Farm Machinery Financing Options

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1 Delta States Farm Management and Agricultural Policy Working Group (SERA 35) May 26, 2016 Vicksburg, Mississippi Farm Machinery Financing Options An Applied Extension Application Dr. Michael Deliberto Department of Agricultural Economics and Agribusiness Louisiana State University Agricultural Center Baton Rouge, LA

2 Central Louisiana farming operation with 6,200 acres Diversified acreage Rice (600 ac) Soybeans (3,300 ac) Sugarcane (2,300 ac)

3 Do I buy or flip my machines? 21 machinery units evaluated individually Conventional purchase option Five-year loan term Rollover (annual) lease option Subject to contract terms Model that incorporates grower-specified inputted values Income tax effects Net cash flows Yearly after-tax cash outflows Least cost alternative

4 Tractors Investment Puma 185 (7 units) $946,379 Magnum 220 (3 units) $467,388 Magnum 280 WASS (1 unit) $204,902 Magnum 250 (1 unit) $179,458 Magnum 250 WASS (2 units) $376,916 Magnum 340 (track) (1 unit) $274,412 Magnum 340 (tire) (1 unit) $255,250 Steiger 420 (1 unit) $257, Combine (1 unit) $435,061 SPX 3340 Sprayer (1 unit) $294, Sugarcane Harvester (2 units) $667,956

5 After-tax discount rate Unit price of machinery unit Loan term and interest rates Annual use (hours) constraint MACRS depreciation schedule (to include Sec. 179 exp.) Repair cost estimates (via ASABE Stds.) Remaining asset valuation (via ASABE Stds.) Tax information End of period information NPV Annualized cash flow Contract terms (per contract language)

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10 (April 2016 Version) Case Puma 185 Tractor General Information Enter Input Note: Cells that appear shaded in color and containing blue numerials can (and should be) altered by the farm operator. Price $183,651 This is the list price for the machine, as obtained from the dealer. Farm Acres 6200 Acreage does not compute into this financial exercise. No. of Years in Analysis (Requiring Finance) 5 Interperted as: 'The farm operator would purcahse another tractor in five years'. Tax Rates (Federal) Tax rates are expressed as a demical value. Tax Rates (State) Tax rates are expressed as a demical value. Tax Rates (SS) Tax rates are expressed as a demical value. (Enter saving account rate) After tax Discount rate Assumes a money market savings account grows at a rate of Capital Gains Tax Rate 0.15 Tax rates are expressed as a demical value. Express the rate as a decimal value. Purcahse Option Farm Acres 6200 Acreage does not compute into this financial exercise. Taxable Basis of New Machine $135,197 This is the purcahse price to the farm. This value would reflect any discounts from the dealer from the list price. Amt of Sec. 179 Expensing $0.00 Loan Information Downpayment (plus equity value of machine traded in) $0.00 (Enter total cost of insurance) Loan Balance $139,394 Loan balance that includes the yearly insurance. $3, Interest Rate Express this number as a decimal value. No. of Year of the Loan 5 Payment per Year $28, This is the payment amount per year of the loan term. End of Period Information Years Machine is Held 5 Remaining Value of Machine $77, $77, Actual ASABE function used to determine the remaining (salvage) vlaue of the machine. This considers the list pice. After tax Discount Rate Is a function of the tax parameters previously entered in the general informtion section. Final Ballon Payment on Loan, if any $0.00 Years Under repair Warranty 2 Hours on Machine when Acquired 0 Annual Use Hours 1000 Enter the annual hours placed on the machine. Age of Machine When Acquired 0

11 (Repair cost defered by one year for tax purposes.) Income Tax Effects on Purchase Year Sec 179 Expensing MACRS Depreciation Repair Costs Interest on Loan Recaptured Dep. Capital Gain Net Tax Saving Year MACRS factor (7 yr class) 1 $0.00 $14, $ $0.00 $0.00 $7, $26, $0.00 $1, $0.00 $0.00 $13, $20, $0.00 $ $0.00 $0.00 $10, $17, $6, $ $0.00 $0.00 $12, $17, $8, $ $0.00 $0.00 $13, $0.00 $11, $ $34, $0.00 $11, $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $ Net Cash Flows for Purchase Year Dwn Pymt Remain Value Repair Tax Save Net Cash Flow ASABE Standard 0 $0 $0.00 Repair RC1 factor $28, $0.00 $0.00 $7, $21, Repair RC2 factor 2 2 $28, $0.00 $0.00 $13, $14, Note: Adjusting these coeffiences will effect the repair cost estiamtes. 3 $28, $0.00 $6, $10, $24, Source: American Society of Agricultural and Biological Engineers. 4 $28, $0.00 $8, $12, $25, $28, $77, $11, $13, $50, $0.00 $0.00 $0.00 $11, $11, $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 Total $142, $77, $26, $46, $45,861.06

