Life Cycle Cost Model

1
Internal
Session Objectives
By end of the session, the participants will be able:

– To identify the cost drivers.

– To perform the simplified and rigorous LCC analysis.
– To perform life cycle analysis and recommend option based on
lowest total cost of ownership.

2
Content
Cost Drivers
Simplified Model
Rigorous Model
Comparison between alternatives

3
Cost Driver

• Definition: A cost driver triggers a change in the cost of an activity. The

concept is most commonly used to assign overhead costs to the
number of produced units. It can also be used in activity-based
costing analysis to determine the causes of overhead, which can be
used to minimize overhead costs.

• Examples of cost drivers are as follows:

– Direct labor hours worked
– Number of customer contacts
– Number of engineering change orders issued
– Number of machine hours used
– Number of product returns from customers

4
Life Cycle Costing – “Mandatory” cost drivers
The following information is considered “mandatory” cost drivers to be
considered when performing an LCC analysis.
– Asset purchase, Installation and documentation costs
– Scheduled maintenance cost and intervals (both PPM and PDM)
– Spare parts cost and their estimated consumption pattern
– Repair costs for credible failures
– Opportunity losses resulting from failures (if any)
– Asset removal and scrap value costs
– Environmental cleaning costs (if any)

5
Comparison and Selection Among
Alternatives

6
The Present Worth Method
One alternatives
– Calculate PW at the MARR.

– If PW (𝒊 = MARR)≥ 𝟎, the requested MARR is met or

exceeded and the alternative is financially viable.

A PW analysis requires a MARR for use as 𝒊 value in all PW relations.

7
The Future Worth Method
One alternatives
– Calculate FW at the MARR.
– If FW (𝒊 = MARR)≥ 𝟎, the requested MARR is met or exceeded
and the alternative is financially viable.

A FW analysis requires a MARR for use as 𝒊value in all FW relations.

8
Example: FW - One Alternative
A piece of new equipment has been proposed by engineers to increase
the productivity of a certain operation. The investment cost is $25,000
and the equipment will have a market value of $5000 at the end of a
study period of 5 years. Increased productivity attributable to the
equipment will amount to $8000 per year after extra operating costs
have been subtracted from the revenue generated by the additional
production. If the company’s MARR is 20% per year, is the proposal a
sound one?
$5000

$8000 $8000 $8000 $8000 $8000

1 2 3 4 5
End of Year
i = 20%/year
$25,000
𝐹𝑊 20% = −$25000(𝐹 Τ𝑃, 20%, 5) + $8,000(𝐹 Τ𝐴, 20%, 5) + $5,000 = $2324.80
Because 𝐹𝑊(20%) ≥ 0, this equipment is economically justified.
9
The Present Worth Method
Two or more alternatives
– Calculate the PW of each alternative at the MARR.
– Select the alternative with the PW value that is numerically the
largest (less negative or more positive), indicating a lower PW of
cost cash flows or larger PW of net cash flows or larger PW of
net cash flows of receipts minus disbursements.

For independent projects

– For one or more independent projects, select all projects with
PW ≥ 0 at the MARR.
– This compares each project with the do-nothing alternative.
– The projects must have positive and negative cash flows to
obtain a PW value that exceeds zero (revenue projects).

10
PW Method: Equal-Life Alternatives
Example: MARR = 10% per year
Electric- Gas- Solar-
Powered Powered Powered

First cost, $ -2500 -3500 -6000

Annual operating cost (AOC), $ -900 -700 -50
Salvage value S, $ 200 350 100
Life, years 5 5 5

Solution

These are service alternatives:

PWE = -2500 – 900(P/A,10%,5) + 200(P/F,10%,5) = $-5788
PWG = -3500 – 700(P/A,10%,5) + 350(P/F,10%,5) = $-5936
PWS = -6000 – 50(P/A,10%,5) + 100(P/F,10%,5) = $-6127

Electric-powered is selected since PW is the highest.

