Tractor replacement policies and cost minimisation

Abstract

Calculating the most appropriate replacement policy for farm tractors is a complex exercise made even more difficult because of inadequate data on how resale values and repair costs vary with tractor age and hours of use. Accordingly, it is not possible to make any definitive statements as to exactly at what age a tractor should be replaced. However, analyses indicate that the most appropriate policies tend to be stable despite considerable variations in these parameters and hence a number of general statements and recommendations can be made. In most situations the fixed costs associated with tractor ownership and replacement are minimised by keeping a tractor for at least 15 years. However, there is considerable flexibility in this policy and in many cases, as long as the replacement cycle is not reduced to five years or less, the additional costs of early replacement may be balanced by other non quantifiable factors. These factors include pride, satisfaction, and a reduction in the risk of inconvenience and timeliness associated with mechanical breakdowns. The effect of general inflation in the economy is to increase the real cost of tractor ownership even when machinery costs increase only at the same rate as other costs. This effect increases as the marginal tax rate increases, but it could be eliminated if taxation liability was measured using principles of current cost accounting rather than historical cost accounting. In times of inflation farmers should avoid saving for machinery replacement by use of a sinking fund. For farmers on high marginal tax rates it is preferable to use borrowed funds, even where hire purchase interest rates have to be paid. However, if a farmer does have the required cash on hand it may be profitable to use the funds for machinery replacement depending on the alternative investments available.