ESTIMATING FARM POWER & MACHINERY COSTS

ESTIMATING FARM POWER & MACHINERY COSTS
Farm power, machinery and equipment are major cost items in agriculture. Larger
machines, new technology, higher prices for parts and new machinery, 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 hectare. 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 Rs 10000 per hectare. All of these decisions
require accurate estimates of the costs of owning and operating farm machinery.
Machinery Costs
Farm machinery costs can be divided into two categories: (i) annual ownership costs i.e.
Fixed cost, which occur regardless of machine use, and (ii) 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, annual use, and fuel and labour prices.
1. Ownership costs (also called fixed costs) include depreciation, interest
(opportunity cost), taxes, insurance, and housing facilities.
Depreciation
Depreciation is a cost resulting from wear, obsolescence, and age of a machine. 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 accumulated hours of use usually are the most important factors in determining
the remaining value of a machine. Before 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 must be specified. 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 (Age) 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. Salvage value (SV) is 10 % purchase price (PP) of the
machine.
Interest
If the operator borrows money to buy a machine, the lender will determine the interest
rate to charge. But if the farmer uses his or her own capital, the rate will depend on the
opportunity cost for that capital elsewhere in the farm business. If only part of the
money is borrowed, an average of the two rates should be used. For the example we
will assume an average interest rate (i) of 8-10 percent.
Taxes and Insurance
This cost usually is much smaller than depreciation and interest, but they need to be
considered. A cost estimate equal to 1.0 percent of the purchase price often is used.
Housing
Providing shelter, tools, and maintenance equipment for machinery will result in fewer
repairs in the field and less deterioration of mechanical parts and appearance from
weathering. That should produce greater reliability in the field and a higher trade-in
Age
PP SV
Depriciation
−
=
2 100
i
x
PP SV
Interest
+
=
AG ENGG 243 Lecture 10
value. An estimated charge of 1.0 percent of the purchase price is suggested for
housing costs.
Total Ownership Cost (Fixed Cost)
The estimated costs of depreciation, interest, taxes, insurance, and housing are added
together to find the total ownership cost.
If the tractor/Machinery is used 500 hours per year, the total ownership cost per hour
is: Ownership cost/use hours per year
2. Operating costs (also called variable costs) include repairs and maintenance,
fuel, lubrication, and operator labour.
Repairs and Maintenance
Repair costs occur because of routine maintenance, wear and tear, and accidents.
Repair costs for a particular type of machine vary widely from one geographic region
to another because of soil type, rocks, terrain, climate, and other conditions. Within a
local area, repair costs vary from farm to farm because of different management
policies and operator skill. The best data for estimating repair costs are the operator’s
own records of past repair expenses. Good records indicate whether a machine has had
above or below average repair costs and when major overhauls may be needed. They
also will provide information about the operator’s maintenance program and
mechanical ability. Without such data, repair costs must be estimated 5-8 percent of
purchase price of tractor/power tiller per year.
Fuel
Fuel costs can be estimated by using average fuel consumption for field operations in
liters per hour. Those figures can be multiplied by the fuel cost per litre to calculate
the average fuel cost per hour/hectare.
Lubrication
Surveys indicate that total lubrication costs on most farms average about 15 percent of
fuel costs. Therefore, once the fuel cost per hour has been estimated, it can be
multiplied by 0.15 to estimate total lubrication costs.
Labour
Because different size machines require different quantities of labour to accomplish
such tasks as planting or harvesting, it is important to consider labour costs in
machinery analysis. Labour cost also is an important consideration in comparing
ownership to custom hiring. Actual hours of labour usually exceed field machine time
by 10 to 20 percent, because of travel time and the time required to lubricate and
service machines. Consequently, labour costs can be estimated by multiplying the
labour wage rate times 1.1 or 1.2. Using a labour value of Rs 50 per hour for our
tractor. Different wage rates can be used for operations requiring different levels of
operator skill.
Total Operating Cost
Repair, fuel, lubrication, and labor costs are added to calculate total operating cost.
Total Cost
After all costs have been estimated, the total ownership cost per hour can be added to the
operating cost per hour to calculate total cost per hour to own and operate the machine.
Implement Costs
Costs for implements or attachments that depend on tractor power are estimated in the
same way as for the example tractor, except that there are no fuel, lubrication, or labor
costs involved.
AG ENGG 243 Lecture 10
Composition of Costs
An example problem will be used to illustrate the calculations. The example uses a 15
horse power diesel power tiller with a list price of Rs 150,000. An economic life of 10
years is assumed, and the tiller is expected to be used 500 hours per year.
Assumption
• Salvage value (SV): 10%
• Interest rate : 10 %
• Insurance & taxes: 1% of PP
• Housing: 1 % of PP
• Fuel consumption: 1lit/hour
• Fuel Cost = Rs 50 per lit
• Lubrication cost: Rs150 per lit
• Lubrication consumption : 5% of fuel
• Repair and Maintenance : 5-8 %
• Labour : Rs 50 per hour
Solution: The total cost can be calculated as:
1. Fixed Cost:
a.
= Rs13500 per year
b.
= Rs 8250 per year
c. Insurance & Taxes = 1% of PP = 0.01 x 150000
= Rs 1500 per year
d. Housing = 1 % of PP = 0.01x 150000
= Rs 1500 per year
Total fixed cost= Rs 24750 per year
Total fixed cost per hour = Rs 49.5
2. Operating Cost
a. Repair & Maintenance = 5% of PP = 0.05x 150000
= Rs 7500 per year
Per hour cost = 7500/500 = Rs15.0
b. Fuel = 1x 50 = Rs 50 per hour
c. Lubrication = 1x 0.05 x 150 = Rs 7.5 per hour
d. Labour cost = Rs 50 per hour
Total operating cost= Rs 122.50
Total cost = 49.5 + 122.5 = 172.0
Age
PP SV
Depriciation
−
=
2 100
i
x
PP SV
Interest
+
=
10
150000 −15000
=
100
10
2
150000 15000
x
+
=
AG ENGG 243 Lecture 10
How much hours the machinery is to be used annually, which has to be calculated as
follows:
BEP =
   
 

   
,     /
   
,     /
=

.
= Rs 89.18 hours/year
• Economics of farm Equipment
Annual use of Power tiller: > 600 hours
Profit to Entrepreneur/farmer
Annual Expenditure : 172 X 600 = 1,03,200
Annual Income : 400 X 600 = 2,40,000
Net annual income, Rs = 1,36,800