**The Cost of Forest Operations**

![](media/image1.png){width="1.0416666666666667in"
height="1.0416666666666667in"}A \"machine rate\" is a calculated hourly
charge for owning and operating a piece of capital equipment. Machine
rates are commonly used in construction, agriculture and forestry. The
derivation of estimated owning and operating costs is generally treated
in engineering economics textbooks. The classical approach in forestry
was defined by Matthews (1942) and more recently by Miyata (1980). Costs
are averaged over the ownership life of the asset to estimate a constant
hourly charge. The formulae have been used in many forms as a simple
method of cost estimation (e.g. Brinker et al., 2002). The machine rate
calculations are simple, easy to understand, do not require detailed
cost history, and are constant over the life of the machine. They are
particularly useful for generic comparisons of equipment and operations.

However, a number of authors (Rickards 1983; Burgess and Cubbage 1989;
Stenzel et al 1985) note the limitations of the machine rate:

1\) The treatment of depreciation and interest does not consider the
effect of compound interest on capital recovery

2\) The machine rate does not consider the effect of tax treatment for
various cost categories

3\) Costs are assumed constant (average) for all years of ownership and
thus never match actual cash outflows

4\) Most cost factors are based on rules-of-thumb with little supporting
data

While the limitations are clearly acknowledged, the standard machine
rate is still widely used for quick estimation of machine costs when
actual costs are unknown (e.g., FAO 1992). We have developed an
Excel-based Machine Rate Calculator that addresses several of the more
significant shortcomings.

A more exact approach to estimating machine costs is the discounted cash
flow, incorporating additional cost categories such as tax effects. The
detailed calculations are particularly important for economic analysis
of expensive equipment (helicoptors, yarders, harvesters). Butler and
Dykstra (1981) and Tufts and Mills (1982) illustrate the application of
discounted cash flow analysis to equipment replacement decisions. Cash
flow analysis should be used when making financial investment decisions,
when situation-specific information or assumptions are critical. Burgess
and Cubbage (1989) compared machine rate and cash-flow methods and
concluded that over a five-year ownership period, cash flow rates were
generally lower than machine rates. Consideration of income tax effects
significantly reduced hourly costs.

Note: Neither the machine rate method or the cash-flow method explicitly
treat additional costs of operation such as overhead, profit, or risk.
Thus, contract rates or rental rates can be significantly different than
estimates based on machine rates.

**References**

Brinker, R.W.; Kinard, J.; Rummer, B.; Lanford, B. 2002. Machine rates
for selected forest harvesting machines. Circular 296. Auburn, AL:
Alabama Agricultural Experiment Station. 29 p.

Burgess, J.A.; Cubbage, F.W. 1989. Comparison of machine rate and cash
flow approaches for estimating forest harvesting equipment costs. Paper
89-7548. Presented at the 1989 Meeting of the American Society of
Agricultural Engineers. St. Joseph, MI: ASAE. 24 p.

Butler, D.A.; Dykstra, D.P. 1981. Logging equipment replacement: a
quantitative approach. Forest Science 27(1):2-12.

Cubbage, F.W.; Burgess, J.A.; Stokes, B.J. 1991. Cross-sectional
estimates of logging equipment resale values. Forest Products Journal
41(10):16-22.

Food and Agriculture Organization. 1992. Cost control in forest
harvesting and road construction. Forestry Paper 99. Rome. 106 p.

Matthews, D.M. 1942. Cost control in the logging industry. New York:
McGraw-Hill. 374 p.

Miyata, E.S. 1980. Determining fixed and operating costs of logging
equipment. Gen. Tech Rep GTR NC-55. St. Paul, MN: U.S. Department of
Agriculture, Northcentral Forest Experiment Station. 16 p.

Riggs, J.L. 1977. Engineering economics. New York: McGraw-Hill. 617 p.

Stenzel, G.; Walbridge, T.A.; Pearce, K. 1985. Logging and pulpwood
production. 2nd Ed. New York: John Wiley & Sons. 358 p.

Tufts, R.A.; Mills, W.L. 1982. Financial analysis of equipment
replacement. Forest Products Journal 32(10):45-52