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May 2008

MACHINERY COST ESTIMATES: TRACTORS

This publication shows estimated costs for different sized tractors. These estimates are useful for determining machinery costs on farms, rental rates for machinery, and custom rates for machinery operations. Costs include charges for depreciation, interest, insurance, housing, repairs, fuel and labor. Not included are allowances for profit. Charging custom rates at estimated costs should cover costs, but will not generate profits. Adding 5 to 15 percent to estimated costs may be appropriate when determining custom rates. Table 1 shows list prices and per hour costs for different sized tractors.


Methods of Calculating Costs

Formulas developed by the American Society of Agricultural Engineers (ASAE) are used to calculate costs. All costs are based on buying a new tractor, owning the tractor for 10 years, and using the tractor 300 hours per year. A more detailed description of how each cost is calculated is given below.

Depreciation: Depreciation covers the decline in the tractor's value over its life. Depreciation is calculated as: (purchase price salvage value) / years of ownership. The purchase price equals the list price of the tractor (Table 1) times 85 percent. The salvage value gives the price of the tractor when sold. Given a 10 year life, ASAE Standards suggest a salvage value equal to 36 percent of a tractor's list price.

Interest: Interest covers the cost of having funds invested in the machine. Interest is calculated by multiplying the remaining value of the machine at the beginning of each year by a 7.0 percent interest rate. The remaining value is calculated using ASAE standards. The 7.0 percent interest rate represents a charge for equity and debt capital invested in the machine. The yearly interest charges are totaled and then divided by the total hours of use.

Insurance and Housing: Insurance and housing costs are calculated in a manner similar to interest costs using a one percent charge on the tractor's remaining value.

Repairs: Repairs cover repair parts, installation charges, and general maintenance. These costs are calculated using ASAE formulas. For 300 hours of use per year and 10 years of life, per hour repair charges equal 0.05546 times the list price of the machine.

Fuel and Lubrication: Fuel charges are based on diesel fuel priced at $3.75 per gallon. Lubrication costs are figured at 10 percent of fuel cost.

Labor: Labor charges are based on a $14.50 per hour labor charge. Labor time is assumed to be 10 percent more than the operating time of the tractor.

Composition of Costs

Use of a tractor has a large impact on costs, with higher hour of use reducing per hour costs.

For the 165 HP tractor listed in Table 1, overhead costs of $37.10 per hour include charges for depreciation ($18.70 per hour), interest ($14.30), insurance and housing ($1.90), and repairs ($2.20). Annually, depreciation and interest costs total $9,900 (($18.70 per hour depreciation + $14.30 per hour interest) x 300 hours). These $9,900 of costs are incurred by owning the tractor and do not change with annual use. On a per hour basis, depreciation and interest costs increase as hours of use decrease. At 150 hours of use, for example, depreciation and interest costs equal $66 per hour ($9,900 / 150 hours). At a 450 hour use level, depreciation and interest costs equal $22. Hence

Prepared by: Gary Schnitkey and Dale Lattz, Department of Agricultural and Consumer Economics, University of Illinois


  

Department of Agricultural and Consumer Economics    College of Agricultural, Consumer and Environmental Sciences
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