Life Cycle Costing

Life Cycle Costing

Dr. M.Hodkiewicz, August 2006University of Western Australia

Notes adapted from courses developed by Dr. M.Hodkiewicz and Dr.J.Sikorska, University of Western Australia

2Hodkiewicz, UWA – “AM Life Cycle Costing”

Learning Outcomes

• After this session you will be able to:– Perform life cycle cost calculations using the 12

Step Plan– Identify and estimate the main costs during pump

life– Justify pump selection based on life cycle not just

purchase cost– Adapt the concepts learned to other equipment


Session Content

• Background & introduction to life cycle costing• Systems Engineering approach• Translation to Asset Management• Pump case study example• Calculations• Summary


Text Resources

[1] Pump Life Cycle Costs: A Guide to LCC Analysis for Pumping Systems, Hydraulic Institute and Europump. Ed. L.Frenning et al.Hydraulic Institute and Europump.

[2] Systems Engineering and Analysis 4th ed. 2006, Blanchard & Fabrycky, Prentice Hall.

[3] Asset Management Part 1: Specification for the optimised management of physical infrastructure assets, PAS 55-1, 2004, Institute of Asset Management, UK

[4] Maintenance, Replacement & Reliability. 2006. Jardine & Tsang. CRC Taylor Francis Group.

[5] Life cycle cost tutorial. 1996. Barringer & Weber, Hydrocarbon Processing


Software Resources

• Papers on LCC from Barringerhttp://www.barringer1.com/

• Examples of software: LCCware (ARMS), Perdec(OMDEC) , Relex LCC, Cost commander.

• For demos http://www.plant-maintenance.com/freestuff/index1.shtml

Background

Lifecycle Costing – An Introduction

Notes developed by Dr. M.Hodkiewicz and Dr.J.Sikorska


What is life-cycle?

• “Time interval that commences with the identification of the need for an asset and terminates with the decommissioning of the asset or any liabilities hereafter” [3]


What is life-cycle costing?

• Life cycle management philosophies consider the cost contribution from all phases when making decisions on equipment selection and operation.

• LCC refers to all costs associated with a system as applied to the defined life cycle.


LCC Process summary

IDENTIFY LIFE CYCLE PHASES

IDENTIFY FUNCTIONS IN EACH PHASE

COST THESE FUNCTIONS

APPLY COSTS BY FUNCTION TO YEAR BY YEAR

SCHEDULE

APPLY COSTS BY FUNCTION TO YEAR BY YEAR

SCHEDULE

ACCUMULATE COSTS FOR SPAN

OF LIFE CYCLE


History of LCC

• Integral part of Systems Engineering• Traditionally associated with the design and

development of new products• Principles translate to Asset Management decisions,

such as– Equipment or service selection comparison– Design trade-offs for plant/equipment– Maintenance policy selection, – Inspection frequency


Systems Engineering view

DEFINE NEED

PRODUCTION/ CON-

STRUCTION

DETAIL DESIGN/

PROTOTYPE

ADVANCE DEVELOP-

MENT

CONCEPTUAL DESIGN

UTILIZATION & SUPPORT

RESEARCH

PHASE OUT & DISPOSAL


Systems Engineering – ‘12 Step Plan’ in LCC analysis [2]

DEFINE SYSTEM REQUIREMENTS &

PERFORMANCE MEASURES

SPECIFY SYSTEM LIFE CYCLE &

IDENTIFY ACTIVITIES BY

PHASE

DEVELOP COST BREAKDOWN

STRUCTURE (CBS)

IDENTIFY DATA REQUIREMENTS

ESTIMATE COSTS FOR EACH CATEGORY

SELECT COST MODEL FOR ANALYSIS

DEVELOP COST PROFILE & SUMMARY

IDENTIFY HIGH COST

CONTRIBUTORS & CAUSE-EFFECT RELATIONSHIPS

CONDUCT SENSITIVITY

ANALYSIS

IDENTIFY PRIORITIES FOR

PROBLEM RESOLUTION

IDENTIFY ADDITIONAL

ALTERNATIVES

EVALUATE FEASIBLE

ALTERNATIVES & SELECT OPTION


Timing


Consider existing assets


Definition of Asset Management

• Asset Management is– “Systematic and coordinated activities and

practices through which an organization optimally manages its assets, and their associated performance, risks and expenditures over their lifecycle for the purpose of achieving its organizational strategic plan” [3]


Asset Management phases

• The AM life cycle is initiated by a business need which determines the equipment required.

