Analysing the Economics of Machinery Purchases

GRDC - Barry Mudge

Type: Factsheet
Knowledge level: Intermediate

Farm Table says:

Getting machinery purchase decisions right can have substantial implications for the resilience of individual farm businesses. Whether valid or not, the colour of the paint and the desire to have the newest and best can also be important in the final decision.

 

This webpage is taken from GroundCover™ Issue: 104  and written by Barry Mudge, who is a farm business consultant from South Australia.  It is looking at some of the simple analyses that can be done to aid machinery purchase decisions.

The clever and effective use of machinery on Australian broadacre farms has been a prime driver in achieving substantial productivity gains over many years. Investment in machinery on most properties is considerable and would usually only be exceeded by land purchases as the single biggest farm expenditure.

Growers are frequently influenced by taxation considerations. These are relevant, but do not necessarily take account of the real value of the machine to the business or the risks of the investment.

The key sections include:

  •  What is the appropriate level of investment in machinery for my business?”  It looks at how mixed-farming businesses can benchmark machinery investment. The important aspect of these benchmarks is that they are only guides and there may be valid reasons for operating outside them.
  • Simple analyses can also be informative when deciding on individual machinery purchases. Machinery costs can be divided into two areas: fixed (or overhead costs); and operating costs.
  • Another ‘rough’ rule of thumb is that the total annual costs to own and operate a machine will be usually about 25 to 30 per cent of the value of the machine.  This rule can allow a prospective purchaser to undertake a first ‘quick and dirty’ analysis of the financial effects of a machinery purchase.

In conclusion Mudge suggests that the decision to buy machinery invariably involves the assessment of a wide range of factors and potential benefits, many of which are difficult to quantify. These can include the potential for productivity improvements, risk of breakdowns, operator comfort and ease of use, timeliness risk, potential for environmental benefits, and workplace health and safety considerations.

 

 

2017 - Australia - GRDC - Barry Mudge
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