Buying Advice anyone looked at how much per hour it costs to own a cut?

[California]

No offense meant or intended, but consult https://www.extension.iastate.edu/agdm/crops/html/a3-29.html to see the way economists compute annual ownership costs.

Exactly. (Purchase price - salvage value) / years = depreciation expense per year. This is standard cost accounting. Any accounting class, review and advice by a CPA, federal purchasing standards etc will include this cost in any analysis. (BTDT, 20 years reviewing purchase contracts for reasonableness). Accelerated, front-loaded depreciation allowed for tax reporting will give different numbers and may or may not be relevant for a purchase decision.

Also in making a decision to purchase, 'Opportunity Cost' must be considered. Assuming you pay cash for the tractor then this is what that same investment could earn if you invested it in some other income-producing activity; the other income that you are giving up in order to make this purchase. Interest cost if you finance the tractor will approximate this number.

Most of us have some intuitive feel for these numbers without getting all formal about it, and can afford our toys. But any small business starting out needs to carefully analyze, and understand, these concepts. Lots of failed businesses had no idea what their costs ... were.

 

[vtsnowedin]

5000 series utility tractor 4wd $21,000
553 loader $7000
cover my tractor soft cab $1800
Pulling HRM's SUV out of the brook undamaged before the kids on her bus saw it PRICELESS.

 

[Tx Jim]

Playing the Devil's Advocate here Gittyup, no offense meant. You must count the initial cost of your tractor and can only minus that off when you sell the remains. So,,,, $22K for 600 hours of use equates to $36.66 per hr. You must count that expense until such time as you sell the tractor. Then you can minus off whatever the selling price is. Because you see,,, it's cost you more than $13/hour to buy/operate that tractor. No offense meant or intended.

I think the salvage value of anything enters into the true cost of operation.

 

[ovrszd]

Richard,

I'm sorry but you are splitting hairs. If we really want to talk about the cost to "own", let's talk about the savings incurred by owning:

$5000 fencing
$300 propane burial
$1000 stump removal
$4000 retaining walls
$400 trenching for gutters and septic line
$10,000 for road construction
....

This is savings alone, and not even close to a complete list. One could easily argue that my tractor has earned me money per hour of usage by owning it. But, I'll standby the $14/hour number as a convention way to estimate "cost of ownership".

I bought a tractor not for fun but to save money, and I think I have. From here on out, I'm in 100% in the black

I totally agree with everything you stated, except "cost of ownership". What you are quoting is "cost of operation".

 

[ovrszd]

I think the salvage value of anything enters into the true cost of operation.

Yep, Jim, I 100% agree with your statement!!! California mentioned that above and I agree. To determine cost of operation that must be included. Very few posters here have done that, a few, but very few. Again, we are now talking about cost of operation versus cost of ownership.

Again, I'm looking toward the reader that doesn't own a tractor and wants to get one. Or the reader that is trying to figure out what ownership costs to estimate a value for an hour of work he hires out to do. The initial cost of the machine MUST be considered. How else could he determine the financial resources he needs to get started.

So to say to either of those guys, hey, your tractor will cost you (hypothetically) $10 per hour to operate and you are estimating 500 hours per year, so all you need is $5000 to get you in business is in error.

Again, no argument here. Just discussion. Great thread.

 

[smstonypoint]

I think the salvage value of anything enters into the true cost of operation.

Economists divide total cost into two components -- fixed (ownership) costs and variable (operating) costs. Fixed costs do not vary with usage -- they are incurred even if the tractor is parked full time. Variable costs are incurred when the tractor is being operated.

Insurance, property taxes, and the opportunity costs of the funds tied up in the tractor are clearly fixed costs. Fuel, lubrication, and allowance for repairs and maintenance are clearly variable costs.

Depreciation is a little bit tricky as it has both fixed and variable aspects. The value of the tractor will decline (in real terms) over time regardless of use and this is a fixed cost. The value of the tractor will also decline (in real terms) with usage -- the higher the hours, the lower the value of the used tractor, all else constant.

The Iowa State report I linked handles depreciation as a fixed cost but requires assumptions about the useful life of the tractor and the number of hours it will be used. Although this is the typical approach, some studies allow for a usage component of depreciation as an operating cost.

