What does the formula for capital expenditures (Capex) include?

The formula for capital expenditures (Capex) is designed to capture the amount a company invests in its fixed assets during a specific period. The correct formulation includes the change in net fixed assets adjusted for any depreciation that has occurred during that period.

The reasoning behind the correct answer involves calculating the net increase in fixed assets. By taking the ending net fixed assets and subtracting the beginning net fixed assets, you can ascertain the total change in fixed assets over the period. However, this figure would also include any depreciation that has been accounted for, which reduces the value of existing fixed assets. Therefore, to isolate the new investments that a company has made in its fixed assets, depreciation must be added back to this difference.

This approach effectively provides a clear view of how much new physical capital the company has acquired, overriding the erosion of value from depreciation. Hence, the formula accurately reflects capital expenditures by accounting for both growth in asset value and the decline due to usage and aging.

The other options either misrepresent the necessary calculations for Capex or omit crucial components like depreciation adjustment, leading to incomplete or incorrect interpretations of the capital investment.