By Garen Paulson
Making the decision to trade in an old piece of farm machinery for new equipment is one of the biggest financial calls you’ll make. It’s a moment of balancing spreadsheet numbers with gut instinct and real-world risk.
The key to knowing when to trade boils down to comparing two costs: the long-term average cost of a new machine versus the yearly expense of keeping your old one.
The economic test
To get a clear, unbiased look at your options, we use an economic concept called Equivalent Uniform Annual Cost (EUAC).
Think of the EUAC as the average total cost per year to own and operate a machine over its entire life. It takes the huge upfront purchase price, all the future interest, and all the repair bills, adds them up, and spreads them out evenly into one annual payment.
The EUAC is made up of two major costs that pull in opposite directions:
- Capital Recovery (cost of ownership): This includes depreciation (the loss of value) and the interest you pay (or could have earned). This cost is highest when the machine is new.
- Annual Operating Costs (cost of running): Primarily driven by repairs and maintenance. This cost is lowest when the machine is new and rises sharply as it ages.
Source : umn.edu