Evaluating Tractor Ownership with the OwnTractor Spreadsheet

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In an economic analysis, machinery ownership and operating costs often are classified into the following categories:

  1. interest;
  2. depreciation;
  3. repair and maintenance;
  4. labor;
  5. fuel and lubrication; and
  6. property taxes, insurance, and shelter (TIS).

Although the timing of tax depreciation does impact overall costs and profitability, the depreciation ultimately of interest here is market depreciation. Market depreciation is the change in machine market value over time, which represents a real loss in asset value. Although based on prevailing lender interest rates, the interest cost considered most important here is opportunity interest, rather than the interest associated with an actual loan arising from an owner’s financing decision. That is, because equity could be invested elsewhere, it is considered to bear interest just as does debt. Because a machine could have been sold at the end of last year, with the proceeds invested elsewhere, this year’s opportunity interest cost is calculated by multiplying last year’s machine market value by the prevailing lender interest rate.
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Kevin Dhuyvetter
Rich Llewelyn
Terry Kastens
Kansas State University