Economic Engineering Analysis

American-Eurasian J. Agric. & Environ. Sci., 4 (1): 81-85, 2008 ISSN 1818-6769 © IDOSI Publications, 2008

Corresponding Author: M. Karimi, Department of Agricultural Machinery, Faculty of Biosystems Engineering, University of Tehran, Iran

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Determination of Optimum Life (Economic Life) for Mf285 Tractor: A Case Study in Center Region of Iran

G. Khoub Bakht, H. Ahmadi, A. Akram and M. Karimi

Department of Agricultural Machinery, Faculty of Biosystems Engineering, University of Tehran, Iran

Abstract: Making use of tractor to do agricultural mechanized operations is responsible for a fundamental and important role to mechanize agricultural section. Replacement of farm machinery with a new similar machine is one of the most important objects of farm machinery management. Decision making about replacement of used farm equipment with a new similar one is one of the important items in farm machinery management. Proper performance in this case can lead to timely, high quality farm operations which in turns results in considerable decrease in product expenditures and also more income. Based on that the study in order to determine optimum life or economic life for MF285 in west region of Isfahan province was performed. Listed price of tractor, annual depreciation and Internal Rate of Return (I.R.R) in the study period were calculated. These items accompanied by their repair and maintenance cost were used to determine their economic life. Finally replacement time for the study tractor 18316 hours was predicted.

Key word: Economic life Replacement time cost MF285

INTRODUCTION operating of farm machinery represent 35 to 50% of the

Today, tractor is one of the most important power [8]. The R&M (repair and maintenance cost) is an sources in agriculture. Effect of tractor power on important item in costs of owning and operation. In agriculture is considerable [1]. The use of modern general, the costs other than those for R&M usually technology during latter decades resulted in rapid growth decrease with increasing usage, but the reverse is true of farm production. Tractors and farm machinery are with respect to R&M costs. The cost of R&M is usually important samples of this modern technology [2-4]. about 10% of the total cost; as the machine age increases The quality of mechanization inputs and consequently the cost increases until it becomes the largest cost item of land and labor productivity in both situations, may differ owning and operating of farm machines [9]. Agricultural considerably [5-7]. engineers have done many studies regarding R&M of

Management of farm machinery is one of the farm machines. Several studies were conducted in both important branches of farm management. Deciding developed and undeveloped countries either to develop considering replacement time of farm machinery noted to models to determine the cost during a certain period or to conditions of their economical and technological is one get absolute numbers to represent owning and operating of the considered aims in management of farm machinery. certain equipment [10-16]. Based on ASAE, replacement A complete line of machinery is one of the largest age for a machine that is placed on economic life arrives investments that a farm business can make. Yet, unlike typically before fundamental breakdowns resulted worn- land or buildings, machinery must be constantly out and technological disabling [17]. monitored, maintained and eventually replaced. How and Economic or optimum life for a machine presents a when equipment is replaced can mean a difference of time period based on constant and variable costs that thousands of dollars in annual production costs. using the machine is economical [18,19]. Each machine

Deciding for replacing old machinery by new has a determined economical life that thereafter using the machinery is performed based on its economic life. machine is not economical. It is known that repair and Economic life, named as optimum life, has a direct relation maintenance cost has a large share from machine with repair and maintenance costs. Costs of owning and ownership costs.

costs of agricultural production when excluding the land

Am-Euras. J. Agric. & Environ. Sci., 4 (1): 81-85, 2008

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Fig. 1: Curves of total annual machine, constant and variable costs for two wheel drive tractor

As it is shown in Figure 1, while machine age is Machinery costs are divided into two categories, raised, constant costs is reduced, but repair and fixed costs and variable costs. Variable costs increase maintenance (variable) costs is raised. As it is seen, proportionally with the amount of operational use given indication of total annual machine costs is obtained by the machine, while fixed costs are independent of use. sum total constant and variable costs. Minimum point of It is not always clear as to which category some of this curve, that is intersection point of constant and the specific costs belong. The costs of interest on the variable cost curves, is present as the most appropriate machinery investment, taxes, housing and insurance time for replacing machine [13]. are dependent on calendar-year time and are clearly

