Cost of owning a tractor

[smstonypoint]

True but that method ignores savings accrued by doing work yourself that would otherwise be contracted out and paid out of pocket.

Not so. In order to make a fair comparison of buying versus hiring it out, you need to consider both the opportunity cost of ownership and the opportunity cost of your time. The breakeven formula for cost of buying versus hiring is H* = FC/(P-AVC), where H* = breakeven annual hours of use, FC = annual fixed (ownership) cost, AVC = average variable (operating) cost per hour of usage (including the opportunity cost of your time), and P = the cost per hour if contracted out. If your annual usage is greater than H*, it pays to buy and DIY.

Steve

 

[Creamer]

Not so. In order to make a fair comparison of buying versus hiring it out, you need to consider both the opportunity cost of ownership and the opportunity cost of your time. The breakeven formula for cost of buying versus hiring is H* = FC/(P-AVC), where H* = breakeven annual hours of use, FC = annual fixed (ownership) cost, AVC = average variable (operating) cost per hour of usage (including the opportunity cost of your time), and P = the cost per hour if contracted out. If your annual usage is greater than H*, it pays to buy and DIY.

Steve

What about the the valuation of the stress relief and the corresponding lack of divorce?

 

[smstonypoint]

What about the the valuation of the stress relief and the corresponding lack of divorce?

That depends on your utility function.

Steve

 

[IslandTractor]

Not so. In order to make a fair comparison of buying versus hiring it out, you need to consider both the opportunity cost of ownership and the opportunity cost of your time. The breakeven formula for cost of buying versus hiring is H* = FC/(P-AVC), where H* = breakeven annual hours of use, FC = annual fixed (ownership) cost, AVC = average variable (operating) cost per hour of usage (including the opportunity cost of your time), and P = the cost per hour if contracted out. If your annual usage is greater than H*, it pays to buy and DIY.

Steve

The opportunity cost of my time while operating the tractor, is basically the lost opportunity to groom the lint in my navel. Like most folks here, I don't run my tractor commercially and I use the tractor when I would otherwise be working hard on bupkis. The hourly cost of operating the tractor for practical purposes is therefore fuel and some small amount towards maintenance/repairs. The benefit side of the equation is quite different, especially as I use the tractor on an island. For me to hire and operator and equipment to do what I can do requires a full day rental/operator x 8 hrs plus ferry transport. In this part of the country that amounts to close to a grand a day. It doesn't take many days of work on the tractor to pay it off and be left with just the variable operating cost per hour which might be something between $5-10 depending on how much of a rainy day fund one builds into the model. I think it is fair to say that the tractor itself and a few of the implements paid for themselves in the first big project I did clearing land which took at least 30 man/tractor days. Yes, in theory there is opportunity cost of leaving capital tied up in the tractor (even though by my calculations the tractor owes me nothing) but I can counterbalance that with the notion that if I took that capital out (sold it), I would be at risk of needing to make an even bigger repurchase once I needed it again. (for example, last week we had a leak in our water system, I pulled the tractor and BH out of the barn, dug it up, repaired it and was finished in less time than it would take to arrange to get a TLB and plumber over to the island).

I don't think businesses typically tally up "opportunity cost" for fully depreciated or expensed equipment as part of their standard budgeting process. You probably know more about that but from a non accountant's perspective, those are sunk costs and don't really add "opportunity costs" on an ongoing basis. In any case, I am happy believing that it costs me less than $10 per hour of tractor operation now which even if doubled or tripled would still be a good deal.

 

[smstonypoint]

The opportunity cost of my time while operating the tractor, is basically the lost opportunity to groom the lint in my navel.

So, you don't enjoy reading, participating in TBN, spending time with your wife and kids, watching TV, golfing, fishing, hunting. or any activity other than grooming your navel lint? The time spent on your tractor is time that you are not spending in these other activities.

I don't think businesses typically tally up "opportunity cost" for fully depreciated or expensed equipment as part of their standard budgeting process. You probably know more about that but from a non accountant's perspective, those are sunk costs and don't really add "opportunity costs" on an ongoing basis.

Economic depreciation is not the same as either book depreciation or depreciation for tax purposes. Businesses use tax depreciation for filing taxes, book depreciation in preparing financial statements according to GAAP, and economic depreciation in decision-making.

The opportunity costs of capital and your time are implicit costs and are not "accounted" for by accountants.

Steve

 

[cartod]

that does not mean there are not costs it just means there is a return on the investment. Owning a tractor or any other piece of equipment is not free.

But if my tractor has paid for itself and all it's fuel and maintenance then it has cost me ZERO! NADA! ZIP!

A 100% return on an items investment makes that item sitting in my barn free.

 

[smstonypoint]

But if my tractor has paid for itself and all it's fuel and maintenance then it has cost me ZERO! NADA! ZIP!

A 100% return on an items investment makes that item sitting in my barn free.

Not trying to be pedantic, but owning and operating your tractor is not free. What you are saying is that your benefits from owning and operating your tractor have equaled or exceeded the costs of owning and operating your tractor. To obtain a 100% ROI, the benefits who have to be twice as large as the costs.

Steve

 

[RaydaKub]

All those trips to the chiropracter.

Not to mention the psychiatrist. Diesel therapy, man! :thumbsup:

Priceless, indeed.

Absolutely.

 

[Baby Grand]

Not to mention the psychiatrist. Diesel therapy, man! :thumbsup:


Absolutely.

Diesel therapy! I forgot about that.

Then there's the Thinking Machine benefit:
The son of the guy who built our house told me that his dad would come home from his job as a tool & die maker, throw on his coveralls and get the tractor out into the field as fast as he could. He said his dad called it his "Thinking Machine", meaning if he had a work problem that he couldn't figure out, what with all the stresses & distractions at work, after a few minutes on the tractor a solution would bubble up for him.

I will testify that the man was onto something. It has something to do with no phones ringing, nobody asking you to do something - just some nice scenery passing by and that deisel purring away. Your brain farts all clear up and the ideas start pouring out. It's an intangible benefit, and hard to put a value on, but there are plenty of business consultants who lead creativity seminars that charge a pretty penny for 2 or 3 hours of yacking at you in a stuffy conference room that is meant to achieve the same result. I'll take the tractor time, any time. I know it delivers results. And you'll be getting those potatos hilled, while you're solving your thinking problems.

 

[ultrarunner]

Convenience=Priceless