Machinery costs are affected by inflation which, if not correctly considered, will bias cost estimates. Accurate estimates of machinery costs are essential in budgeting costs of crop production in farm policy programs, crop hedging decisions, and general cost of production research. Machinery decisions relating to replacement, size, and custom or leasing alternatives are also improved by realistic budgeting techniques.

The objective of this article is to examine appropriate adjustments for inflation in developing machinery costs through budgeting techniques. The authors attempt to demonstrate the adjustments necessary in both capital and traditional budgeting models to place cost estimates on a real basis. Capital budgeting is first compared with traditional budgeting. Next, by the use of a simple machinery example, the necessary adjustments to account for inflation are shown for a capital budgeting model that does not include income tax considerations. Similarly, the inflation adjustments are demonstrated for a traditional budgeting model that does not include income tax considerations. Finally, a capital budgeting model including income tax aspects is examined in reference to real and nominal after-tax cost estimates.