• This is followed by the design and/or select phase• Acquisition phase• In-service phase (also known as asset utilization)• Finally equipment disposal phase.


Question?

• Give examples of typical AM utilization (maintenance) decisions?


Typical AM utilization/ maintenance decisions

• Evaluate the LCC of different RCM outputs• Repair, replace decisions• Design decisions eg redundancy• Upgrade decisions• Inspection and repair frequency • Spare parts holding• Capital equipment purchase• Action due to increased operating and maintenance

costs


Constraints on using traditional Systems engineering 12 step approach

• Existing plant• Existing management, purchasing

practices• Existing accounting cost methods• Preferred suppliers


Adapt the 12 Step Plan (from [2]) to AM

DEFINE REQUIREMENTS/

FUNCTIONS & PERFORMANCE

MEASURES

IDENTIFY LC ACTIVITIES BY

PHASE

IDENTIFY COST CATEGORIES

IDENTIFY DATA REQUIREMENTS

ESTIMATE COSTS FOR EACH CATEGORY

SELECT COST MODEL FOR ANALYSIS

DEVELOP COST PROFILE & SUMMARY

IDENTIFY HIGH COST

CONTRIBUTORS & CAUSE-EFFECT RELATIONSHIPS

CONDUCT SENSITIVITY

ANALYSIS

IDENTIFY PRIORITIES FOR

PROBLEM RESOLUTION

IDENTIFY ADDITIONAL

ALTERNATIVES

EVALUATE FEASIBLE

ALTERNATIVES & SELECT OPTION


Step 1: Define strategic requirements

• What is the context of the analysis?• What is the business need?• How will this ‘project’ assist with meeting

strategic business unit goals?


Define functional requirements?

• What are the technical (operational, safety, reliability) functions that the project must fulfill/meet?

• What are the constraints?


Example

• Business need: Improve profit before tax by 15% within 3 years.

• Organizational Strategic Plan: To achieve profit improvements through expanding capacity so as to meet increased demand, funded through private finance, which will be repaid through future profits.

• AM strategy: To upgrade the core infrastructure, to meet the increased demand, by efficiently investing up to $2m over the next 5 years and the development/adoption of optimal operating and maintenance strategies.

BUSINESS NEED

ORGANISATIONAL STRATEGIC PLAN

ASSET MANAGEMENT

STRATEGIC PLAN

PROJECT PLAN


Link between project plan & Business Need

• AM strategy: To upgrade the core infrastructure to produce x t/hr product with y quality at $ z/t.

• Project Plan: Replace or upgrade the A pumps to produce w l/s for with a minimum of 95% availability and 60% efficiency over 5 years.

BUSINESS NEED

ORGANISATIONAL STRATEGIC PLAN

ASSET MANAGEMENT

STRATEGIC PLAN

PROJECT PLAN


Identify performance measures

• How will you assess the project?

• Typical assessment measures include:– Costs (capital, operating, maintenance)– Life cycle costs– Availability– Production


Step 2: Identify LC phases

• Select appropriate phases, not all may be relevant for the situation or contribute significantly to the LCC.

• Select significant sub-phases. • For in-service phase may need breakdown to separate

installation, commissioning, operation, repair, logistics categories.


Step 3: Identify cost categories

• Most Asset owners have existing cost breakdown structures (CBS).

• The cost breakdown structure required for the LCC analysis must be aligned with the existing CBS, if one exists. However it may need to be tailored to the needs of the LC exercise.

• If the project is new then the CBS can be tailored to the project.


Examples• Examples for in-service AM include

– Spare parts holding and logistics costs– Operating costs– Energy costs– Maintenance costs

(Repair/Replace/Inspection/Condition Assessment)

– Quality control costs– Training costs– Engineering support costs– Disposal costs


General Recommendations

• All LCC should be considered and identified in the LC cost breakdown structure.

• Cost categories in the CBS must be well defined.• Manager, accountants and engineers should have a

common understanding about what is included in a given cost category.

• CBS must be at sufficient level of detail to identify high cost areas.


