Partial budget for a two-wheel tractor versus continued custom hiring

Annual cost of ownership

Item	Calculation	Rs/year
Depreciation	(550,000 − 50,000) ÷ 10	50,000
Interest on average investment	12% × (550,000 + 50,000)/2	36,000
Repairs	4% × 550,000	22,000
Fuel	1.5 L/h × Rs 380 × 150 h	85,500
Operator labour	Rs 400 × 150 h	60,000
Insurance and shelter	given	8,000
Total ownership cost		261,500

Annual cost of continuing to hire

Hire charges 216,000 + delay cost 30,000 = 246,000.

Result: owning costs about Rs 15,500 a year more than hiring at the planned 150 hours - a difference of only about 6%, which is inside the error of the assumptions.

Recommendation: do not sign on the financial case as it stands, but do not dismiss it either. The gap is small, so the decision should be made on factors the budget does not capture well:

1. Credibility of the Rs 30,000 timeliness figure. If delays are becoming more frequent, the real cost of hiring is higher than the budget shows and ownership becomes attractive. If last season was exceptional, it does not.
2. Liquidity and risk. The farm would commit Rs 200,000 of savings and carry Rs 350,000 of debt at 14% for a machine that returns less than the hire alternative. That is a poor use of scarce capital.
3. Residual value. The Rs 50,000 salvage figure is conservative; two-wheel tractors hold value well, which would improve the ownership case.
4. Reliability of the contractor. A machine that is always in the shed has a value that a partial budget cannot price.

A prudent decision is to negotiate a seasonal contract with the contractor (fixed dates, penalty clause) for one more year while testing whether the contracting-out market justifies a purchase.

Marginal analysis of extra hours

The variable cost per machine hour is fuel (1.5 × 380 = Rs 570) + operator (Rs 400) + repairs (22,000 ÷ 150 = Rs 147) = Rs 1,117/h.

At the offered rate of Rs 1,600/h the contribution is Rs 483/h. The machine must be used for work it is paid for, not just work it saves.

• To close the current Rs 15,500 gap: 15,500 ÷ 483 ≈ 32 extra paid hours.
• To earn a clear margin of Rs 50,000 a year: 50,000 ÷ 483 ≈ 104 extra hours.

The neighbour's 3 ha, at three passes, would generate roughly 20–30 machine hours - useful but not sufficient. Several neighbouring holdings would be needed to reach 100+ hours.

Risks to attach to this plan

• Wear and resale. The Rs 1,600/h contribution assumes repairs stay at Rs 147/h. Heavy contracting accelerates wear, shortens the machine's life and lowers resale value - the contribution is overstated.
• Timeliness conflict. Custom work is often demanded at exactly the peak of the owner's own season. Earning Rs 483/h by ploughing a neighbour's field while your own crop waits is a net loss.
• Credit and payment risk. Neighbouring farmers may pay late or default, while the loan instalment is fixed.
• Distance and transport. Hauling a two-wheel tractor beyond a few kilometres erodes the margin.
• Operator availability. If a second operator must be hired, the labour line rises and the contribution falls.
• Breakdown risk. A single machine has no backup; a major failure in peak season would cost both the contract income and the farm's own timeliness.

Judgement: the contracting-out route can work only if written work can be secured in advance for at least 100 hours with payment on completion, and only if the work is done outside the farm's own peak windows. Otherwise the purchase is a capital commitment that buys convenience rather than profit.

Effect of the financing on the budget

The Rs 36,000 interest line in the standard budget is an opportunity cost at 12% on the average investment. With this financing structure the real cash cost is different: Rs 350,000 borrowed at 14% costs about Rs 49,000 in interest in the first year, plus principal repayment, while the Rs 200,000 of savings also has an opportunity cost. Total finance cost in year one is therefore around Rs 13,000 higher than budgeted, plus a principal repayment that must come from farm cash flow in a year when the machine itself is not yet earning.

So the ownership cost rises from about Rs 261,500 to roughly Rs 275,000, against Rs 246,000 for hiring - a gap of about Rs 29,000 a year, on top of a heavy debt commitment. The recommendation becomes firmer: do not buy new under this financing.

Alternatives to put to the farmer

1. A used machine. A sound second-hand two-wheel tractor at around Rs 250,000 would roughly halve the depreciation and interest lines, cut the annual ownership cost to near the hiring cost, and remove the need to borrow at 14%. The trade-off is reliability and the absence of a warranty, so an inspection and a spares-availability check are essential.
2. Shared or cooperative ownership. Two or three neighbouring farms buying one machine and sharing the cost in proportion to hours used spreads the fixed costs and raises utilisation without any one farm carrying the debt. A written agreement covering scheduling, repairs, fuel and exit is essential.
3. Reduce the need for the machine. Zero-till or strip-till, a herbicide-based stale seedbed and a permanent bed system can cut the three passes to one or two, lowering the Rs 216,000 hire bill directly - often the cheapest option of all.

The wider judgement is that the timeliness problem is real, but a capital purchase is the most expensive way to solve it. Fixing the contractor relationship, cutting the number of passes and sharing a used machine all address the same problem with far less financial risk.