Machine Costs
The Cost of Forest Operations
A "machine rate" is a calculated hourly charge for owning and operating a piece of capital equipment. Machine rates are commonly used in construction, agriculture and forestry. The derivation of estimated owning and operating costs is generally treated in engineering economics textbooks. The classical approach in forestry was defined by Matthews (1942) and more recently by Miyata (1980). Costs are averaged over the ownership life of the asset to estimate a constant hourly charge. The formulae have been used in many forms as a simple method of cost estimation (e.g. Brinker et al., 2002). The machine rate calculations are simple, easy to understand, do not require detailed cost history, and are constant over the life of the machine. They are particularly useful for generic comparisons of equipment and operations.
However, a number of authors (Rickards 1983; Burgess and Cubbage 1989; Stenzel et al 1985) note the limitations of the machine rate:
1) The treatment of depreciation and interest does not consider the effect of compound interest on capital recovery
2) The machine rate does not consider the effect of tax treatment for various cost categories
3) Costs are assumed constant (average) for all years of ownership and thus never match actual cash outflows
4) Most cost factors are based on rules-of-thumb with little supporting data
While the limitations are clearly acknowledged, the standard machine rate is still widely used for quick estimation of machine costs when actual costs are unknown (e.g., FAO 1992). We have developed an Excel-based Machine Rate Calculator that addresses several of the more significant shortcomings.
A more exact approach to estimating machine costs is the discounted cash flow, incorporating additional cost categories such as tax effects. The detailed calculations are particularly important for economic analysis of expensive equipment (helicoptors, yarders, harvesters). Butler and Dykstra (1981) and Tufts and Mills (1982) illustrate the application of discounted cash flow analysis to equipment replacement decisions. Cash flow analysis should be used when making financial investment decisions, when situation-specific information or assumptions are critical. Burgess and Cubbage (1989) compared machine rate and cash-flow methods and concluded that over a five-year ownership period, cash flow rates were generally lower than machine rates. Consideration of income tax effects significantly reduced hourly costs.
Note: Neither the machine rate method or the cash-flow method explicitly treat additional costs of operation such as overhead, profit, or risk. Thus, contract rates or rental rates can be significantly different than estimates based on machine rates.
References
Brinker, R.W.; Kinard, J.; Rummer, B.; Lanford, B. 2002. Machine rates for selected forest harvesting machines. Circular 296. Auburn, AL: Alabama Agricultural Experiment Station. 29 p.
Burgess, J.A.; Cubbage, F.W. 1989. Comparison of machine rate and cash flow approaches for estimating forest harvesting equipment costs. Paper 89-7548. Presented at the 1989 Meeting of the American Society of Agricultural Engineers. St. Joseph, MI: ASAE. 24 p.
Butler, D.A.; Dykstra, D.P. 1981. Logging equipment replacement: a quantitative approach. Forest Science 27(1):2-12.
Cubbage, F.W.; Burgess, J.A.; Stokes, B.J. 1991. Cross-sectional estimates of logging equipment resale values. Forest Products Journal 41(10):16-22.
Food and Agriculture Organization. 1992. Cost control in forest harvesting and road construction. Forestry Paper 99. Rome. 106 p.
Matthews, D.M. 1942. Cost control in the logging industry. New York: McGraw-Hill. 374 p.
Miyata, E.S. 1980. Determining fixed and operating costs of logging equipment. Gen. Tech Rep GTR NC-55. St. Paul, MN: U.S. Department of Agriculture, Northcentral Forest Experiment Station. 16 p.
Riggs, J.L. 1977. Engineering economics. New York: McGraw-Hill. 617 p.
Stenzel, G.; Walbridge, T.A.; Pearce, K. 1985. Logging and pulpwood production. 2nd Ed. New York: John Wiley & Sons. 358 p.
Tufts, R.A.; Mills, W.L. 1982. Financial analysis of equipment replacement. Forest Products Journal 32(10):45-52