11
PW Method: Unequal-Life Alternatives
Procedure for equal life applicable for mutually exclusive alternatives with one exception.
– The PW of the alternatives must be compared over the same number of years
and end at the same time

Equal service requirements must be met by satisfying either of two approaches:

– Compare the alternatives over a period of time equal the least common multiple
(LCM) of their lives
– Compare the alternatives using a study period of length n years – does not
necessarily take into consideration the useful lives of the alternatives – planning
horizon approach
– In either case, the PW of each alternative is calculated at the MARR, and the
selection guideline is the same as that for equal-life alternatives.

Assumptions:
– The service provided by the alternatives will be needed for the LCM of years or
more.
– The selected alternative will be repeated over each life cycle of the LCM in
exactly the same manner.
– The cash flow estimates will be the same in every life cycle.

12
PW Method: Unequal-Life Alternatives
Example: MARR = 15% per year

Location A Location B
First cost, $ -15,000 -18,000
Annual lease cost, $/year -3,500 -3,100
Deposit return, $ 1,000 2,000
Lease term, years 6 9

13
 Compound Interest Table
15.00% 15.00%
Single Payment Uniform Series Payment Arithmatic Gradients
n F/P P/F A/F A/P F/A P/A A/G P/G
1 1.1500 0.8696 1.0000 1.1500 1.0000 0.8696 0.0000 0.0000
2 1.3225 0.7561 0.4651 0.6151 2.1500 1.6257 0.4651 0.7561
3 1.5209 0.6575 0.2880 0.4380 3.4725 2.2832 0.9071 2.0712
4 1.7490 0.5718 0.2003 0.3503 4.9934 2.8550 1.3263 3.7864
5 2.0114 0.4972 0.1483 0.2983 6.7424 3.3522 1.7228 5.7751
6 2.3131 0.4323 0.1142 0.2642 8.7537 3.7845 2.0972 7.9368
7 2.6600 0.3759 0.0904 0.2404 11.0668 4.1604 2.4498 10.1924
8 3.0590 0.3269 0.0729 0.2229 13.7268 4.4873 2.7813 12.4807
9 3.5179 0.2843 0.0596 0.2096 16.7858 4.7716 3.0922 14.7548
10 4.0456 0.2472 0.0493 0.1993 20.3037 5.0188 3.3832 16.9795
11 4.6524 0.2149 0.0411 0.1911 24.3493 5.2337 3.6549 19.1289
12 5.3503 0.1869 0.0345 0.1845 29.0017 5.4206 3.9082 21.1849
13 6.1528 0.1625 0.0291 0.1791 34.3519 5.5831 4.1438 23.1352
14 7.0757 0.1413 0.0247 0.1747 40.5047 5.7245 4.3624 24.9725
15 8.1371 0.1229 0.0210 0.1710 47.5804 5.8474 4.5650 26.6930
16 9.3576 0.1069 0.0179 0.1679 55.7175 5.9542 4.7522 28.2960
17 10.7613 0.0929 0.0154 0.1654 65.0751 6.0472 4.9251 29.7828
18 12.3755 0.0808 0.0132 0.1632 75.8364 6.1280 5.0843 31.1565

14
PW Method: Unequal-Life Alternatives

Location A

Solution

LCM = 18 years

PWA = -15,000 – 15,000(P/F,15%,6) + 1000(P/F,15%,6) – 15,000(P/F,15%,12)

+ 1000(P/F,15%,12) + 1000(P/F,15%,18) – 3500(P/A,15%,18) = $-45,036

15
PW Method: Unequal-Life Alternatives

Location B

Solution

LCM = 18 years

PW B = -18,000 – 18,000(P/F,15%,9) + 2000(P/F,15%,9) + 2000(P/F,15%,18)

– 3100(P/A,15%,18) = $-41,384

16
PW Method: Unequal-Life Alternatives
Example: MARR = 15% per year

Solution

LCM = 18 years

PWA = -15,000 – 15,000(P/F,15%,6) + 1000(P/F,15%,6) – 15,000(P/F,15%,12)

+ 1000(P/F,15%,12) + 1000(P/F,15%,18) – 3500(P/A,15%,18) = $-45,036

PW B = -18,000 – 18,000(P/F,15%,9) + 2000(P/F,15%,9) + 2000(P/F,15%,18)

– 3100(P/A,15%,18) = $-41,384

Location B is selected since it costs more in PW terms.