12 Rollover Option Enter Input List Price $183,651 Age of Machine When Lease (0 for new) 0 Enter a 0 if the machine is new. Hours on Machine when Acquired 0 Annual Use Hours 1000 Enter the annual hours placed on the machine. Down Payment $0.00 Amount of Taxiable Basis / Loan Amount $135,197 If this value references the taxable basis of the machine (previously entered in cell B14), then it is implied that there is 0% interest, $0 insurance, and $0 in administration fees. Loan Interest Rate 0 Express this number as a decimal value. Months on which Interest is Charged 0 (Tax) (Enter flip cost) Annual Rollover Payment $18,458 Annual rollover payment contains tax and 'flip' cost $17, Years to Cont. Rollover After Purchase 5 Express the tax rate as a decimal value. Percent of Repairs Under Warranty 1.00 Expressed in decimal format. Note that 1.00 equates to 100% of the repairs are covered under the dealer warranty. Remaining Value After Last Year $116, Actual ASABE function used to determine the remaining (salvage) vlaue of the machine. This considers the list pice. Income Tax Effects on Rollover Year Sec 179 Expensing MACRS Depreciation Repair Costs Loan Int Recaptured Dep. Capital Gain Net Tax Saving 1 $0.00 $14, $0.00 $0.00 $0.00 $7, $0.00 $14, $0.00 $0.00 $0.00 $0.00 $7, $0.00 $15, $0.00 $0.00 $0.00 $0.00 $7, $0.00 $15, $0.00 $0.00 $0.00 $0.00 $7, $0.00 $15, $0.00 $0.00 $0.00 $0.00 $8, $0.00 $16, $0.00 $0.00 $0.00 $0.00 $8, $0.00 $0.00 $0.00 $0.00 $0.00 $18, $2, $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Net Cash Flows for Rollover Year Roll Pymt Remain Value Repair Costs Tax Save Net Cash Flow 0 $0.00 $ $18, $0.00 $0.00 $7, $11, $18, $0.00 $0.00 $7, $10, $18, $0.00 $0.00 $7, $10, $18, $0.00 $0.00 $7, $10, $18, $0.00 $0.00 $8, $10, $0.00 $18, $0.00 $8, $10, $0.00 $0.00 $0.00 $2, $2, $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00

13 Summary (Yearly After Tax Cash Outflows) Year Purcahse Lease Rollover (The lease option categories and analysis are hidden from this worksheet.) 0 $0.00 $0.00 $ $21, $0.00 $11, $14, $0.00 $10, $24, $0.00 $10, $25, $0.00 $10, $50, $0.00 $10, Values are presented for a summary comparison for the purcahse and rollover options. 6 $11, $0.00 $10, Do not alter these values. 7 $0.00 $0.00 $2, $0.00 $0.00 $ $0.00 $0.00 $ $0.00 $0.00 $0.00 Total Cash $45, $0.00 $67, Present Value $45, $0.00 $66, Annual Cost $9, $0.00 $11, The cost can be interpeted as the least cost alternative among the financing options. Imposed limit of a 10-year window for analysis. The conventional lease option was not include in this particular example.

14 Machine Purchase Option Rollover Option Puma 185 $9,214 $11,202 Magnum 220 $11,251 $8,231 Magnum 250 $12,923 $8,848 Magnum 250 WASS $13,484 $8,371 Magnum 280 WASS $14,751 $10,790 Magnum 340 Track $19,888 $19,924 Magnum 340 Tire $18,373 $13,102 Steiger 420 $18,456 $18, Combine $25,527 $20,407 SPX 3340 Sprayer $20,409 $73, Cane Harvester $47,853 $60,429

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16 Michael Deliberto, Ph.D. Assistant Professor-Research Dept. of Agricultural Economics & Agribusiness 101 Martin D. Woodin Hall Louisiana State University Agricultural Center Baton Rouge, LA Phone: Fax: