Machine Usage Cost (including depreciation, repair, interest, taxes, insurance and housing).

Transcription

1 MACHINERY COSTS The question of whether to keep a piece of farm equipment or buy a new or used replacement is a major decision for a farmer. To make the right decision, factors such as the capital requirement, the annual usage cost, capacity, functional efficiency, and probable reliability must be considered. Reliability is extremely important to some producers who must make every hour count at the peak of the machinery-use season. Since machine reliability decreases with usage, some producers may benefit by trading a particular piece of equipment every 3 or 4 years. On the other hand another producer may not require as high a degree of reliability and it may be more profitable for him to buy used rather than new machinery. The following is a method of estimating the usage cost for (1) a new piece of equipment based on its expected life, and (2) a used piece of equipment when previous usage is known. In this method, the total cost of operating a machine is broken down into the following parts: Depreciation Machine Usage Cost (including depreciation, repair, interest, taxes, insurance and housing). Fuel and Lubrication Costs Operator Labor Machine Usage Cost Depreciation results from obsolescence and wear. Age is the predominant factor in establishing the market value of used farm machinery. Consequently, depreciation is usually considered a fixed annual cost that disregards amount of use, although the condition of the used machine does affect its market value. Table M2.1 shows the average market value for various machines up to 12 years old. The value is expressed in dollars per $1,000 of initial list price ($1,000 ilp). Because of discounts from list prices or high trade-in allowances, it is assumed that machines can be purchased outright at 10-percent discount. As an example from Table M2.1, the first years depreciation per $1,000 ilp for a tractor is estimated as follows: $1,000 list price-$100 discount-$623 "as is" value after 1 year = $277 depreciation per $1,000 ilp. Depreciation for any succeeding year is the loss in value during that year. In the case of a tractor, Table M2.1 shows that it will depreciate $41 per $1,000 ilp during the second year ($623 - $582).

2 Table M2.1: Remaining "As Is" Values of Farm Machines in Dollars per $1,000 of Initial List Price Self- Age in Propelled Forage Corn Other* Years Tractors Combines Balers Harvesters Pickers Machines 1 $ 623 $ 596 $ 664 $ 600 $ 585 $ * Includes moldboard plows, disc harrows, grain drills, corn planters, cultivators and mowers. Interest, Taxes, Insurance and Housing Interest, taxes, insurance and housing are also annual fixed costs independent of amount of use. The cost for a particular year is found by multiplying the total charge (11-percent) by the machine's average "as is" value during that year. Interest is estimated at 8-percent and reflects either the rate paid if money is borrowed or the return that could be obtained if the money were invested otherwise. Taxes are assumed to be 1-percent, insurance 1/2-percent and housing (including a service shop), 1-1/2 percent of the average value during the year. Total Fixed Cost The accumulated total cost of depreciation, interest, taxes, insurance, and housing is estimated from Table M2.2 for tractors and major farm machinery from the time they are new up to 12 years of age. These costs make no allowance for possible income tax credit for depreciation. Using accumulated costs as provided in Table M2.2 simplifies the problem of determining the fixed cost for a used machine. Section Break (Next Page)

3 Table M2.2:Accumulated Total Fixed Cost for Farm Machines in Dollars per $1,000 of Initial List Price (Includes depreciation, interest, taxes, insurance, and housing. Self- Age in Propelled Forage Corn Other* Years Tractors Combines Balers Harvesters Pickers Machines 1 $ 361 $ 386 $ 322 $ 383 $ 397 $ * Based on depreciation from Table 1 plus 11% of the average value during the year, which includes interest (8%), taxes (1%), insurance (1/2%) and housing (1-1/2%). ** Includes moldboard plows, disc harrows, grain drills, corn planters, cultivators and mowers. For example, if a 3-year-old tractor is purchased second-hand to be kept for 4 years, the fixed cost for the period of ownership is determined by subtracting the accumulated fixed cost at the end of 3 years from the cost at the end of 7 years ($906 - $558 = 338). The average fixed cost per year will be 1/4 the difference or $84.50 per $1,000 ILP per year. Repair Figure M2.1 through M2.12 estimate total accumulated repair costs according to total hours of use since new. The costs of replacement parts as well as replacement machines tend to rise in relation to the original list price. The accumulated repair cost data in figures M2.1 through M2.12 reflect this influence and need not be adjusted for inflation. When a machinery owner plans to trade or sell a machine, he will not do some normal repairs. Consequently, to estimate repair costs, assume that 1/2 of the last years repair costs will not be made.

4 A used machine is likely to require greater-than-normal repairs the first year after purchase because the previous owner probably spent as little as possible on it the year before he traded. If a dealer overhauls it, the price will be correspondingly higher than the average market value. However, if the machine is purchased "as is", the new owner should make allowance in his usage cost prediction for extra repairs. One way to make such allowance is to assume that the new owner will stand half the normal repair cost for the previous years. It can also be assumed that he will make only half the normal repairs in his final year of ownership. Based on these assumptions, usage cost is estimated as follows: Fuel and Lubricant Costs Fuel consumption for a particular make and model of tractor can be approximated from Nebraska Tractor Test Data. Tractor dealers usually have the results of these tests. Where Nebraska Test Data are not available, fuel consumption can be estimated from Table M2.3. These fuel consumption figures are the average for a year's normal use, and should be modified in accordance with expected engine loading when used to estimate consumption for specific jobs. If the tractor is fully loaded, it will use more fuel than indicated in table M2.3, and it would use less for light work. The cost of lubricants (oil, grease, filters) can be estimated at 15-percent of the fuel cost. Operator Labor Operator labor must be included in the total cost even if the farmer operates the machine himself. Include labor at the rate for specific locations and operations. Custom Rates Custom rates are often set by tradition and may have little correlations with actual costs. Custom rates vary significantly with location, even within the same county. Some traditional custom rates seem excessive, while others are much lower than actual cost. A fair custom rate could be determined by calculating the machine usage cost, fuel and lubricant cost, operator labor cost, and adding some profit. The custom rate worksheet on page M2.10, can be used to estimate a fair custom rate. Selected References Richey, C. B., and D. R. Hunt, "Determining Usage Costs For Farm Tractors and Field Machines." Cooperative Extension Service, Purdue University, AE Agricultural Engineers Yearbook, 1975.

5 Table M2.3: Average Tractor Fuel Consumption Rates Average Fuel Average Fuel Consumption Consumption Maximum (Diesel) 1 Maximum (Diesel) 1 Pto hp Gallons per Hour Pto hp Gallons per Hour Multiply by 1.37 for gasoline and 1.64 for LP gas. Section Break (Next Page)

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