Machinery Replacement Strategies

Farm machinery is typically the second largest asset category on a farm (after land). Farmers often appear to manage their machinery purchases in order to minimize cash flow variability, which usually leads to lower overall taxes. To test this hypothesis, farm income in the current year is compared to the previous two years to determine if farms had a “good” year. Results of a correlation analysis show that there is a strong correlation between having a relatively “good” year and machinery purchases.