Regardless of how depreciation is treated, using a tractor in a business requires that you cover your total machine costs and your labor rate if you hope to survive in business in the long run.

Steve

 

[ovrszd]

Regardless of how depreciation is treated, using a tractor in a business requires that you cover your total machine costs and your labor rate if you hope to survive in business in the long run.

Steve

Good stuff Steve. And your last statement is what leads me to include machine purchase cost, in some manner, in the equation. Whether it be in depreciation or upfront cost to start said business, it must be considered.

I look at my tractor with the purchase price included in my equation. If I hadn't purchased the tractor I would have that $43K still earning me a return thru investments. Because I spent that money on the tractor and now don't have those earnings, it's a cost. Where we plug it into the equation is debateable but has to be considered. When I'm dead and gone or such a wrinkled up old man that I sell the tractor, then I can recoup that cost and reevalute my equation over that period of time. So for me, 500 hours into a new tractor in one year, my cost per hour is pretty high. I'm still trying to spread that initial cost over a longer period of time.

This philosophy is also why the Township I work for includes the trade cost when trading for a new machine in the cost of operation per hour equation. Last trade we spent $53,000 to trade off a machine with 1650 hrs. So the ownership cost per hour of that machine had to include the $32.12 per hour it cost to stay in a current machine. If that cost isn't included the township's budget would be waayyyy off. That is also why we look at approximately $85 per operating hour as how much it costs us to own that machine.

 

[slowzuki]

I'm just basing off my own but we had 34,000$ in purchase, salvage value right now private sale is about 22-24,000, trade-in is about 18,000. It had 600 hours at purchase, roughly 2000 now. I've have had the tractor since 2005 I think? So-
7.14$/per hour - 1250/yr if I was able to recover 24k
10$/hour - 2000$/yr if I get 18K on trade

My fuel costs are hard to figure as the bulk tank fills another tractor too but its approximately 10$/hr. More in winter snowblowing, about 15$ per hour. Less in summer doing lighter tedding and raking.

Repairs and maintenance about 7.50$ per hour averaged over several years.

Insurance is about 2.50$ per hour on 200 hr / year

Cost of financing is gone now.

So I guess I'm at about 30-35$ an hour right now. Not much I could do to lower that. Looks pretty good compared to the $ per mile on my F350!



Compared to if I had purchased an M6800 at the same time which was priced almost the same. The depreciation is almost 1/2. Few people want to buy a CUT with 2000 hours, an ag tractor that is still nearly new.

 

[Tx Jim]

Depreciation is a little bit tricky as it has both fixed and variable aspects. The value of the tractor will decline (in real terms) over time regardless of use and this is a fixed cost. The value of the tractor will also decline (in real terms) with usage -- the higher the hours, the lower the value of the used tractor, all else constant. Steve

I agree depreciation is tricky. One's CPA needs to be very good or one will be paying back to the IRS the depreciation upon the equipment disposal.

 

[ovrszd]

I'm just basing off my own but we had 34,000$ in purchase, salvage value right now private sale is about 22-24,000, trade-in is about 18,000. It had 600 hours at purchase, roughly 2000 now. I've have had the tractor since 2005 I think? So-
7.14$/per hour - 1250/yr if I was able to recover 24k
10$/hour - 2000$/yr if I get 18K on trade

My fuel costs are hard to figure as the bulk tank fills another tractor too but its approximately 10$/hr. More in winter snowblowing, about 15$ per hour. Less in summer doing lighter tedding and raking.

Repairs and maintenance about 7.50$ per hour averaged over several years.

Insurance is about 2.50$ per hour on 200 hr / year

Cost of financing is gone now.

So I guess I'm at about 30-35$ an hour right now. Not much I could do to lower that. Looks pretty good compared to the $ per mile on my F350!



Compared to if I had purchased an M6800 at the same time which was priced almost the same. The depreciation is almost 1/2. Few people want to buy a CUT with 2000 hours, an ag tractor that is still nearly new.

Excellent estimate. Looks like you covered everything. I think you're figures are pretty accurate. Now you can see how we have $85 per hour in a $220,000 grader!!!!

I also agree with your theory about which tractor to buy. I think I might have been able to hold my values together better if I'd stepped up to an M110 which is an AG tractor versus a Utility tractor. I was just trying to avoid the weight. But it'll probably cost me when/if I trade this one in on a new model.