If study period is 5 years no cycle repeats are necessary and location A is

preferred

17
The Annual Worth Method

• AW = PW(A/P,i,n) = FW(A/F,i,n)

• AW value has to be calculated for only one life cycle. Therefore it is not
necessary to use LCM of lives, as it for PW and FW analysis

• When alternatives being compared have different lives, assumptions to

be used:
– The services provided are needed for at least LCM of the lives of
alternatives
– The selected alternative will be repeated for succeeding life cycles in
exactly the same manner as for the first life cycle
– All cash flows will have the same estimated values in every life cycle.

18
 The Annual Worth Method

PW was performed over 18 years, the LCM of

6 years.

First cost = $15,000

Annual costs = $3500
Deposit return = $1000
i = 15%
PW = $-45,036

Solution:
AW = -15,000(A/P,15%,6)+1000(A/F,15%,6)-3500
= $-7349
The AW value for each cycle is the same.
Using PW value:
AW= - 45,036(A/P,15%,18) = $-7349

19
Simplified LCC Estimates

20
Simplified LCC Estimates
Electronic Governor Example
– Scenario:
 Consider installing Electronic Governor System on a
mechanical drive Steam Turbine coupled to a process gas
compressor.
 Plant is expected to operate for another 30 more years
– Options Available:
• Option 1: Do nothing i.e. keeping the hydromechanical
governor.
• Option 2: Purchase new non redundant Electronic Governor
• Option 3: Install new fault resistant (redundant) Electronic
Governor

21
Simplified LCC Cost Estimating
Option 1: Do nothing
– Facts Given:
 28 hydromechanical governor failed 33 times in 7 yrs.
 Repair Time 18 Hrs (MTTR)

Costs $
Repair Costs 12,370
Production Loss 72,820
Profit Loss 5,120

Restarting, Overtime & Associated Costs 4,960

Environmental Fines 20,000

Total 115,270

22
Simplified LCC Cost Estimating

Total time available Total downtime of the

Option 1: Do nothing for 28 governors in governors in 7 years
7 years (33 failures with 18
hours repair per failure

MTBF = (28 X 7 X 8760) - (33 X 18)

33
= 52,011 hrs.. or 5.94 yrs.

Therefore the Annual Cost = $115,270 / 5.94

Or = $19,406 / year

23
Simplified LCC Cost Estimating

Option 2: Purchase new non redundant Electronic governor

Facts Given:
MTBF= 80,270 hours = 9.16 years
Acquisition & Conversion =$ 49,700
Costs $
Troubleshooting & Replacement Costs 3,700
Production Loss 72,820
Profit Loss 5,120

Restarting, Overtime & Associated Costs 4,960

Environmental Fines 20,000

Total 106,600
Therefore the Annual Cost = $106,600 / 9.16 Yrs
Or = $11,638 / year
24
Simplified LCC Cost Estimating

Option 3: Purchase new fully redundant Electronic governor

Facts Given :
MTBF = 120,362 hours
= 13.74 yrs
Acquisition & Conversion =$ 71,870
Costs $
Troubleshooting & Replacement Costs 3,700
Production Loss 72,820
Profit Loss 5,120

Restarting, Overtime & Associated Costs 4,960

Environmental Fines 20,000

Total 106,600

Therefore the Annual Cost = $106,600 / 13.74 Yrs Or = $ 7,758 / year

25
Simplified LCC Cost Estimating

LCC = AC + IC + present value (OC + MC + LP + DC)

n
Present value is cost multiplied by [(1+i) -1]
the cumulative present worth factor = [ i(1+i) n ]

where i = real annual interest rates in %

n = number of years

Given annual interest rate of 6% and projecting a 30 year

plant life 30
[(1+0.06) -1 ]
Present worth factor = 30
[ 0.06(1+0.06) ]