Recommendations concerning maintenance costs

• The maintenance policy for the equipment should be clearly defined so reasonable assumptions about failure frequency/ repair costs etc can be made.

• Assumptions about downtime costs and lost production should be clearly defined.


Step 4: Identify data requirements

• What data do you need for the LCC analysis?• Where is it located?• What accuracy is required?


Step 5: Estimate costs

• Estimate costs in each category (from Step 3) using data sources identified in Step 4.

• Record assumptions


Sources of data (adapted from [2])

LIFE CYCLE COST DATA

Engineering design data

Reliability data

Logistic support data

Production data

Construction data

Customer/ Market data

Accounting data

Management planning data

CMMS data


Visibility of elements of life-cycle costs

Source:[2] B.S. Blanchard and W.J. Fabrycky, Systems Engineering and Analysis, Prentice Hall, 2006.


Challenges with LC Cost data

• Cost visibility • Existing accounting procedures• Different interpretations may exist about what

constitutes the life cycle.• Uncertainty over assumptions concerning failure

frequency and failure effects on production.

MH4

Slide 35

MH4 Possible inclusion of discussion on Activity based costingMelinda Hodkiewicz; 2006/07/15


Step 6: Select Cost Model

• This step depends on the complexity of the problem. • Simple LCC comparisons may be done with standard

LCC software/spreadsheets. • Complex problems involving assumptions concerning

reliability distributions, spare parts models etc may require a more complex solution.


Modeling considerations

• We can work in:– Nominal (actual/inflated) dollars – value of dollars

in the year in which they are spent (or received)– Real dollars – dollars having present day value.

• Assuming inflation is constant, same total discounted cost is obtained provided the interest rate for discounting used is appropriate to the type of dollars we are working in.


Economic life calculations

• Discount factor:

• Present value:

• Future value:

• Repetitiveexpenditure:

( )1= = ⋅

+n

nFVPV FV r

i

( )1= + =nn

PVFV PV ir

11

=+

ri

111

+⎡ ⎤−= ⎢ ⎥−⎣ ⎦

nrPV Ar

A is repetitive expenditure

i=interest raten=number of years (≥0)


Comparison of present and future values

( )1= = ⋅

+n

nFVPV FV r

i

( )1= + =nn

PVFV PV ir


Net present value

• Net present value for a project is the ‘present’ value of the income/proceeds minus ‘present value’ of the outlays

Truck costs $75000Interest = 15% Maintenance Costs: Year 0: $5000

Year 1: $10000Year 2: $15000

( ) ( )1 210000 1500075000 5000 $100,0381 .15 1 .15

= + + + =+ +

PV


Example: Equipment A

Interest rate = 11%, What is Net Present Value) = ?

$5000$100

$100 $100 $100 $3000

0 1 2 3

NPV = 5000 + 100 + 100/(1+0.1)1 + 100/(1+0.1)2 + 100/(1+0.1)3

– 3000/(1+0.1))3

= $ 3150

( )1= = ⋅

+n

nFVPV FV r

i


Step 7: Develop cost table

• Develop a format (table) for recording the costs from each activity/ category in the CBS for each year.

• Record and sum categories as appropriate• Ensure that a common method of recording costs is

used, either in ‘money of the day’ or in ‘present value’terms.

• Spreadsheets and LCC software are commonly used.


Step 7: Identify high cost contributors

• Review results and identify high cost contributors. • Pareto analysis is commonly used.• Objective is to determine causes for these high costs

and review their underlying assumptions.• Relate high cost factors back to the function that is

being performed.• Ask – are there alternative system selections/designs

that can be implemented to produce a similar outcome at a lower LCC?

• If so, evaluate these candidate solutions


Step 8: Conduct sensitivity analysis

• Determine ‘sensitivity’ of the result to key assumptions.

• Ask – how sensitive are results to variations in uncertain input factors?

• Ask – to what extent can selected input parameters be varied without changing the result of the analysis?


Review results of sensitivity analysis

• Examine the output of the sensitivity analysis• Identify those outputs which change significantly• Revisit the assumptions that determine these outputs

and attempt to improve input data confidence.


Step 10: Identify priorities

• Evaluate and prioritize the problem areas identified in Steps 8 and 9.

• Use a Pareto chart to show the relative contributions of the different categories.

• Relative importance can be measured as the LCC but can also include measures of risk and criticality.


