Is my math right-return on depreciation for a Bx23s

[Chevca]

If I have a machine thats out the door price is 27k which is the tractor, plus attachments, tax and freight. I Googled around for a depreciation rate and came to 45% in 5 years, as in the machines value will decrease 45% in 5 years time, with that being said per year my math says I'm losing approximately $2432 per year.

So my question is the above correct? If it is then my next question is would it be correct to say if was already paying someone $2400 per year to do a task that I would now do myself with the tractor that would be a return on my investment?

Trying to be smarter with my money and for reference I'm actually thinking I might be ahead, but want to know if I'm on the right track?

Also hope that makes sense?

 

[Doughknob]

What about how much u pay for the tractor?

 

[jeff9366]

Two factors your model does not consider.

1) Tractor condition. Some writing here admit to abusing their tractor so badly than they want to replace them after 3-4-5 years because they are barely operable and dealer repair estimates are too expensive relative to residual value. An abused tractor might be worth less than 45% after five years.

2) The Deere and Kubota dealers tend to remain around. Those two brands represent around 70% of the compact tractor market of 300,000 units per year. The other 30% of the market, "normally" around 100,000 compact tractor units per year, the 2nd tier, is spread over 20 - 25 brands depending on how you count. Second tier dealers open and second tier dealers close. If there is no local dealer 45% depreciation over five years, on a well maintained tractor, may be about right. (There is a cushion here, as 2nd tier owners may have paid 20% less up front for a 2nd tier brand.)

In most cases a well maintained tractor with good dealer support should not depreciate more than 30% over five years in a reasonable economy with reasonable employment.


Would it be correct to say if was already paying someone $2400 per year to do a task that I would now do myself with the tractor that would be a return on my investment?

Your are paying someone 5 X $2,400 = $12,000 over five years for a job?

What about dealer or self-service consumables for your tractor?
Motor oil, hydraulic fluid, filters, parts that dropped off?

What about your cost for garage space given to the tractor?

What about your cost of fetching tractor fuel, which may be more than the fuel itself?

What about tractor insurance?

In a calculation like this, you cannot value your operating time at zero.

Enter your tractor into your T-B-N PROFILE.
Enter your LOCATION too.​

 

[4570Man]

I don’t think it’s going to deprecate anything close to that much if you rarely use it and keep it inside. If it’s a commercially used machine with a ton of hours then it might. I’d plan on losing closer to the inflation rate

 

[Have tractor did travel]

Price is 27k out the door.

I Googled around for a depreciation rate and came to 45% in 5 years, as in the machines value will decrease 45% in 5 years time, with that being said per year my math says I'm losing approximately $2432 per year. Your calculation is straight line depreciation - same each year. In reality, purchase will depreciate at an unequal rate - more the first year(s), less in the later years. "Sum of the year's digits" is a more realistic depreciation schedule - 15% the first year, 14% the 2nd, 12% the 3rd, 9% the 4th, and 5% the 5th. That total is 55%, so if you're determined to accept the 45%, then just subtract 2% of each year. Stated in different words - you suffer the greatest depreciation in the early years, less in the later years.

Ten years ago, before today's shortage of tractors, we figured depreciation 25% each year (of the prior year's depreciated value) for five years. After that, the value of the tractor (and all) began to appreciate, due to inflation.

So my question is the above correct? If it is then my next question is would it be correct to say if was already paying someone $2400 per year to do a task that I would now do myself with the tractor that would be a return on my investment?
That savings would be a return on your investment If all the tractor work you want done, is being done for $2400, that suggests 50 hours of tractor work a year, or an hour a week if evenly distributed. That $2400 is a 9% return on your $27K purchase BUT the cost of the tractor, once you resell it at the end of 5 years will be closer to $13K, which gives you an 18% return on your investment. Seems like a good investment to me.
We did not figure in operating costs or insurance or personal property tax,all of which the fellow you hire pays.

Trying to be smarter with my money and for reference I'm actually thinking I might be ahead, but want to know if I'm on the right track?

