The decision to replace an item of farm machinery can be made for several reasons.

Cost minimization. The standard rule for mini­mizing the long-run cost of equipment is to make a change when the annualized total cost of owning and operating the machine begins to increase. In the example shown in Figure 1, this happens in about the tenth year of ownership. At this point repair costs begin to increase faster than deprecia­tion and interest costs decrease. However, the rate at which total costs rise is often very gradual. In this case, the total cost in year 10 is estimated to be $23,463 while the cost by the time the tractor is 15 years old is only $24,002.

Thus, while the rule of increasing total cost can give a general picture of when to replace a particular machine, it cannot give a precise answer. Note that the estimates for repair costs project them to increase gradually over time. In reality, though, repair costs tend to be quite variable from year to year, ranging from only routine maintenance items to a complete