AGRICULTURAL

Revised 2017
MACHINERY
AND
EQUIPMENT Introduction
COST RETURN ANALYSIS OF
AGRICULTURAL MACHINES n Careful appraisal and good planning must be undertaken before
by
making an investment in an agricultural machines.
Alexis T. Belonio, MS, PAE, ASEAN Engineer n Economic analysis will determine which of the different
Former Associate Professor
alternatives of agricultural machines is most viable to purchase
Department of Agricultural Engineering and Environmental Management and operate.
College of Agriculture Resources and Environmental Sciences
,Central Philippine University, Iloilo City

Former Affiliate Professor

Department of Agricultural and Biosystems Engineering
College of Engineering, Central Luz on State University
Science City of Munoz , Nueva Ecija

Former Adjunct Assistant Professor

Department of Agricultural and Biosystems Engineering and
Department of Chemical Engineering
College of Engineering and Agro-industrial Technology
University of the Philippines at Los Banos
College, Laguna

Methods of Appraising Investment Terms

n Discounted Method n Cost Factors – It is the total cost of using the machine
– It involves discounting and allows payment and receipts which includes charges for ownership and operation.
occurring at different times in the future to be converted to a – Fixed Cost – It is the ownership cost which are
common standard in terms of their present value.
independent of use.
n Undiscounted Method
– Variable Cost – It is the cost used for operation of the
– It does not consider timing of cost and benefit flows and the
changing value of money over time. machine which vary directly with the amount of use.

n Depreciation – This reflects the reduction in value of
an asset with the use and time. The actual total
depreciation can never be known until the equipment
has been sold. It can be estimated by using different
computational methods depending on the objective.
n Interest – It is the interest charge for the use of the
money in a machine invested. Simple interest on the
average investment over the life of the machine can be
added to the annual depreciation to estimate the
yearly capital cost of ownership.
n Repair and Maintenance Cost – It is the cost for the
amount of use of the machine. It is expressed in the
accumulated for to reduce variability.
n Fuel Cost – It is the cost incurred for the fuel used by
the machine.
n Labor Cost – It is the cost incurred in operating the
machine based on the 8-hour rate. For owner
operator, labor cost is determined from alternative
opportunities for use of time. This cost varies
depending on the labor cost in a certain area.

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 n Machine Custom Cost – It is the amount paid for
hiring the equipment and operator services to
perform a certain task.
n Operating cost – It is the cost which depend directly
on the amount of machine use. This includes the
labor, fuel, lubrication, and repair and maintenance.
n Ownership Cost – It is the cost which do not depend
on the amount of use of the machine. It includes
depreciation, interest on investment, taxes,
insurance, and storage.
n Lease – It is the contract for the use of a machine for
an agreed period of time in return for periodic
payment. The ownership remains with the lessor and
the lessee acquire the right of temporary possession
and use of the machine.
n Obsolete – It is the condition of a machine when it is
out of production and parts to repair and update it are
not available from normal suppliers, or it can be
replaced by other machine or method that will
produce a greater profit.

n Price – It is the market value per unit of a machine. n Specific Fuel Consumption – The fuel consumed by an
n Rent – It is a short-term contract for the use of engine to deliver a given amount of energy.
machinery in exchange for a fee.
n Repair – It is the restoration of a machine to operative
n Gross – The return for sale or product and the value
received for a service or product before expenses are condition after breakdown, excessive wear, or
deducted. accidental damage.
n Net – It is the return for sale of a service or product
and the value received for a service or product less all
expenses except income taxes.
n Maintenance and Service – It is the periodic activities
to prevent premature failure and to maintain good
functional machine performance.

Operating Cost Analysis

Procedure The salvage value is usually 10% of the purchase price of
the machine. The life span depends on the machine and
n Determine the annual fixed cost which includes the
depreciation, interest on average capital investment, is usually 5 to 7 years for field equipment while 10 to 15
repair and maintenance, and tax and insurance. years for farmstead equipment. The interest on
Usually depreciation can be determined using the investment depends on the bank rate and is usually 24%.
straight line method with this formula Repair and maintenance is usually 10% while the tax and
D = (P-S) / L insurance is 3%.
where: D - depreciation, P/year
P - principal, P
S - salvage value, P
L - life span

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n Determine the variable cost which includes fuel, oil, and
wage of the operator. It depends on the use and operation
of the machine. The fuel consumption and the oil
requirement of the machine can be determined from the
manufacturer’s brochure or catalogue. The cost of labor
will depend on the prevailing wage for laborer in the are
depending on the skills of the operator.
n Determine the total operating cost of the machine by
adding the total fixed costs and the total variable cost.
n Determine the operating cost of the machine by
dividing the total cost by its field or functional capacity.
This should be expressed in P/hr, P/hectare, or P/kg.

n Calculate the BEP by dividing the purchase price by the

Sample Analysis Using Flat- Bed
difference between the commercial rate of the machine Paddy Dryer
and the computed operating cost.
n Calculate the PBP which is the length of time from the Investment Cost
start of purchasing the machine until its net benefit equal
cost. Dryer* P200,000.00