 

[Doughknob]

Price is in the first line of the post, Doughknob.

I mean why didn't he mention that in how much he is losing? He only used depreciation. No mention of cost up front and how that money could no longer be used elsewhere, plus depreciation on top of that....

 

[Torvy]

Opportunity cost is a thing, but there is a difference between actual depreciation and 'accounting ' depreciation. If you are trying to do estimates, you need to look at the used market at that time. Accountants typically use a set formula and then adjust when you sell the asset. For farm equipment the irs says 10 years useful life. Take original value minus salvage value. Divide by 10 years. You may be able to use double declining balance method where you accelerate depreciation for vehicles that lose more value early. So, if you buy a 30k tractor and assume a 5k salvage value, you would depreciate 2500 per year straight line. DDB method would reduce 20% of the remaining balance each year, so 6000 first year 4800 the 2nd, etc.

 

[ultrarunner]

Many purchase for convenience of being able to work on your schedule and ideal conditions...

I am surprised at just how well equipment retains value... especially some later model pre tier 4 emission.

I bought a Dozer and used it 17 years... expenses for repair and maintenance parts averaged about $200 annually...

When it came time to sell it was almost what I had paid...

When of my good friends is in farm country Oregon... he wanted a tractor but when penciled out he was way ahead paying a neighbor farmer to till or brush hog... as there is an abundance of local talent...

 

[quicksandfarmer]

What you're looking for is total cost of ownership, and you're right to be focused on depreciation because for most people who buy new that's the single biggest cost of ownership. You can never now how much depreciation is until you're done with something and get rid of it, but accountants like to try and estimate it along the way.


Accountants will assume that a piece of equipment has a useful life measured in years, and that at the end of that life it will have some salvage value. The depreciation is generally assumed to be "accelerated" -- it's more in the early years than in the late years-- rather than linear, the same every year. There are different ways of doing accelerated depreciation, one that's easy to calculate is called "sum of the years." If you have a ten year useful life you would take ten units of depreciation the first year, nine the second, eight the third, and so on until the last year you take one unit.

Let me give an example with numbers. Let's say you buy an asset worth $30,000, and you assume it has a useful life of ten years and will have a salvage value of $3,000 at the end of those ten years. So it will have $27,000 of depreciation in those ten years. If you take ten units of depreciation the first year, nine the second, and so on, you will have 55 units of depreciation, and each unit is worth $490.91. Here's what your depreciation schedule looks like:

Year	Beginning Value	Depreciation	End value
1	$ 30,000.00	$ 4,909.09	$ 25,090.91
2	$ 25,090.91	$ 4,418.18	$ 20,672.73
3	$ 20,672.73	$ 3,927.27	$ 16,745.45
4	$ 16,745.45	$ 3,436.36	$ 13,309.09
5	$ 13,309.09	$ 2,945.45	$ 10,363.64
6	$ 10,363.64	$ 2,454.55	$ 7,909.09
7	$ 7,909.09	$ 1,963.64	$ 5,945.45
8	$ 5,945.45	$ 1,472.73	$ 4,472.73
9	$ 4,472.73	$ 981.82	$ 3,490.91
10	$ 3,490.91	$ 490.91	$ 3,000.00

Does this mean at the end of year 4 you could sell it for exactly $13,309.09? Probably not. But it gives an idea of what the shape of the curve looks like. One of the lessons is that for any depreciating asset the first years are the most expensive and the end years are almost free.

Now these assumptions work well for assets like cars, and things like computers you probably need shorter lives and lower salvage values. While brand new tractors depreciate quite a bit it stops after a few years, I'm not sure a five-year-old tractor is worth appreciably more than a ten-year-old one. For personal planning I might assume a tractor depreciates 50% in the first five years and then not at all after that.

 

[Torvy]

I don't think sum of the years is used anymore, at least if you deal with the IRS. My in-house accountant is out of town for the next week, so I cannot check with her.

If you accelerate, use Double Declining Balance method. We learned them all in Accounting class, but that's been over 30 years for me.