Part II: Performing a Cost-of-Ownership Calculation
Navigating the purchase of a self-propelled (SP) sprayer can be
intimidating. You may be asking yourself such questions as:
"Can I afford it given the acreage I farm?"
"I know it is a good investment, but how long will it take to pay for itself?"
"Is it better for my operation to buy or lease?"
"Are there tools out there to help me justify the investment to a lender?"
"Can government tax incentives help defray costs?"
Our Cost of Ownership tool answers all these questions and more, including the simplest question stopping you from owning an SP sprayer…"Will it make me money?"
Understanding Inputs and Costs
In all business decisions, you need to understand the costs associated with an investment in order to understand the benefits. Over the years, with the help of our customers and dealers, we clearly defined the inputs and costs of various application methods to show you an apples-to-apples comparison between your current method and an SP sprayer. The calculations often include current ownership of a pull-behind (PB) sprayer, hiring custom applicators, or both. In other words, to calculate the cost of owning an SP sprayer you have to factor in all the costs associated with your current application method to make an apt comparison. Our cost-of-ownership tool does just that. We begin by looking at the inputs…
Acres versus sprayed acres – Unlike planting and harvesting, application often requires going over the field multiple times. Therefore, in considering application methods we calculate acreage not by the planted acre, but by the sprayed acre.
Custom application labor – If you hire custom applicators, you no doubt know what they charge by the acre. You also know what they charge for chemicals.
Pull-behind costs – Our calculator includes worksheets to help isolate the costs associated with operating a PB sprayer. In reality, most PB owners also hire custom applicators, so we need to account for both costs.
Annual operation costs of a SP sprayer – These costs include fuel, maintenance, operator's wages, and insurance.
Tax benefits and other accounting-related considerations – Because an SP sprayer is not a minor purchase, accelerated or bonus depreciation may be involved. Most importantly, Section 179 depreciation certainly applies in the case of SP sprayer ownership.
Resale value (equity in the asset) – Over the years you own a sprayer, how well does it hold its value? Without strong resale, return on investment (ROI) will be difficult to achieve.
Understanding Intangible Benefits
While this white paper primarily concerns specific cost-benefit analysis for SP sprayers, ownership conveys numerous intangible benefits as well. Some, like comfort, are universal but others, like timeliness, may vary based on your region. For example, if you needed to eradicate a late season infestation, being able to spray promptly on your schedule instead of hiring custom applicators saves you money. It also adds peace of mind that the calculator cannot measure, but may make a significant impact on your yields.
Financing Options, Tax Benefits, Valuation of the Asset, and Resale Value
Buy or lease? – Both buying and leasing SP sprayers have advantages, depending on your specific situation. Leasing allows for ownership without the burden of a large initial cash investment and may come with lower annual payments. On the other hand, buying the sprayer may have stronger advantages related to ROI, particularly because of resale.
Tax benefits (in greater detail) – We previously touched on tax incentives, and mentioned Section 179 - straight line and bonus deprecation.
For tax year 2012, Section 179 allows you to depreciate up to $139,000 of an equipment purchase in year one of operation. Additionally, 50% bonus depreciation can be applied to the difference between the purchase price of your sprayer and the $139,000 Section 179 allows. Finally, your tax advisor can use a regular depreciation schedule for the remaining useful life of the sprayer.
Valuation of the asset and resale value – When considering purchasing costs and costs of ownership, we must also evaluate the purchase decision pre- and post-tax, and examine the difference between straight and discounted cash flows.
We all have to pay taxes and your purchasing decisions impact your tax bill. When you perform the cost-of-ownership calculation, we assume that you paid the taxes at the time of purchase. Simply put, it is a cash savings and it contributes greatly to ROI.
Our calculator also simplifies straight cash flow and discounted cash flow. Our ROI calculations use either a straight cash flow or discounted cash flow analysis. However, our sample calculation in this white paper uses the discounted cash flow method because it takes into consideration the time value of money. That is, a dollar in your hand today is worth more than the prospect of gaining a dollar tomorrow. Therefore, using the discounted cash flow method of arriving at ROI calculations presents a clearer picture of our assessment.
Performing a Sample Calculation
In order to illustrate our sample calculation, we created a producer's profile for John Q. Farmer using numbers taken from within our cost-of-ownership tool.
Sprayed acres John Q. Farmer farms
1,500 acres of beans, which he sprays two times
1,500 acres of corn, which he sprays two times
800 acres of wheat, which he sprays three times Total application acres: 8,400
Outsourcing and pull-behind costs
Currently, John runs a PB sprayer and he also typically hires custom applicators to spray when he can't get his PB into the field. Given two applications with his PB and one custom application per year, John's annual cost for his current application method is $5.50 per acre, or $46,200.
- Section 179 (year one only) - John will be taking the full $139,000
- 50% bonus (year one only) - $30,500
- Straight depreciation - after the Section 179 and 50% have been exhausted, the regular depreciation schedule begins
Purchase Price: $200,000
Interest rate: 3.9%
Term: four years
Down payment: $40,000
Self-propelled sprayer operating costs:
John figures the following annual operating costs of his new SP sprayer:
- Fuel $2,660 ($3.80/gallon)
- Maintenance $500
- Operator $2,520 ($15/hour)
- Insurance $1,600 (0.8% of the purchase price) Total annual operating costs: $7,280
Will the purchase of an SP sprayer make John money? Yes! Compared to John's current spraying method, owning a self-propelled sprayer will have:
- An ROI of $10,626 per year compared to his current spraying method
- A savings of $1.26/sprayed acre compared to a combination of PB and custom applications
- Cost per application acre of $2.07
Now, click here to look at the details of how we arrived at $10,626 annual ROI
(Refer to the breakout image above for the following section)
Line 1: Here we have our costs for running the PB twice and hiring the custom applicator once.
Line 2: The -$140,252 is the net present value, or what the total expense after four years, of running a PB and
hiring custom applicators is worth in today's dollars.
Lines 3 – 8: These figures represent what it costs to operate the SP sprayer you're thinking about buying.
Lines 9 – 15: Cash savings from depreciation, interest and salvage value are just that… cash savings.
Lines 16: The -$87,123 is the net present value, or what the total cash savings after five years of running your SP sprayer is worth in today's dollars.
Line 17: This is John's ROI. You might be wondering, why is it that two negative numbers are being added up to
make a positive number? Well, we are not saying it doesn't cost money to own and operate an SP sprayer.
We're saying that it costs significantly less to do so when compared to the current combination of PB and
More about ET's Cost of Ownership Calculator
You probably noted that in our sample calculation a lot of math seems to happen behind the scenes. Equipment Technology's Cost-of-Ownership Calculator performs calculations such as financing options and different depreciation choices automatically. The tool outputs the summary on one page, as seen below, for your tax account, your banker, or the Missus. Guys, our calculator does not factor in the cost of your wife's new kitchen once you have convinced her to let you buy an SP sprayer…you are on your own there.
Interested in a self-propelled sprayer cost of ownership analysis?
Contact Nick Smith, Apache sprayer Sales Manager at Equipment Technologies.
(866-463-0452) or firstname.lastname@example.org
Est. average resale value of Apache sprayers after five years is 76% based on actual experience calculated by Equipment Technologies. The resale value
shown in the above example is 66% after five years to give a more conservative estimate.