= 13.7652
Or use compound interest table
26
 Simplified LCC Cost Estimating

Therefore :

Option 1 Total LCC = AC + IC + present value (OC + MC + LP + DC)

= 0 + 0 + 13.7652 X ($19,406)
= $267,127

Option 2 Total LCC = AC + IC + present value (OC + MC + LP + DC)

= 49,700 + 13.7652 X ($11,638 )
= $209,899

Option 3 Total LCC = AC + IC + present value (OC + MC + LP + DC)

= 71,870 + 13.7652 X ($7,758)
= $178,660
Therefore option 3 is favored due to the lowest LCC, i.e. install redundant
electronic governor

Note: AC- Acquisition Cost; IC- Installation Cost; OC-Operation Cost, MC- Maintenance Cost; LP-Loss Production; DC –Decommissioning cost

27
Rigorous LCC Estimates

28
Rigorous LCC Method

(cont.)

29
Example: Rigorous LCC Method
A pump is operating without an on-line spare. At pump failure, the
process shuts down and financial losses are incurred as each hour of
downtime results in a gross margin loss of $4,000/hour of outage. Find
an effective LCC alternative as the plant has an estimated 10 years of
remaining life and is expected to be sold out during this interval.

30
Rigorous LCC Method
Step 1: Define the problem.
➢ Pump operating without on-line spare
➢ If pump fails, process shuts down, loss of $4,000 / hour
➢ Find effective LCC if plant has an expected life of 10 years.

31
 Rigorous LCC Method

Step 2
Consider the available
alternatives

Option 1: Do nothing
Continue using ANSI Option 3: Remove the
pump with 100 existing equipment and
horsepower, 1750 rpm, replace with a heavy duty
250 psi, 500 gpm, 70% alternative
hydraulic efficiency.
Replace ANSI pump with API
pump that cost $18,000 plus
Option 2: Add a new $3,500 for installation and
redundant standby will incur a four hour loss of
equipment production during
Can start immediately installation.
without loss of production,
capital cost is $8000 plus
$3000 for check/isolation
valves, plus $2,500 for
installation

32
Rigorous LCC Method
Step 3: Prepare cost breakdown structure or tree.
– Cost components for solo ANSI pump
Sustaining
Acquisition Cost Tree
Cost

Recurring Investment Sched. & Unsched.

R & D Cost Non Recurring Costs Facility Usage Cost Disposal Cost
Cost MNT Cost

Labor, Material & Energy & Facility Permits & Legal

Program Management Spare Parts & Logistics Upgrade Parts
Overhead Usage Cost for Disposal

R & D and Advance R Manufacturing, Ops & Replacement & Support & Supply Wrecking / Disposal
Support Eng. Upgrades
&D MNT Renewal Costs Maintenance Cost Cost

Facilities & System Integration Of Replacement &

Engineering Design Operations Cost Remediation Cost
Construction Improvement Renewal Trpt. Cost

Initial Utility Improvement System / Modification Ongoing Training for Write - Off Assets
Equipment Dev. & Test
Training Cost Cost Ops & MNT Recovery Cost

Engineering Technical Engineering Document Technical Data

Green & Clean Cost Green & Clean Cost
Data Data Cost Management Cost

33
Rigorous LCC Method
Step 3: Prepare cost breakdown structure or tree.
– Cost components for parallel/redundant ANSI pump

Sustaining
Acquisition Cost Tree
Cost

Recurring Investment Sched. & Unsched.

