ECONOMIC ANALYSIS OF

AGRICULTURAL
MACHINES
by

Engr. Alexis T. Belonio, PAE, Fellow PSAE

Associate Professor and Chair
Department of Agricultural Engineering and Environmental Management
College of Agriculture
Central Philippine University
Iloilo City
Email: atbelonio@yahoo.com
 Introduction
 Careful appraisal and good planning must
be undertaken before making an
investment in an agricultural machines.
 Economic analysis will determine which of
the different alternatives of agricultural
machines is most viable to purchase and
operate.
 Methods of Appraising
Investment
 Discounted Method
– It involves discounting and allows payment
and receipts occurring at different times in the
future to be converted to a common standard
in terms of their present value.
 Undiscounted Method
– It does not consider timing of cost and benefit
flows and the changing value of money over
time.
 Terms
 Cost Factors – It is the total cost of using the
machine which includes charges for ownership
and operation.
– Fixed Cost – It is the ownership cost which
are independent of use.
– Variable Cost – It is the cost used for
operation of the machine which vary directly
with the amount of use.
 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.
 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.
 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.
 Fuel Cost – It is the cost incurred for the
fuel used by the machine.
 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.
 Machine Custom Cost – It is the amount paid
for hiring the equipment and operator
services to perform a certain task.
 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.
 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.
 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.
 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.
 Price – It is the market value per unit of a
machine.
 Rent – It is a short-term contract for the use
of machinery in exchange for a fee.
 Gross – The return for sale or product and
the value received for a service or product
before expenses are deducted.
 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.
 Maintenance and Service – It is the periodic
activities to prevent premature failure and to
maintain good functional machine
performance.
 Specific Fuel Consumption – The fuel consumed
by an engine to deliver a given amount of
energy.
 Repair – It is the restoration of a machine to
operative condition after breakdown, excessive
wear, or accidental damage.
 Cost Analysis Procedure
 Determine the annual fixed cost which
includes the depreciation, interest on average
capital investment, repair and maintenance,
and tax and insurance. Usually depreciation
can be determined using the straight line
method with this formula
D = (P-S) / L
where: D - depreciation, P/year
P - principal, P
S - salvage value, P
L - life span
The salvage value is usually 10% of the
purchase price of the machine. The life span
depends on the machine and is usually 5 to 7
years for field equipment while 10 to 15 years
for farmstead equipment. The interest on
investment depends on the bank rate and is
usually 24%. Repair and maintenance is
usually 10% while the tax and insurance is
3%.
 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.
 Determine the total operating cost of
the machine by adding the total fixed
costs and the total variable cost.
 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.
 Calculate the BEP by dividing the purchase
price by the difference between the
commercial rate of the machine and the
computed operating cost.
 Calculate the PBP which is the length of
time from the start of purchasing the
machine until its net benefit equal cost.
 Sample Analysis Using Flat-
Bed Paddy Dryer
Investment Cost

Dryer* P200,000.00

Engine (8 hp) P54,000.00

Total P254,000.00

* Dryer equipment installation, transport are

included
Specifications:
Capacity - 70 sacks per load
Drying Time - 10 hours
Rice husk consumption - 15 sacks/load
Diesel Consumption - 10 liters/load
Operator requirement - 1 person
Loading and Unloading - 2 persons
 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

days/year
Investment
Repair and P254,000 x 0.1/365 P69.59/day
days/year
Maintenance
Insurance P254,000 x 0.03/365 P20.88/day
days/year

Total P346.95/day
 Variable Cost
Rice Husk 15 sacks x P2/sack P30.00/load
Fuel
Diesel Fuel 10 liters/load x P220.50/load
P22.05/liter
Laborer 1 person x P150.00/load
P150.00/person-load
Loading and 70 sacks/load x P210.00/load
P3.00/sack
Unloading
Total P610.05/load

One load is equivalent to 10 hours operation with loading

capacity of 70 sacks
 Total Cost

Fixed Cost P346.95/day

Variable Cost P610.05/load or

P1,221.00 per day*
Total Cost P1,567.95 / day

* For two drying loads at 70 sacks per load

 Operating Cost

Capacity 140 sacks

Operating Cost P11.20 per sack

Payback Period* 2.62 months

* P40 custom cost, 140 sacks/day, 6 days/wk, 4

wks/months
 Undiscounted Measures
 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
operated in one year to cover the annual
cost.
 Payback Period – It is the time it takes to
recover the cost invested to the machine. It
is useful in choosing among the investment
alternatives when there is a high degree of
risk involved and/or financial resources are
limited to decide for a short period.
 Discounted Measures
 Internal Rate of Return – It is the discount
rate that equates the present value of the
expected cash outflows with the present value
of the expected inflows.
 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.
 Benefit-Cost-Ratio – It is the ratio of
the total benefits derived from
operating the machine to the total
cost needed for operation.
Make an operating cost analysis of using a
power tiller for plowing a rice farm. The
power tiller has an investment cost of
P20,000.00 while the 12 hp diesel engine
that drive the machine was bought at
P15,000.00. Both the power tiller and the
engine is expected to perform well within
7 years. Based on the initial test showed
that he power tiller has an actual field
capacity of 0.5 hectare per day (8 hours)
and consumes diesel fuel of 1.2 liters per
hour. One person is needed to operate the
machine in one day operation. Consider a
price of diesel fuel of P35.00 per liter and
labor cost of P200.00 per day. If the
prevailing rate of power tilling is
P2,000.00 per hectare, what is the
payback period and the break-even point
of the machine? Assume a 5 days per
week, 20 days per month, and 6 months
per year use of the machine
Given:
Machine - power tiller
Investment cost power tiller - P20,000.00
Investment cost 12hp engine - P15,000.00
Life span - 7 years
Actual field capacity - 0.5 hectare per day
Fuel consumption rate - 1.2 liters per hour
Labor requirement - 1 person
Price of diesel - P35.00 per liter
Labor cost - P200.00/day-person
Operating period - 8 hr/day, 5 days/week,
20 days/month, and
6 months/year
Custom rate - P2,000/hectare

Required: operating cost, payback period, and break-even point

Solution:
Investment Cost P20,000.00 + P15,000.00 P35,000.00
Fixed Cost
Depreciation (35,000-0.1 x 35,000) / (365) P12.33/day
Interest on investment 0.24 x 35,000/ (365) P23.01/day
Repair and Maintenance 0.1 x 35,000 / (365) P9.59/day
Insurance 0.03 x 35,000 / (365) P2.88/day
Sub total P47.81/day
Variable Cost
Fuel 1.2 lph x 8 hr x P35.00/liter P200.00/day
Labor 1 x P200.00 P336.00/day
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
 References:
 ASAE. ASAE Standard 1997. 44th Edition.
American Society of Agricultural Engineers.
 Maranan, C. L. Farm Economics: Undiscounted
Techniques for Investment Appraisal. Break-
Even Point (BEP) and Payback Period (PBP).
Handout Sheet. Agricultural Engineering Training
Course. The International Rice Research
Institute. May-June 1986. 12pp.