ChargeOut! : discounted cash flow compared with traditional machine-rate analysis

Abstract

ChargeOut!, a discounted cash-flow methodology in spreadsheet format for analyzing machine costs, is compared with traditional machine-rate methodologies. Four machine-rate models are compared and a common data set representative of logging skidders’ costs is used to illustrate the differences between ChargeOut! and the machine-rate methods. The study found that the machine-rate methodologies were not standardized and the methodologies had differences in accounting for ownership, other fixed costs, and variable operating costs. The result was that two of the machine-rate models calculated hourly rates that were higher than needed to provide the specified return on capital, and two of the machine-rate models calculated hourly rates that were insufficient to provide the specified return. In contrast, ChargeOut!’s break-even rate returned exactly the specified return. Differences between the results calculated by the machine-rate methods occur because of different implicit assumptions used within the models’ formulas, largely because the machine-rate models are unable to properly incorporate the time value of money. Whereas ChargeOut! can be sufficiently constrained to approximately replicate a machine-rate calculation, doing so sacrifices much of ChargeOut!’s power and flexibility. Machine-rate models cannot be configured to replicate ChargeOut!’s calculations. Machine-rate models cannot be configured to calculate cash flows, allow for uneven costs or machine hours, incorporate loans that have a different life than the expected machine life, or perform an after-tax analysis. ChargeOut! can do all of these.

Supporting material is available in an Excel spreadsheet. https://www.fpl.fs.usda.gov/documnts/fplgtr/fpl_gtr178_chargeout.xls

Citation

Bilek, Ted. 2008. ChargeOut! : discounted cash flow compared with traditional machine-rate analysis. General Technical Report FPL-GTR-178. Madison, WI: U.S. Department of Agriculture, Forest Service, Forest Products Laboratory. 15 pages