R & D Cost Non Recurring Costs Facility Usage Cost Disposal Cost
Cost MNT Cost

Labor, Material & Energy & Facility Permits & Legal

Program Management Spare Parts & Logistics Upgrade Parts
Overhead Usage Cost for Disposal

R & D and Advance R Manufacturing, Ops & Replacement & Support & Supply Wrecking / Disposal
Support Eng. Upgrades
&D MNT Renewal Costs Maintenance Cost Cost

Facilities & System Integration Of Replacement &

Engineering Design Operations Cost Remediation Cost
Construction Improvement Renewal Trpt. Cost

Initial Utility Improvement System / Modification Ongoing Training for Write - Off Assets
Equipment Dev. & Test
Training Cost Cost Ops & MNT Recovery Cost

Engineering Technical Engineering Document Technical Data

Green & Clean Cost Green & Clean Cost
Data Data Cost Management Cost

34
Rigorous LCC Method
Step 3: Prepare cost breakdown structure or tree.
– Cost components for solo API pump
Sustaining
Acquisition Cost Tree
Cost

Recurring Investment Sched. & Unsched.

R & D Cost Non Recurring Costs Facility Usage Cost Disposal Cost
Cost MNT Cost

Labor, Material & Energy & Facility Permits & Legal

Program Management Spare Parts & Logistics Upgrade Parts
Overhead Usage Cost for Disposal

R & D and Advance R Manufacturing, Ops & Replacement & Support & Supply Wrecking / Disposal
Support Eng. Upgrades
&D MNT Renewal Costs Maintenance Cost Cost

Facilities & System Integration Of Replacement &

Engineering Design Operations Cost Remediation Cost
Construction Improvement Renewal Trpt. Cost

Initial Utility Improvement System / Modification Ongoing Training for Write - Off Assets
Equipment Dev. & Test
Training Cost Cost Ops & MNT Recovery Cost

Engineering Technical Engineering Document Technical Data

Green & Clean Cost Green & Clean Cost
Data Data Cost Management Cost

35
Rigorous LCC Method
Step 4: Choose the analytical cost model.
– The model used for the analysis will be based on
spreadsheet template. The spreadsheet merges cost details
and failure details to prepare the NPV calculations. Failure
costs are prorated into each year because the specific time
for failure, because of chance of events, is not known.

36
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Alternative 1 - Do Nothing Case
• Capital Costs are zero
• Loss gross margin of $4,000/hour when down for repairs
• Power Cost
– Annual cost of running pump $165/year/horsepower.
– Plant incurs 1.6 power outages/year for 0.5 hours.
– Annual power costs = (165/hp-yr) X (100)hp =
$16,500.

37
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Pump Seal Cost
• Pump seals MTBF = 3 yrs.
• Seal failure downtime (Lost Production)= 8 hrs
• Maintenance labor, expense & material costs = $100/hr
• Seal replacement cost = $1,500/seal
• bearing replacements = $300/incident
• Expediting costs seal & bearing transportation = $150/incident

Annual seal costs = (1/3 yrs/failure) X [$(1500+300+150) + ($100/hr)

X 8 hrs + ($4,000/hr X 8 hrs.)]
= $11,583

38
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
Pump Shaft Cost
– Pump shaft MTBF = 18 yrs
– Shaft failure downtime (Lost Production)= 10 hrs
– Maintenance labour, expense & material costs = $100/hr
– Shaft replacement cost = $2,500/seal
– Seal & bearing replacements = $1,800/incident
– Expediting costs shaft, seal & bearing transportation = $450/incident

– Annual shaft costs

= (1/18 yrs/failure) X [$(2500+1800+450) + ($100/hr) X 10 hrs +
($4,000/hr X 10 hrs.)]
= $2,542

39
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
Pump Impeller Cost
– Pump impellers MTBF = 12 yrs
– Impeller failure downtime (Lost Production)= 8 hrs
– Maintenance labour, expense & material costs = $100/hr
– Impeller replacement cost = $3,000/seal
– seal & bearing replacements = $1,800/incident
– Expediting costs impeller, seal & bearing transportation = $750/incident

Annual impeller costs = (1/12 yrs/failure) X [$(3000+1800+750) +

($100/hr) X 8 hrs + ($4,000/hr X 8 hrs.)]
= $3,171

40
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.