The aim of this study is to provide a statically independent of use. The costs of fuel, lubrication, daily analysis on constant and variable costs for MF285 tractor service and maintenance, power and labor are clearly cost in order to present the best time for replacing tractor. associated with use. The two remaining cost items, Determining economical life for farm machinery provides depreciation and the cost of repairing, seem to be planners and policy makers and also farmers an functions of both use and time. opportunity to evaluate the performance of machinery Estimations of yearly costs are adequate for economic. determining crop production costs and for deciding if

MATERIALS AND METHODS replacement decision depends on the accumulated

This study was carried out in Khansar and costs and accumulated costs during the life of a Golpayegan townships in central region of Iran. Data were machine. The costs in Fig.2 need to include only collected from 102 MF285 tractor operators in the study depreciation, interest on investment and repair as all other region by using a face-to-face questionnaire in the year costs are assumed to be independent of the time of 2007. Information was sought on tractor characteristics replacement. and economic costs such as use of tractor each year, lubrication cost, filter cost, repairman wage, etc. Sample Depreciation: Declining-balance was used to calculate operators were randomly selected from the 32 Villages in depreciation for the study tractor. A uniform rate is the study area by using a stratified random sampling applied each year to the remaining value (includes method. The tractors were classified according to their salvage value) of the machine at the beginning of age in unit year into 26 groups from 1 to 26. Therefore, for the year. The depreciation amount is different for each example, class 4 includes the total tractors four-year- year of the machine´s life. Equations 1, 2 and 3 express the worked. relationships by formulas.

machine ownership is profitable; but the time of

costs over a period of years. Figure 2 compares yearly

Yearly cost

Average accumulated cost

Year

$

1n nD V V += −

1 n

n X

V P L

  = − 

 

1

1 1 n

n X

V P L

+

+  

= −   

1 n i

r i

i i i

i −

= +

n n ri V i= ×

Am-Euras. J. Agric. & Environ. Sci., 4 (1): 81-85, 2008

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Fig. 2: Average annual and accumulated costs

(1) Therefore the interest on investment was calculated

(2)

(3)

Where: Depreciation, is amount of depreciation charged for year n+1, n, is number representing age of the machine in years at beginning of year in question, V, is remaining value at any time and x, is ratio of depreciation rate used to that of straight-line method (x may have any value between 1 and 2). If x = 2, the method is called a double-declining-balance method and is the maximum rate method permitted by the IRS. For used tractor the rate is x = 1.5.

Interest on Investment: The interest on investment in a farm machine is included in operational cost estimates. Even if the investment money is not actually borrowed, a charge is made since that money cannot be used for some other interest-paying enterprise. Nominal interest rates include expected inflation. In times of substantial monetary inflation, a machinery manager must include the effects of inflation on machinery planning. Inflation causes increased prices for goods and services in future years.

The real interest rate, i , is a function of ther nominal interest rate, i and the rate of inflation, i ,n i as shown in Eq. (4).

(4)

by using Eq.(5).

(5)

whrere, i is the interest on investment in n-th year ($)n and i is the real interest rate.r

Repair: Repair costs are the expenditures for parts and labor for, 1: installing replacement parts after a part failure and 2: reconditioning renewable parts as a result of wear. The anticipated annual cost of repair for any one machine is highly uncertain.

To determine time of replacement for the study tractor accumulated depreciation, interest on investment and repair costs were calculated and regression analysis was performed on the data by using the computer software SPSS 12.0 (version 2003).

RESULTS AND DISCUSSION

Accumulated depreciation, interest on investment, repair and total costs for the study tractor is presented in Table 1. One of the difficulties in analyzing machinery costs is that they change over time. Depreciation, often the largest cost of farm machinery, measures the amount by which the values of a machine decrease with the passage of time whether used or not. As it is seen in Table 1 depreciation tends to be great at first, especially for a machine purchased new, but declines over time. Likewise, interest expends is high initially but gradually diminishes. This is true whether the interest cost is cash interest paid on a loam, or an opportunity cost based on revenue foregone by continuing to own a machine year after year. On the other hand, repair costs may amount to little or nothing when a machine is still under warranty,

y = 0.0013 x2 - 0.0525 x + 2.1381

R2 = 0.9295

y = 0.0025 x 2 - 0.0784 x + 2.1073 R2 = 0.4238

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2

2.1

2.2

2.3

1 2 3 4 5 6 7 8 9 1011 1213 1415 1617 18 19 202122 2324 2526

Year

$ / h

Poly. (Accumulated cost) Poly. (Annual cost)

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Table 1: Accumulated costs for Mf285 tractor Table 2: Operating hours and cost for MF285 tractor