Step 11: Identify feasible alternatives

• Investigate alternative ways that the functions can be accomplished

• Compare LCC profiles and Net Present value calculations.

• Consider risk factors of alternatives


Factors that affect Life Cycle Costs

Figure adapted from International Infrastructure Management Manual – V2.0 2002


Step 12: Evaluate alternatives and select approach

• List options• Identify criteria for decision making• Consider effect of assumptions on the selection of

the preferred option.• Evaluate risks• Summarize and record results

LCC example I

Pump example – from Reference [1]


Step 1: Define requirements

• Calculate cost of continuing to repair CV on failure and examine alternatives to the existing pump-control valve arrangement to recommend lowest LC cost solution.


Case study Background

• Single pump circuit from storage tank to pressurised tank through a Heat Exchanger. The Control Valve (CV) regulates flow into pressurised tank at 80 m3/hr. Fluid has contained solids.

• Desired Process flowrate – 80 m3/hr for 6000 hr/yr.• Historically the CV fails every 10-12 months as result

of erosion caused by cavitation. Cost of each failure is~ $4000.


Step 2: Identify LC phases

– Acquisition– Installation & commissioning– Operation & Maintenance– Disposal


Step 3: Identify cost categories (from [1])

LCCpump= Cic+ Cin+ Ce+ Co+ Cm+ Cs+ Cenv+ Cd

Cic = initial cost, purchase price Cin = installation and commissioning cost Ce = energy costs Co = operating costCm = maintenance and repair cost Cs = downtime and loss of production cost Cenv = environmental cost Cd = decommissioning and disposal


Initial costs

• May need to include– Engineering (design & drawings, regulatory

issues)– Bid process– Purchase order administration– Testing and inspection– Inventory of spare parts– Auxiliary equipment for cooling and sealing water


Initial cost considerations

• Initial cost considerations– Small fitting/pipe diameters reduce purchase costs

but increase energy costs as more power is required due to increased line velocity and friction losses.

– Small inlet pipes increase NPSHA, risking earlier onset of cavitation.

– Material selection may affect repair frequency– Seal selection is important


Installation and commissioning costs

• May need to include– Foundations– Connection of process piping, electrical wiring and

instrumentation, auxiliary systems and utilities.– Provision for system flushing and commissioning

on water– Performance evaluation at start-up– Training


Energy costs• Often the largest cost element in a pump life cycle cost.• May need to consider

– Is use constant or variable?– How to determine pump efficiency or energy

consumption reliably over time?– How to estimate efficiency when system

conditions/load vary?– Throttling control valves, pressure relief and flow by

pass reduce operating efficiency and increase energy consumption

– Consider energy costs of auxiliary services


Operating costs

• Operating costs are labour costs related to the operation of the pumping system.

• Vary widely but may need to be considered for example for hazardous systems requiring daily checks for emissions and performance.

• Other costs may relate to performance monitoring tests, vibration, noise, pressure, power consumption.


Maintenance and repair costs

• Consists of number and cost of routine preventative maintenance, routine repairs/ overhauls and corrective (unscheduled repairs)

• Repairs can include– Labour costs– Costs of replacement parts– Consumables– Cost of loss production or requirement for temporary

replacement.– Cost of removal. transportation, inspection and

reinstallations


Alternative sustaining cost category structure (from [5])

SUSTAINING COST TREE

SCHED & UNSCHED MAINTENANCE

FACILITY USAGE COSTS DISPOSAL COSTS

LABOUR, MATERIAL & OVERHEAD

ENGINEERING DOCUMENTATION

SYSTEM/EQUIPMENT MODIFICATIONS

REPLACE/ RENEW TRANSPORTATION

REPLACEMENT & RENEWAL

ENERGY & FACILITY USAGE COSTS

TECHNICAL DATA MANAGEMENT

ONGOING TRAINING FOR MAINT & OPS

OPERATIONS COSTS

SUPPORT & SUPPLY COSTS

PERMITS & LEGAL COSTS - DISPOSAL

GREEN & CLEAN COSTS

WRITE OFF/ ASSET RECOVERY

REMEDIATION

WRECKING/ DISPOSAL


Step 4: Identify data required

• Cost factors for items in Step 3• Present energy price ($/kWh)• Expected equipment life (n Years)• Interest rate % (i)• Inflation rate % (f)