Pump Housing Cost

– Pump housing MTBF = 18 yrs
– Housing failure downtime (Lost Production)= 14 hrs
– Maintenance labour, expense & material costs = $100/hr
– Housing replacement cost = $3,000/seal
– Seal & bearing replacements = $1,800/incident
– Expediting costs housing, seal & bearing transportation = 1,150 / incident

Annual housing costs = (1/18 yrs/failure) X [$(3000+1800+1150) +

($100/hr) X 14 hrs + ($4,000/hr X 14 hrs.)]
= $3,519

41
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Pump Bearing
• Pump bearing sets MTBF = 4 yrs
• Bearing failure downtime (Lost Production)= 8 hrs
• Maintenance labour, expense & material costs = $100/hr
• Bearing replacement cost = $300/seal
• Seal & bearing replacements = $1,500/incident
• Expediting costs bearing, seal & bearing transportation =
$300/incident

Annual bearing costs = (1/4 yrs/failure) X [$(300+1500+300) + ($100/hr) X 8 hrs +

($4,000/hr X 8 hrs.) = $8,688

42
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
Motor Cost
– Motors sets MTBF = 12 yrs
– Motors failure downtime (Lost Production)= 8 hrs
– Maintenance labour, expense & material costs = $100/hr
– Motor replacement cost = $3000/seal
– Expediting costs motor transportation = $300/incident

Annual motor costs = (1/12 yrs/failure) X [$(3000+500) +

($100/hr)] X 8 hrs + ($4,000/hr X 8 hrs.)
= $3,025

43
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
Coupling Cost
– Coupling sets MTBF = 8 yrs
– Coupling failure downtime (Lost Production)= 8 hrs
– Maintenance labour, expense & material costs = $100/hr
– Coupling replacement cost = $400/seal
– Expediting costs motor transportation = $300/incident

Annual coupling costs = (1/8 yrs/failure) X [$(400+300) +

($100/hr)] X 8 hrs + ($4,000/hr X 8 hrs.)
= $4,188

44
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– PM Costs
• Maintenance personnel visit for PM, lube oil
addition/changeout, etc.
– No of visit = 1/month
– Maintenance costs for labour, materials and expense = $50/hr with
1 hr per visit
– Annual maintenance PM costs =($12 visits X 1hr/visit) x $50/hr =
$600
• Operation Visit for PM Inspection
– No of visit = 1/week
– Operations routine PM inspection and vib. logging = $35/hr with
0.2 hrs per visit
– Annual operations PM costs = 52 visits X 0.2 hrs/visit) X $35/hr =
$364

45
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Reliability Cost
• Reliability group costs
• No of visit = 1/week
• Surveillance costs for labour and expense
– = $50/hr with 0.2 hr per visit
• Annual maintenance PM costs
– =(52 visits X 0.2hr/visit) x $50/hr = $520

46
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.

Training Cost
– Training duration = 0.5 hrs
– No of trainees = 3 from maintenance, 3 for operations
– Cost of training = $50/hr for maintenance, $35/hr/person for Operations
– Annual training costs = 0.5hr X (3 people X $50 + 3 people X $35) = $128

47
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Alternative 1 - Do Nothing Case

ANSI Pump: Non-annualised Acquisition and disposal cost Solo ANSI Pump
Cost Element / Year 0 1 2 3 4 5 6 7 8 9 10

Acquisition Costs: 0

Program Management 0

Engineering Design 0

Engineering Data 0

Spare parts & Logistics 0

Facilities & Construction 0

Initial Training 0

Technical Data 0

Capital Cost 0

Sustaining Costs: 0

Documentation Costs 0

Disposal Cost 0 0 0 0 0 0 0 0 0 0 3000

Total 3000

48
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models
Alternative 1 - Do Nothing Case

