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Latimer Iowa | Had a conversation today with a neighbor about equipment strategies.
If a piece of equipment can be traded for new for the cost of depreciation should it be updated or run the older one? Brands are really irrelevant. Just assume a green, red, blue, or greenish tractor of the same cost will do the same job in the same way.
For very easy math, Say a 1 year old $400,000 tractor with 400 hours can be traded for a new one for $40,000. Essentially $100 per hour and will have a new warranty, new tires, and a new seat to fart in****
On one hand, G.A.A.P. accounting principles says to depreciate that tractor 10% per year so a $40,000 balance sheet hit if it is ran another year. A new one can't be depreciated because, well its new. So balance sheet stays pretty much the same.
One the other hand, you need to come up with the $40,000 in cash to trade.
There is opportunity cost/interest on owning both, again for easy math just say $4000 as it is only relevant on the difference between two tractor values, the next year obviously that difference is larger but repairs will also increase each year. There have been several neighbors of every tractor color looking at $75,000 repair bills on 5 year old tractors and the downtime associated with a blown transmission or engine. Its a bit daunting seeing an unbudgeted expense like that as a possibility. Seems like having a dealer out is an automatic $1000 bill, tires just keep getting more expensive, and even a full service/filters/fluids annually is several 1000 bucks. New tractor with new warranty has virtually no unplanned downtime.
Should the tractor be updated or ran another year, or 5?
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trade equipment or not
