If the capital invested in a machine is to be used efficiently, that machine must be used over enough acres or for enough hours to have costs comparable to or below the same operation being done by a custom operator. This Factsheet is intended to provide a framework for calculating the total annual cost of farm machinery so that you can determine whether or not it makes economic sense for you to own a machine. These costs impact on the profitability of the business. Fixed costs per unit of work done drop as the hours or acres of use per year increase. Fixed costs include depreciation, interest, insurance and housing.
Depreciation is a measure of the loss of value of a machine over time.
Estimated trade-in values as a percent of new price are shown in Table 1. Interest cost is the interest on the capital you have invested in the machine. The interest rate used should reflect conservative rates of return for money that could be obtained in the current market, e.g. T-Bill rate, GIC rate. If capital is in tight supply, you may want to choose a higher rate that gives you more of a return for the risk you assume in the investment. Interest costs are calculated by adding the new cost and the trade-in value of the machine, dividing by two to give an average value over the machine's life, and then multiplying by the chosen interest rate.