IA Farm Machinery Cost PM710

IA Farm Machinery Cost PM710 - Machinery Management...

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PM 710 Paper version Revised November 2001 Electronic version Revised August 2005 Machinery Management Estimating Farm Machinery Costs Machinery and equipment are major cost items in farm businesses. Larger machines, new technology, higher prices for parts and new machin- ery, and higher energy prices have caused machinery and power costs to rise in recent years. However, good managers can control machinery and power costs per acre. Making smart decisions about how to acquire machinery, when to trade, and how much capacity to invest in can reduce machinery costs by as much as $25 per acre. All of these decisions require accurate estimates of the costs of owning and operating farm machinery. Machinery Costs Farm machinery costs can be divid- ed into two categories: annual own- ership costs, which occur regardless of machine use, and operating costs, which vary directly with the amount of machine use. The true value of some of these costs is not known until the machine is sold or worn out. But the costs can be estimated by making a few assumptions about machine life, an- nual use, and fuel and labor prices. This publication contains a work- sheet that can be used to calculate costs for a particular machine or operation. An example problem will be used throughout this publication to illus- trate the calculations. The example uses a 180-PTO horsepower diesel tractor with a list price of $110,000. Dealer discounts are assumed to reduce the actual purchase price to $93,500. An economic life of 15 years is assumed, and the tractor is expect- ed to be used 400 hours per year. Ownership costs (also called xed costs) include depreciation, interest (opportunity cost), taxes, insurance, and housing facilities. Depreciation Depreciation is a cost resulting from wear, obsolescence, and age of a ma- chine. 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. 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. But age and ac- cumulated hours of use usually are the most important factors in de- termining the remaining value of a machine. Before an estimate of annual depreci- ation can be calculated, an economic life for the machine and a salvage value at the end of the economic life must be specifi ed. The economic life of a machine is the number of years for which costs are to be estimated. It often is less than the machine’s service life because most farmers trade a machine for a different one before it is completely worn out. A good rule of thumb is to use an economic life of 10 to 12 years for most new farm machines and a 15-year life for tractors, unless it is known that the machine will be traded sooner.
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This note was uploaded on 08/08/2008 for the course AAE 320 taught by Professor Mitchell during the Spring '08 term at University of Wisconsin.

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IA Farm Machinery Cost PM710 - Machinery Management...

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