Step 5: Estimate costs• Valve repair - $ 4000/yr• Pump repair - $2500 every 2nd yr • Routine maintenance - $500/yr • Energy cost – 0.08 $/kWh• Motor efficiency – 90%• Pump efficiencies –75.1% • Pump power consumption - 23.1 kW• No. of years – 8• Inflation rate – 4% • Interest rate – 8 %,


Step 6: Select cost model

• Need to know:– When costs are incurred– What the costs are– Are they single or recurring?– Is the model in ‘nominal’ (adjusted for inflation)’ or

‘real’ (Present Value) $?– What costs are inflated and what are the inflation

rates?


Step 7: Develop cost profile (nominal – inflated $)


Example in ‘real $’


Step 8: Identify high costs

66% of the total costs over the 8 year period are for energy consumption


Comparison graph

0100002000030000400005000060000700008000090000

100000

Energy

Cos

t

Valve r

epair

Pump r

epair

Mainten

ance

cost

Initia

l inve

stmen

t Ins

tallat

ion

Operat

ing co

st

Downti

me cos

t

Enviro

nmen

tal co

st

Dispos

al co

st

PV $

0102030405060708090100

% o

f tot

al P

V co

st


Step 9: Sensitivity analysis

• Test model to determine sensitivity to energy costs (kWh/t)

• Other options include inflation and interest rates


Step 9: Identify problems for resolution

• Energy costs and the annual valve repair cost are high, are there alternatives?

• Consider the situation shown below


Investigation

1. What were the original design specifications and how do they compare with current operational requirements?

2. What is the maintenance history?3. What are the desired operating parameters for the system?4. Determine how the system is currently operating5. Investigate why the CV fails6. Determine the effect of the failure


Examine pump & system curves

Ref:[1]

Desired flowrate 80 m3/hr

System Curve with valve 15% open to get 80 m3/hr


Identify issues

• To achieve 80 m3/hr the valve is at 15% open• Results in high differential pressure across the valve.• What do we conclude from this?

– Valve is throttled– Increases energy consumption– High DP causes cavitation through the valve.


Options• A. Purchase a new

CV that will handle the high ΔP

• B. Trim the pump impeller to 375 mm

• C. Install a VFD and remove the control valve

• D. Leave system as is


Estimate costs required for options A, B, C (1 of 2)

1500 (Yr 0)Installation of VFD

500 (All yrs)

Maintain VFD

4000 (All yrs)

Valve repair

20000 (Yr0)VFD

2250 (Yr 0)Modify impeller

5000 (Yr 0)New Valve

Repair CV (D)

VFD(C)

Trim Impeller (B)

Change CV (A)

Cost $


Estimate costs required for options A, B, C (2 of 2)

80 m3/hr80 m3/hr80 m3/hr80 m3/hrFlow

23.1 kW11.6 kW14.0 kW23.1 kWPower consumed

$11088$5568$6720$11088Energy cost/yr

75.1%77%72.7%75.1%Pump efficiency

71.7 m34.5 m42.0 m71.7 mPump Head

430 mm430 mm375 mm430 mmImpeller diameter

Repair CV

(D)

VFD

(C)

Trim Impeller (B)

Change CV (A)


Results of analysis

$134704$84044$70010$107704Total PV Cost

66%53%77%82%Energy as % Total Cost

$88704$44544$53760$88704Total PV Energy cost

$0$21500$2250$5000Initial investment cost

$113,930$74,313$59,481$91,827Present LCC value

Repair CV (D)

VFD(C)

Trim Impeller (B)

Change CV (A)

Cost $


Step 11: Evaluate alternatives

• Lowest Present value cost is Option B - trim the impeller

• This reduces the pump head to 42 m at 80 m3/hr, reducing the ΔP across the control valve to 10m (to match the valve design).

• This results in significantly lower energy cost.

• Option C – results in lowest energy costs.

• If the impeller is trimmed, difficult to respond quickly to calls for production increase. Limited flexibility.


Step 12: What option would you recommend?

