Large capital expenditure?

B

bobsledder

New member
We are thinking of making a large capital expenditure in our agricultural based business. My thoughts are to improve our machinery line while interest rates are low (locked in of course) and inflation seems to be in the not so distant future. I don’t want to go nuts on our debt to equity ratio however I think we could improve our net worth significantly in the next 4 years. When the downturn in agriculture comes we would a more modern line of machinery to get through the unprofitable time. Am I missing anything in this thought?
Thanks for anyone’s input
Bob
 
R

rocketman356

New member
Your comments seem reasonable to me.But I would be asking my accountant.If inflation does hit as I think it will.Won't your grain price increase along with everything else? I would go cautiously and replace a piece a year.Hard to really comment not knowing your balance sheet and inventory.
 
D

Deleted member 10829

Guest
Depreciation

Another big consideration this year is the bonus depreciation that became law late in 2010. You can take 100% depreciation the first year on qualified purchases of new equipment. Again, this depends on how much depreciation you actually need and should be something you discuss with your accountant.
 
A

anonomoose

New member
mspease said:
Another big consideration this year is the bonus depreciation that became law late in 2010. You can take 100% depreciation the first year on qualified purchases of new equipment. Again, this depends on how much depreciation you actually need and should be something you discuss with your accountant.
Click to expand...
If you can depreciate new equipment at 100% in one year, how can you go wrong buying it? Seems like a no brainer, unless you have more than enough depreciation, anyway. I would be replacing everything I own.

Last time I checked, equipment that is not warn out, and kept in top shape holds value for years. If that is the case, you get more efficient equipment, and a great deduction in one year. As long as you have the cash flow to support that purchase, the rest of this is easy.

Don't forget about the Japan issue. Money flowing out of our country should devalue the dollar and make products made outside the USA more expensive, which should cause American Made stuff rise in cost too.
 
Last edited:
B

bobsledder

New member
The depreciation factor is important in managing taxes however we will have to borrow about 75% of the cost and so if we set the purchase to a 5or 6 year term we have to allow for the cash flow to support the payments. Therefore maxing the expense selection is great for 1 year then the time comes to pay the piper unless you can cash flow additional purchases. If we had the money sitting in cash it would be defiantly wise to take all the expense.
 
D

Deleted member 10829

Guest
What equipment are you buying exactly? Depending on the life of the equipment, you could look at doing a longer term or adding a balloon to the end of the loan. This all depends on the equipment and how well it holds it's value of course. Since you are in a seasonal business, it may make sense to do annual payments, semi-annual or even skip payments in the months you are slow. If you want to know if the rates you are being quoted are fair, let me know.
 
A

anonomoose

New member
Dear Mr. Sledder....

Barnie Maddoff made a darn good living doing a variation of what you are working around.

If you go buy the stuff on time, depreciate it all in one year, sell it again at the end of the year and then go buy again the next year, I believe....that you will never ever have to use any of YOUR money!

And you will have the latest and greatest equipment, and all your neighbors will think that you are in the drug business...because no self respectin farmer could afford to do what your doing....thereby they will offer you a job as chief financial wizard of the farmers coop....making pile of money and thereby avoid all the pitfalls that every farmer in the country must go thru at this time of year...wondering if there will be enough rain...too much rain.....fertilizer expenses...and all those things that puts Grey hair on your head....

See....btw, if you can get me in as assistant CEO at that coop...I would appreciate it...we can become best buds...and I will opt for taking odd weekends to your choices of sledding days.

All fits, neat as a glove, doesn't it?
 
D

Deleted member 10829

Guest
Your plan sounds very interesting, just one small problem. Once you sell the equipment, after fully depreciating it, you have a capital gain and are now on the hook with the IRS for taxes on that. Of course you could never pay that and wait for the IRS to catch up to ya!
 
A

anonomoose

New member
mspease said:
Your plan sounds very interesting, just one small problem. Once you sell the equipment, after fully depreciating it, you have a capital gain and are now on the hook with the IRS for taxes on that. Of course you could never pay that and wait for the IRS to catch up to ya!
Click to expand...


Oh, so you mean that he should actually report a sale of a capital expenditure....geez...who does that?

Don't you just will the thing down to the next generation? Who's gunna know?
 
B

bobsledder

New member
corn planter

We tried to purchase a new corn planter, no luck. The best we could do is order one the style we want this summer and take delivery before Jan 1 to have the tax write off for this year. Machinery is so expensive the dealers don’t want to invest in inventory, just fill orders. I see both sides. We usually don’t purchase new so maybe we will find a nearly new trade in when someone else gets new.
Thanks all for the info and laughs
Bob
 
You must log in or register to reply here.
Top