Agriculture Reference
In-Depth Information
for) during the first year in service, then a gradual decline for the remainder
of its expected life. Using this strategy, you might take $5,000 in depreci-
ation the first year, then $789.47 during each of the following 19 years. At
age 20, you estimate that the tractor will have no value and will need to be
replaced.
By accounting for the depreciating value of equipment, buildings, irriga-
tion systems, and other similar items over their expected working lives, you
gain a clearer picture of the profitability and net worth of your business
at any one time. Suppose you were to count the entire $20,000 as a single
business cost the year that you make the purchase. During that year, your
profitability would appear disastrous, even though you've made a reasonable
investment that will pay returns in the form of the tractor's usefulness on
the farm for many years. During the second year, your profitability might
look better but your net value will appear lower than it really is because the
$15,000 value still left in the tractor does not appear on your topics.
The process of amortizing establishment costs is really very similar. Do
not let the terms frighten you. “Amortization” means spreading a cost out
over a period of time. Depreciation is simply a form of amortizing where you
spread out the cost of an item over its expected working life. The term “es-
tablishment costs” refers to how much money it will take you to get the orch-
ard going. Say that your new orchard will cost about $10,000 per acre to es-
tablish. If you establish a 10-acre apricot and peach orchard, your establish-
ment cost is going to be $100,000. If you decide that you want to amortize
the cost of establishing the orchard over 10 years, you would include a fixed
cost of $10,000 in your enterprise budget each year for the next 10 years.
Many tree fruit enterprise budgets are available online and from uni-
versities, Cooperative Extension offices, and ministries of agriculture. A
simple Internet search should supply you with all of the help you need. Two
particularly valuable resources are the Ontario Ministry of Agriculture, Food,
and Rural Affairs Budgeting Tools website and the British Columbia Min-
istry of Agriculture, Food and Fisheries Planning for Profit website, which