$134704$84044$70010$107704Total PV Cost

66%53%77%82%Energy as % Total Cost

$88704$44544$53760$88704Total PV Energy cost

$0$21500$2250$5000Initial investment cost

$113,930$74,313$59,481$91,827Present LCC value

Repair CV (D)

VFD(C)

Trim Impeller (B)

Change CV (A)

Cost $


Reflections

• Proper pumping system design is the single most important element in minimizing the LCC [1]

• Consider the effect of maintenance policies on the cost and frequency of repairs & replacements.

• Consider the effect of decisions on the efficiency of the pump and resulting energy consumption.


Operating ‘duty’ pointPump duty point for 438mm impeller: 120 l/s at 58 m head

System Curve


Best efficiency pointSystem Curve with valve 15% open to get 80 m3/hr

Best efficiency point for pump

Throttled valve, pump operating at less than BEP efficiency


Losses resulting in efficiency reduction

SHAFT CENTRELINE

IMPELLER DISCHARGE

IMPELLER SUCTION

LEAKAGE FLOWTHROUGH THE WEAR RING

SHROUD-CASINGSPACE

SUCTIONRECIRCULATION

DISCHARGERECIRCULATION

Effect of reduced flow on the flow field of an end-suction pump(Makay 1980).


Pump energy consumption• The energy required to drive the motors on centrifugal

pumps can account for 50-85% of the lifecycle cost. • A 2001 study by the EU concluded that 14% of all

industrial and commercial electricity in the EU was consumed operating pumps.

LCC example 2

Pump example – from Reference [5]


Identify problem

• An ANSI pump is operating without a spare• At pump failure, downtime costs are incurred at US$

4000/hr.• Find an effective LCC solution

• Assumptions: – Plant has 10 year life.– 100 HP ANSI pump, 1750 rpm, 250 psi, 70%

efficiency, fluid SG 1


Consider alternatives (from [5])

• 1. Do nothing. Continue to operate solo ANSI pump.

• 2. Add a 2nd ANSI pump in parallel at purchase cost of $8k, installation of $2.5k and $3k for valves.

• 3. Remove solo ANSI pump and replace with API pump at purchase cost of $18k, installation of $3.5k plus 4 hours production loss.


Identify cost categories

• Acquisition costs• Sustaining costs – see next slide for breakdown• Disposal costs


Identify cost categoriesSUSTAINING COST TREE

SCHED & UNSCHED MAINTENANCE

FACILITY USAGE COSTS DISPOSAL COSTS

LABOUR, MATERIAL & OVERHEAD

ENGINEERING DOCUMENTATION

SYSTEM/EQUIPMENT MODIFICATIONS

REPLACE/ RENEW TRANSPORTATION

REPLACEMENT & RENEWAL

ENERGY & FACILITY USAGE COSTS

TECHNICAL DATA MANAGEMENT

ONGOING TRAINING FOR MAINT & OPS

OPERATIONS COSTS

SUPPORT & SUPPLY COSTS

PERMITS & LEGAL COSTS - DISPOSAL

GREEN & CLEAN COSTS

WRITE OFF/ ASSET RECOVERY

REMEDIATION

WRECKING/ DISPOSAL

1

2

3

All (1,2,3)


Steps …by 12 step plan

• Step 4: Identify data required – see previous slide• Step 5: Collect cost data• Step 6: Select cost model method: Spreadsheet.• Step 7: Develop model – see next slide


For Option 1: Do nothing (ANSI) (from [5])


For Option 1: Do nothing (ANSI)

02000400060008000

1000012000140001600018000

Electric

ity Seal

Pump b

earin

gsCoup

lings

Housing

Impell

erMoto

rsSha

ft

Mainten

ance PM vi

sits

Vibrati

on de

pt

Operat

ions P

M visit

s

Training co

sts

Cost

/yr

0%10%20%30%40%50%60%70%80%90%100%

% o

f tot

al

05000

10000150002000025000300003500040000

Lost

Gross M

argin

Electric

al pow

er cos

ts

Cost for

Lab,

MatPart

cost

Logis

tics c

ost

Cost

/yr

0%10%20%30%40%50%60%70%80%90%100%

% o

f tot

al


Comparison of Option 1 and 2

02000400060008000

1000012000140001600018000

Lost

Gross M

argin

Electric

al pow

er cos

ts

Cost for

Lab,

MatPart

cost

Logis

tics c

ost

Cost

/yr

0%10%20%30%40%50%60%70%80%90%100%

% o

f tot

al

05000

10000150002000025000300003500040000

Lost

Gross M

argin

Electric

al pow

er cos

ts

Cost for

Lab,

MatPart

cost

Logis

tics c

ost

Cost

/yr

0%10%20%30%40%50%60%70%80%90%100%

% o

f tot

al

Total Sustaining cost= $ 54,827/yr

Total Sustaining cost= $ 21,493/yr


NPV Option comparison (adapted from [5])