ANSI Pump: Annual Sustaining cost for Single ANSI Pump

Cost Element MTBF, Failures Elapsed Activity Cost For Part Cost Logistics Lost Gross Electrical Total Cost
years per year Repair or Cost Labor, US$ Cost US$ Margin Power US$/yr Item Cost Logistics
or activity Activity US$/hr Expenses per US$ Costs US$ US$ Cost US$
per year hours & Matl incident
US$ Seal cost 1,500 75

Electricity Bearing cost 300 75

- - - - - 16,500 16,500
Seal 3 0.3333 8 100 267 600 50 10,667 11,583 Shaft cost 2,500 300
Shaft 18 0.0556 10 100 56 239 25 2,222 2,542
Impeller Impeller cost 3,000 300
12 0.0833 8 100 67 400 39 2,667 3,171
Housing 18 0.0556 14 100 78 267 64 3,111 3,519 Pump housing 3,000 1,000
Pump Bearings
4 0.2500 8 100 200 450 38 8,000 8,688 Motor cost 3,000 500
Motors 12 0.0833 8 100 67 250 42 2,667 3,025
Coupling cost 400 300
Coupling 8 0.1250 8 100 100 50 38 4,000 4,188
Maintenance PM
visits 12 50 600 600 Lost gross
4,000
margin US$/hr
Operation PM
visits 10.4 35 364 364
Vibration Dept Power
10.4 50 520 520 cost(US$ 165
Training Costs 165/hp-yr)
0.5 255 128 128

Total Motor size(hp) 100

2,445 2,256 293 33,334 16,500 54,827

System failure rate= 0.9861 Good maintenance practice:

System MTBF= 1.01408 Seal replacement = seals + bearings
1 yr reliability, R= 37% Bearing replacement = seals + bearings
1 yr unreliability, UR= 63% Shaft replacement = shaft + seals + bearings
1 yr Availability, A= 0.999 Impeller replacement = impeller + seals + bearings
Housing replacement = housing + seals + bearings

49
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Disposal Cost after 10 years
• Permit & legal costs = $500
• Wrecking/disposal costs = $500
• Remediation costs = $1,000 $3000
• Write-off/recovery costs = $ 0
• Green / clean costs = $1,000
– Sustaining costs = $54,827/yr

50
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
Alternative 2 - Add redundant ANSI pump
– System reliability assumed to be 100%
– Capital costs = $8,000 + Check isolation valves costs = $3,000
– Construction & installation costs = $2,500
– Program management costs = $ 1,000
– Engineering design costs = $1,500 + Documentation costs = $ 1,000
– Plant organization for engineering documentation = $1,000.
– Loss gross margin of $4,000/hour
– Annual power costs = ($165/hp-yr) X (100hp) = $16,500

51
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Alternative 2 - Add redundant ANSI pump

Parallel/Redundant ANSI Pump: Non-annualised Acquisition and Sustaining Costs for Parallel ANSI Pump
Cost Element / Year 0 1 2 3 4 5 6 7 8 9 10

Acquisition Costs: 1000

Program Management 1500

Engineering Design 0

Engineering Data 0

Spare parts & Logistics 0

Facilities & Construction 0

Initial Training 0

Technical Data 0

Capital Equipment 13500

Sustaining Costs: 0

Documentation Costs 1000

Disposal Cost 0 0 0 0 0 0 0 0 0 3000

Total 17000 0 0 0 0 0 0 0 0 0 3000

52
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Alternative 2 - Add redundant ANSI pump
Parallel/Redundant ANSI Pump: Annual Cost For Parallel/Redundant ANSI Pump
Cost Element MTBF, Failures Elapsed Activity Cost For Part Cost Logistics Lost Gross Electrical Total Cost
years per year Repair or Cost Labor, US$ Cost US$ Margin Power US$/yr Item Cost Logistics
or activity Activity US$/hr Expenses per US$ Costs US$ US$ Cost US$
per year hours & Matl incident
US$
Seal cost 1,500 75

