Machinery purchasing decision support for broadacre growers

Page last updated: Thursday, 1 March 2018 - 2:01pm

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Owning versus operating costs

The total cost of machinery is the sum of the capital costs and the operating costs (that is, machinery cost = capital costs + operating costs).

Machinery capital costs are referred to as fixed, or ownership, costs.

They are the annual costs incurred regardless of whether machinery is used or not.

Capital costs include the change in capital value of the machinery over time, opportunity cost of capital invested in machinery and insurance, registration and shedding costs.

That is, capital cost = change in capital value + insurance + registration + shedding + opportunity cost of capital.

The opportunity cost of capital is the return that could be generated from an alternative investment (for example, a bank deposit).

The annual change in capital value is the annual cost of the machine over its intended life on the farm.

It is the purchase value of the machine, minus its resale value, divided by the years it will be in operation for before resale (that is, annual change in capital value = purchase value - resale value / years of service).

It is worth noting that even though a piece of machinery may have depreciated to zero value for tax purposes over a period of time, if it is still being used then it is not worth zero to you and you need to account for this.

Example

For a new Class 9 harvester, which is purchased for $500 000 and sold seven years later for $150 000, the annual change in capital cost equates to $50 000/year.

The cost of insurance (typically 1% value), shedding, registration and opportunity cost is then added to this value to calculate the full capital cost.

All for the privilege of owning a harvester, before it has been used. Figure 1 shows how this cost of ownership (capital costs) can be made more efficient, the greater the area a machine works.

refer to accessible excel document
Figure 1 The cost breakdown of owning and operating a Class 9 harvester by cropped hectares

The operating costs are the costs of operating the machinery and include all consumables, fuel, labour, general repairs and maintenance.

The annual operating costs increase with machinery usage however will remain constant on a per hectare or hour basis (that is, more hectares will not lower the $/ha cost) as shown in Figure 1.

The cost of operation should include a labour cost, whether the operator is family or hired.