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How Much Will That Farm Tractor Cost?

How Much Will That Farm Tractor Cost?

Issue Time:2021-07-30

How Much Will That Farm Tractor Cost?

Tractors are probably one of the biggest investments growers make.But with some simple calculations, a good mechanical manager can control the cost of tractors and electricity per acre.Knowing exactly the cost per acre per year will allow you to make an informed decision about when to buy a new tractor and when to trade.

Agricultural machinery costs can be divided into two categories: annual cost of ownership (regardless of machine use) and operating costs (which vary directly with machine use).

The following tips, formulas and charts are provided by Iowa State University.

Note: A tractor sample will be used throughout the process to illustrate the calculations: a 10 year old 105 HP (HP) diesel tractor will have a list price of $80,000 and a discounted price of $75,000.Tractors are used for about 400 hours a year.

How is the cost of ownership calculated

The formula for total cost of ownership (also known as fixed cost) simply adds two numbers together: capital recovery and the number of combinations of tax, insurance and housing (TIH).But you have to do your own calculations.

Capital recovery.The first step in arriving at this figure is to find the residual value of the tractor, followed by the cost of depreciation.

The salvage value is the amount you can expect to receive for the trade-in allowance, or an estimate of the market value used if you wish to sell the machine.

Again, the formula is simple: multiply the purchase price by the "residual value factor," a percentage that can be found in the chart created by Iowa.A small portion of the chart (shown below) includes a residual value coefficient of 37% for our 10 year old prototype tractor.

Using our sample tractor again, the residual value was calculated as follows: $75,000 (purchase price) x 37% (residual value factor) = $27,750

Now you will use this number to calculate the depreciation cost of the tractor.Here is the formula:

Total depreciation = purchase price - salvage value

Using this formula, the total depreciation of the sample tractor is $47,250 ($75,000 minus the sum of $27,750).

Residual value factor

80-149 HP tractor with 400 hours per year

5 to 49%

6 46%

7 to 44%

8 41%

9 39%

10 37%

11 to 35%

12 34%

13 32%

14 31%

15 to 29%

You need to calculate another number, the "real" interest rate.The state of Iowa recommends deducting inflation from the interest rate you get when you buy a tractor.For our example, suppose the lender's interest rate is 7% and inflation is 2%.So the real interest rate is 5 per cent.

The last number needed before calculating capital recovery is the capital recovery factor.The state of Iowa has a chart that will give you that number based on the age of the tractor and the real interest rate.For a sample tractor from 10 years ago with a real interest rate of 5%, the figure was 0.130.

Now we can calculate the capital recovery figure.

Capital recovery = (total depreciation x capital recovery factor) + (residual value x interest rate)

Using our example, it looks like this :($47,250 x.130) + ($27,750 x.05) or $6,142.50 + $1,387.50

So the capital recovery for the tractor is $7,530 per year

Taxes, insurance, and Housing (TIH).These three costs are usually much smaller than depreciation and interest, but need to be considered.

Despite the long name, TIH is easier to calculate than capital recovery.The state of Iowa recommends that you aggregate all taxes, insurance, and housing (such as maintenance shed) costs by multiplying the average tractor by 1% (assuming no property taxes apply).

The average is obtained by dividing the sum of the purchase price and the residual value by half.This makes the formula look like this:

TIH = 0.01x (purchase price + residual value) / 2

For our tractor example, these three costs are:

TIH = 0.01x ($75,000 + $27,750) / 2

= $513.75 per year

Total cost of ownership

To sum up, let's go back to the original formula of total cost of ownership:

Total cost of ownership (also known as fixed cost) = capital recovery + TIH

Or $7,530 + $513.75 = $8,043.75 per year

Now we can translate that into hourly costs.If the tractor is used for 400 hours per year, the total ownership per hour is $8,043.75 /400 hours, equivalent to $20.11 per hour.

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