NEW MACHINERY OWNERSHIP COSTING PROCEDURE

A quick conventional estimate of machinery operating costs is obtained by
averaging the annual costs over the full period of ownership. This ignores the fact that
depreciation is .higher during the first year of ownership than in subsequent years,
whilst repair and maintenance charges increase with age of the machine. This
conventional estimating procedure provides a useful guide to average trends. The
correct evaluation of annual costs is particularly important ascertain the economic life
of a machine. For solutions to more complex machinery management problems, the
annual machinery costs are calculated using the actual cash flows, which occur each
year. The calculation of annual costs of machine ownership is based on three types of
cash flows: (a) capital cost repayable by equal mortgage Installments, (b) recurring
annual repair and insurance charges and (c) income from selling the machine.
The net present value of an investment in farm machinery may be calculated
using a series of steps. First and most important, the cash flow generated by the
investment must be estimated for each year. Second, the cash flow is discounted by a
present value factor. Third, the discounted cash flow is assumed over the number of
years analyzed. The discounted annual Interest charge paid on the borrowed capital is
affected by the amount of the loan and its period. For a given standard tax rate. the
tax relief is calculated for repair and Insurance costs and annual capital allowances
deducting the actual balancing charge. This study is aimed to give an accurate
estimate of the annual costs of a machine and to provide a comparison of the present
annual cost of machine ownership with and without the effects of tax allowance and
tax relief.
The present annual cost of machine ownership is substantially altered by tax
considerations. Allowing 30% tax rate in calculation of machine costs reduces tractor
present annual cost from a current value (CV) of 2916 to a CV of 2032 (30%
reduction) compared to a CV of 2440 calculated using the conventional method. The
present approach yields an intermediate cost figure within the range spanned by the
present annual ownership costs with and without tax.