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Depreciation–The annual depreciation
for equipment or facilities depends on the
remaining useful life. For example, items
with a 10-year remaining life depreciate
at an average rate of 10 percent of their
current value annually. Remember that you
are estimating loss of value due to use and
obsolescence, not depreciation for income tax
purposes. The full investment cost of many
items can be depreciated on the tax return
at a much faster rate than their useful values
decline.
Facilities that have aged well beyond their
original useful lives may be considered to have
no depreciation expense, that is, they are no
longer losing value.
Interest–The interest rate for
intermediate term loans and the rate of return
from other xed investments can be used to
estimate a cost of capital. Multiply this rate
by the current value of the facilities, or by its
average value during a multi-year lease, to nd
an annual interest cost.
Insurance and Taxes–The annual cost of
insurance and property taxes can be estimated
as one to two percent of the current or average
value for most types of farm assets. If
actual insurance and taxes are known, that
information can be used rather than estimates.
In some states agricultural personal property
items are not subject to property tax. Check
your own property tax rates and insurance
coverage rates for accuracy.
Repairs and Maintenance–Unlike most
other ownership costs, repair and maintenance
costs usually increase as a building or other
structure ages. Repair costs can be estimated
as a percent of new replacement value,
to allow for changes in the costs of parts
and labor. Table 1 shows some suggested
percentages for estimating repair costs for
various types of rental items. For older or
well-used items, use the high end of the ranges
shown.
A more satisfactory method may
be to keep a record of actual repair and
maintenance costs incurred by the owner
during the lease period. Some operators may
be able to reduce repair costs by providing
some or all of the necessary labor.
Other Operating Costs–Costs such as water,
fuel and oil, electricity or gas typically will
be the responsibility of the operator, either
directly, or indirectly, through the overall
rental charge. The most accurate method is
to measure the actual consumption of fuel
or other energy, perhaps through a separate
meter. If electrical use cannot be metered
separately, an estimate of its cost can be made
based on the size of lights and motors used
to power fans or conveyers involved and their
hours of use (see example).
Total Costs–The total of all ownership
and operating costs can be used to estimate a
rental charge for the whole year or a portion of
the year. If a structure or piece of equipment
is rented for less than a full year, and can
be rented to someone else for the rest of the
year, the annual ownership cost estimates
should be reduced proportionately. If the
facility realistically can be rented only once
a year, as in the case of a grain bin, the rent
should reect ownership costs for a full year.
Alternatively, the total can be divided by a
typical annual production level to estimate a
charge per unit of production or use, such as
the cost per pig nished.
Example–Estimating Electrical Use
Lights
Multiply wattage of bulb by hours of use, then
divide by 1,000.
150 watt bulb × 12 hours/day × 30 days ÷1,000 = 54
kilowatt-hours (kWh)
Electric Motors
Multiply horsepower rating of motor by hours of
use, then by 0.85.
10 hp. × 300 hours × 0.85 = 2,550 kWh
Cost
Multiply total kWh by farm electrical rate.
2,550 kWh × $0.11 per kWh = $280.50