If you borrow money to buy a machine, the lender will determine the interest rate to charge. Total depreciation = purchase price - salvage value Salvage value = current list price x remaining value factor (Table 1) The tractor is expected to be used 400 hours per year.įor the 180-hp tractor with 400 hours of annual use in the example, the salvage value after 15 years is estimated as 23 percent of the new list price: An economic life of 15 years is selected. Dealer discounts are assumed to reduce the actual purchase price to $180,000. The example is a 180-PTO horsepower diesel tractor with a list price of $200,000. The appropriate values in Table 1 should be multiplied by the current list price of a replacement machine of equivalent size and type, even if the actual machine was or will be purchased for less than list price.Īn example problem will be used throughout this publication to illustrate the calculations. Actual market value will vary from these values depending on the condition of the machine, the current market for new machines, and local preferences or dislikes for certain models. The factors were developed from published reports of used equipment auction values, and are estimates of the average “as-is” value of a class of machines in average mechanical condition at the farm. Note that for tractors, combines and forage harvesters the number of hours of annual use is also considered when estimating the remaining value. It is the amount you could expect to receive as a trade-in allowance, an estimate of the used market value if you expect to sell the machine outright, or zero if you plan to keep the machine until it is worn out.Įstimates of the remaining value of tractors and other classes of farm machines as a percent of new list price are listed in Tables 1a and 1b. Salvage value is an estimate of the sale value of the machine at the end of its economic life. A good rule of thumb is to use an economic life of 10 to 12 years for most farm machines and a 15-year life for tractors, unless you know you will trade sooner. It is often less than the machine’s service life because most farmers trade a machine for a different one before it is completely worn out. The economic life of a machine is the number of years over which costs are to be estimated. But age and accumulated hours of use are usually the most important factors in determining the remaining value of a machine.īefore an estimate of annual depreciation can be calculated, an economic life for the machine and a salvage value at the end of the economic life need to be specified. The introduction of new technology or a major design change may make an older machine suddenly obsolete, causing a sharp decline in its remaining value. The degree of mechanical wear may cause the value of a particular machine to be somewhat above or below the average value for similar machines when it is traded or sold. Ownership costs (also called fixed costs) include depreciation, interest (opportunity cost), taxes, insurance, and housing and maintenance facilities.ĭepreciation is a cost resulting from wear, obsolescence, and age of a machine. This publication contains a worksheet that can be used to calculate costs for a particular machine or operation. But the costs can be estimated by making a few assumptions about machine life, annual use, and fuel and labor prices. The true value of these costs cannot be known until the machine is sold or worn out. Machinery Costsįarm machinery costs can be divided into two categories: annual ownership costs, which occur regardless of machine use, and operating costs, which vary directly with the amount of machine use. All these decisions require accurate estimates of the costs of owning and operating farm machinery. Making smart decisions about how to acquire machinery, when to trade, and how much capacity to invest in can reduce machinery costs as much as $50 per acre. However, good machinery managers can control machinery and power costs per acre. Larger machines, new technology, higher prices for parts and new machinery, and higher energy prices have all caused machinery and power costs to rise in recent years. Machinery and equipment are major cost items in farm businesses. Teaching activity Estimating Farm Machinery Costs
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