v1410) is excluded from Incremental Fixed Capital Investment (F) (v6185.00)..
When expressed as a percentage of incremental Sales (v1030), it is known as “F,” a key Strategic Finance account affecting Shareholder Value (v5070):
Fixed Capital Inv. (v2170.01) - Depr. Exp (Funds) (v2190.01)
Sales (Net) (v1030.00) - Sales (Net) (v1030.00) (prior period)
Depreciation Expense (Funds) (v2190.01), based on historical costs, may understate the cost of replacing equipment when that cost has increased because of inflation and regulatory forces (such as environmental controls). The “F” (v6185.00) ratio does account for greater replacement costs, because they are captured in your estimate of total capital expenditures, Fixed Capital Investment (v2170.01). The numerator, therefore, impounds the cost of expansion and the cost of replacing equipment.
Whether the historical value of this account is a reasonable estimate for the next few years is dependent upon factors such as these:
Your assessment of the speed and extent to which increased fixed capital costs can be passed on to customers through the selling price
Whether assets can be used more effectively
Whether the number of plants can be reduced