Accumulated Accumulated Accumulated Total Annual Accumulate Average Average

Age repair depreciation interest on investment accumulated Age operating operating accumulated annual

(year) cost(1000$) cost(1000$) cost(1000$) cost(1000$) (year) hours hours cost ($/h) cost ($/h)

1 4.64 7.84 4.83 17.31 1 796.23 796.23 21.74 21.74

2 10.69 15.09 9.30 35.08 2 942.25 1738.48 20.18 18.86

3 16.47 21.79 13.44 51.70 3 1015.32 2753.78 18.77 18.37

4 22.12 28.00 17.26 67.38 4 790.25 3544.03 19.01 19.84

5 28.85 33.73 20.80 83.11 5 1137.37 4681.41 17.75 13.82

6 85.24 39.04 24.08 98.36 6 762.6 5464.20 18.00 19.48

7 42.30 43.95 27.10 113.35 7 993.88 6457.88 17.55 15.08

8 49.07 48.49 29.90 127.46 8 825.5 7283.38 17.50 17.09

9 57.27 52.69 32.49 142.46 9 903.66 8187.04 17.4 16.56

10 65.48 59.58 34.89 156.95 10 869.44 9056.48 17.33 16.67

11 73.75 60.17 37.11 171.03 11 1049.25 10106.14 16.92 13.41

12 81.16 63.50 39.16 183.81 12 745.25 10851.39 16.93 17.15

13 89.46 66.57 41.05 197.09 13 936.74 11788.13 16.72 14.17

14 97.26 69.42 42.81 209.48 14 884.52 12674.63 16.53 14.04

15 104.80 72.05 44.43 221.28 15 967.54 13640.17 16.22 12.19

16 114.63 74.48 45.93 235.04 16 886.75 14526.92 16.18 15.52

17 124.99 76.73 47.32 249.04 17 862.52 15389.42 16.18 16.23

18 135.76 78.82 48.60 263.18 18 1099.20 16488.62 15.96 12.87

19 145.96 80.74 49.79 276.50 19 925.75 17414.37 15.88 14.38

20 157.00 82.52 50.89 290.41 20 902.25 18316.62 15.85 15.43

21 169.40 84.17 51.91 305.41 21 865.36 19181.98 15.92 17.40

22 182.03 85.70 52.85 320.58 22 962.52 20144.48 15.91 15.69

23 169.57 87.11 53.72 337.24 23 964.71 21111.48 15.98 17.39

24 210.24 88.42 54.52 353.18 24 834.25 21946.43 15.09 18.90

25 222.88 89.62 55.26 367.77 25 910.25 22856.68 16.09 16.03

26 236.65 90.74 55.95 383.35 26 1047.50 23904.18 16.04 14.87

Fig. 3: Average annual and accumulated costs for MF285 tractor

Am-Euras. J. Agric. & Environ. Sci., 4 (1): 81-85, 2008

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but eventually increase as parts wear out and 5. Gifford, R.C. and A.G. Rijk, 1980. Guidelines for maintenance requirement rise.

Accumulate and annual operating hours and also average annual and total costs are presented in Table 2. As it is seen in the table, average accumulated costs in 20th year drop to their lowest value. Figure 3 presents the accumulated costs through an equation of polynomial with a correlation coefficient R = 0.93 and yearly costs2 through an equation of polynomial with a correlation coefficient R = 0.42for MF 285 tractor.2

As it is shown in the figure, the first year´s costs are high because of the very real marketplace depreciation obtained from the estimate value method. The yearly costs drop to their lowest value (20 th year) and then begin to rise if the annual repair costs increase with age. The accumulate cost curve drops more gradually and levels out at the point where it crosses the yearly cost curve.

The standard rule for minimizing the long-run cost of equipment is to make a change when the annualized total cost of owning and operating the machine begins to increase. In the study, this happens in about the 20th year of ownership. At this point repair costs begin to increase faster than depreciation and interest costs decrease. However, the rate at which total costs rise is often very gradual.

Thus, while the rule of increasing total cost can give a general picture of when to replace a particular machine, it cannot give a precise answer. Note that the estimates for repair costs project them to increase gradually over time. In reality, though, repair costs tend to be quite variable from year to year, ranging from only routine maintenance items to a complete overhaul. Being able to anticipate when large repair costs will be needed is a key consideration in deciding when to replace a machine.

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