Assuming interest rate of 12% and 10 year life


Breakeven chart by option (from [5])

0

50000

100000

150000

200000

250000

300000

350000

0 1 2 3 4 5 6 7 8 9 10

Years

NPV

Option 1 Option 2 Option 3


Sensitivity analysis

• What are some of the considerations for sensitivity analysis?– Failure rates and reliability– Electrical power and assumptions on pump

efficiency (If an 80% efficient pump were selected the power cost would reduce from $16500/yr to $14438)


Conclusion

• Selection of parallel, redundant strategy with 2nd

ANSI pump (Option 2) is preferred.– Avoids process failure– Increases system reliability

• Aim to purchase equipment with high electrical power efficiency

• Aim to purchase a pump that is correctly sized for the system to achieve optimal hydraulic efficiency

Useful Calculations

Notes developed by Dr. M.Hodkiewicz and Dr.J.Sikorska




• Present value:

• Future value:

• Repetitiveexpenditure:

( )1= = ⋅

+n

nFVPV FV r

i

( )1= + =nn

PVFV PV ir

11

=+

ri

111

+⎡ ⎤−= ⎢ ⎥−⎣ ⎦

nrPV Ar

A is repetitive expenditure

i=interest raten=number of years (≥0)


Real rate of interest


• Real rate of interest:

11

=+

ri

i=interest ratep = inflation rate

t = (i – p)/(1+p)


Infinite expenditureConsider the situation where the same expenditure, A, is made every year for an infinite (or very long) period of time:

1

1Let 11

1

As n ,1

+

=+

⎡ ⎤−= ⎢ ⎥−⎣ ⎦

→∞ →−

n

rirPV Ar

APVr

n starts from 0



• Annuity factor

• Capital recovery factor:

• Equivalent Annual Cost:

ANn = (1-rn)/i

( )(1 )

1 1

n

ni iCRF

i+=

+ −

= ×EAC CRF PV

i = Interest rater = 1/(1+i) = discount factorn = number of yearsAN = 1 /CRF


Comparing life costs

To compare different options:

1. Bring all future costs to their present value

2. Compare all cycles over the same period of time

3. Consider all relevant life-cycle costs (e.g. What are the individual elements of costs. Do they change each year? If so, how?)


Economic Life Calculations

• We can work in:– Nominal dollars – value of dollars in the year in

which they are spent (or received)– Real dollars – dollars having present day value.

• Assuming inflation is constant, same total discounted cost is obtained provided the interest rate for discounting used is appropriate to the type of dollars we are working in.


Summary

• You should be able to:– Identify components of the LCC equation– Develop a framework for comparative analysis– Feel comfortable to access and use LCC software

tools to perform calculations– Assess and use results of LCC analysis as part of

the decision-making process.– Consider the potential to improve decision making

for repair/replace process equipment using LCC


Applications and benefits of LCC

• Alternative technical solutions (as in the pump example)

• Alternative system or operating profiles• Alternative maintenance and logistics support

concepts• Alternative designs and system configurations


Benefits of LCC

• Principles can be applied to a variety of AM problems • Provides more robust solutions than those based

only on capital cost.• Focuses attention on the consequences of the initial

design/acquisition/repair decision• Identifies high cost items• Focuses on long-range planning


Current trends

• Complexity of systems is increasing• Current systems may not meet user needs• New technologies• Duty cycles are being extended• Pressure to reduce development times• Reduced availability of resources• Greater emphasis on efficiency


Take-away message

• Think about the relationship between the issue being assessed and the goals of the strategic business unit

• Think economics/costs • Think efficiency• Think life cycle

Backup data from pump life cycle example


Data for Option A


Data for Option B


Data for Option C


Data for Option D

EndThank you

Life Cycle Costing

Documents

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system life cycle

life cycle phases

defined life cycle

life cycle costingdr

span of life cycle hodkiewicz

life cycle cost calculations

life cycle cost tutorial