Engine (8 hp) P54,000.00

Total P254,000.00

* Dryer equipment installation, transport are included

Fixed Cost

Depreciation (P254,000-P25,400)/ P89.47/day

(7 yrs x365 days/year)
Interest on P254,000 x 0.24/365 P167.01/day
Investment days/year

Specifications:
Capacity - 70 sacks per load Repair and P254,000 x 0.1/365 P69.59/day
Maintenance days/year
Drying Time - 10 hours
Rice husk consumption - 15 sacks/load
Diesel Consumption - 10 liters/load Insurance P254,000 x 0.03/365 P20.88/day
Operator requirement - 1 person days/year
Loading and Unloading - 2 persons
Total P346.95/day

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 Variable Cost
Rice Husk Fuel 15 sacks x P2/sack P30.00/load Total Cost

Diesel Fuel 10 liters/load x P220.50/load Fixed Cost P346.95/day

P22.05/liter
Laborer 1 person x P150.00/load
Variable Cost P610.05/load or P1,221.00
P150.00/person-load
per day*
Loading and 70 sacks/load x P210.00/load
Unloading P3.00/sack
Total Cost P1,567.95 / day
Total P610.05/load
* For two drying loads at 70 sacks per load

One load is equivalent to 10 hours operation with loading capacity of

70 sacks

Undiscounted Measures
Operating Cost
n Break-Even Point – It is the level of operation at which total
cost equal to total benefits or gross income. It is useful in
determining the level at which the machine should be
Capacity 140 sacks operated in one year to cover the annual cost.
n Payback Period – It is the time it takes to recover the cost
Operating Cost P11.20 per sack invested to the machine. It is useful in choosing among the
investment alternatives when there is a high degree of risk
Payback Period* 2.62 months involved and/or financial resources are limited to decide for
a short period.
* P40 custom cost, 140 sacks/day, 6 days/wk, 4
wks/months

Discounted Measures
n Benefit-Cost-Ratio – It is the ratio of the total benefits derived
n Internal Rate of Return – It is the discount rate that equates the from operating the machine to the total cost needed for
present value of the expected cash outflows with the present operation.
value of the expected inflows.
n Net Present Value – It is a discounted cash flow approach to
capital budgeting. With the present-value method, all cash flows
are discounted to present value using the required rate of return.

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Make an operating cost analysis of using Given:
a power tiller for plowing a rice farm. The Machine - power tiller
power tiller has an investment cost of Investment cost power tiller - P20,000.00
P20,000.00 while the 12 hp diesel engine Investment cost 12hp engine - P15,000.00
that drive the machine was bought at Life span - 7 years
P15,000.00. Both the power tiller and the Actual field capacity - 0.5 hectare per day
engine is expected to perform well within 7
years. Based on the initial test showed Fuel consumption rate - 1.2 liters per hour
that he power tiller has an actual field Labor requirement - 1 person
capacity of 0.5 hectare per day (8 hours) Price of diesel - P35.00 per liter
and consumes diesel fuel of 1.2 liters per Labor cost - P200.00/day-person
hour. One person is needed to operate the Operating period - 8 hr/day, 5 days/week,
machine in one day operation. Consider a 20 days/month, and
price of diesel fuel of P35.00 per liter and
6 months/year
labor cost of P200.00 per day. If the
prevailing rate of power tilling is P2,000.00 Custom rate - P2,000/hectare
per hectare, what is the payback period
and the break-even point of the machine? Required: operating cost, payback period, and break-even point
Assume a 5 days per week, 20 days per
month, and 6 months per year use of the
machine

Solution:
Investment Cost P20,000.00 + P15,000.00 P35,000.00 References
Fixed Cost
Depreciation (35,000-0.1 x 35,000) / (365) P12.33/day
n ASAE. ASAE Standard 1997. 44th Edition. American Society of
Interest on investment 0.24 x 35,000/ (365) P23.01/day
Agricultural Engineers.
Repair and Maintenance 0.1 x 35,000 / (365) P9.59/day
Insurance 0.03 x 35,000 / (365) P2.88/day n Maranan, C. L. Farm Economics: Undiscounted Techniques for
Sub total P47.81/day Investment Appraisal. Break-Even Point (BEP) and Payback
Variable Cost Period (PBP). Handout Sheet. Agricultural Engineering Training
Fuel 1.2 lph x 8 hr x P35.00/liter P200.00/day Course. The International Rice Research Institute. May-June
Labor 1 x P200.00 P336.00/day 1986. 12pp.
Sub total P536.00/day
Total Cost P47.81/day + 536.00/day P583.81/day
Field Capacity 0.5 ha/day
Operating Cost P1,167.62/hectare
Payback Period P35,000 / [(2000-1167.62) x 0.5 0.7 year
ha/day x 20 days/mo x 6 mo/year]
Break-Even Point P35,000 / (2000-1167.62) 42 ha

Thank you very much and

God bless!!!

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