Electricity - - - - - 16,500 16,500 Bearing cost 300 75

Seal 3 0.3333 8 100 267 600 50 917
Shaft cost 2,500 300
Shaft 18 0.0556 10 100 56 239 25 319
Impeller Impeller cost 3,000 300
12 0.0833 8 100 67 400 39 504
Housing 18 0.0556 14 100 78 267 64 408 Pump housing 3,000 1,000
Pump Bearings
4 0.2500 8 100 200 450 38 688
Motor cost 3,000 500
Motors 12 0.0833 8 100 67 250 42 358
Coupling Coupling cost 400 300
8 0.1250 8 100 100 50 38 188
Maintenance PM
visits 12 50 600 600 Lost gross
4,000
Operation PM margin US$/hr
visits 10.4 35 364 364

Vibration Dept Power

10.4 50 520 520
cost(US$ 165
Training Costs 165/hp-yr)
0.5 255 128 128

Total 2,445 2,256 293 16,500 21,493 Motor size(hp) 100

Good maintenance practice:

Seal replacement = seals + bearings
Bearing replacement = seals + bearings
Shaft replacement = shaft + seals + bearings Installation activity is done online without
Impeller replacement = impeller + seals + bearings
Housing replacement = housing + seals + bearings loss of production (cont.)
53
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– No production loss by having redundant pumps
– Keep all other data as for the single ANSI pump.
– Depreciate asset over 10 yr period.
• Disposal Costs
– Disposal at end of 10 yr remaining life:
– Permits & legal costs = $500
– Wrecking and disposal costs =$500
– Remediation costs = $1,000
– Estimated green/clean costs =$1,000
• Annual sustaining costs = $21,493

54
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
Alternative 3 - Replace Solo ANSI Pump with Solo API Pump
– Capital costs = $18,000
– Construction & installation costs = $3,500
– Program management costs = $ 1,000
– Engineering design costs = $1,500 + Documentation costs = $
1,000
– Technical data = $500
– Plant organisation for engineering documentation = $1,000.
– New spare parts = $2,900 , Training = $1,500
– Loss gross margin of $4,000/hour
– Annual power costs = ($165/hp-yr) X (100hp) = $16,500

55
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
– Alternative 3 - Replace Solo ANSI Pump with Solo API Pump

API Pump: Non-annualised Acquisition and Sustaining Costs for A New Solo API ANSI Pump
Cost Element / Year 0 1 2 3 4 5 6 7 8 9 10

Acquisition Costs:

Program Management 1000

Engineering Design 1500

Engineering Data 1000

Spare parts & Logistics 2900

Facilities & Construction 3500

Initial Training 1500

Technical Data 500

Capital Equipment 18000

0

Sustaining Costs: 0

Documentation Costs 1000

Disposal Cost 0 0 0 0 0 0 0 0 0 3000

Total 30900 0 0 0 0 0 0 0 0 0 3000

56
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.

API Pump: Annual Sustaining Cost For API Pump

Cost Element MTBF, Failures Elapsed Activity Cost For Part Cost Logistics Lost Gross Electrical Total Cost
years per year Repair or Cost Labor, US$ Cost US$ Margin Power US$/yr Item Cost Logistics
or activity Activity US$/hr Expenses per US$ Costs US$ US$ Cost US$
per year hours & Matl incident
US$ Seal cost 2,500 75

Electricity Bearing cost 400 75

- - - - - 16,500 16,500
Seal 4.5 0.2222 8 100 178 644 33 7,111 7,967 Shaft cost 3,500 300
Shaft 22 0.0455 10 100 45 291 20 1,818 2,175
Impeller Impeller cost 3,500 300
16 0.0625 8 100 50 400 28 2,000 2,478
Housing 22 0.0455 14 100 64 336 52 2,545 2,998 Pump housing 4,500 1,000
Pump Bearings
6 0.1667 8 100 133 483 25 5,333 5,975
Motor cost 3,000 500
Motors 12 0.0833 8 100 67 250 42 2,667 1,715
Coupling Coupling cost 1,200 300
20 0.0500 8 100 40 60 15 1,600 188
Maintenance PM
visits 12 50 600 600 Lost gross
4,000
margin US$/hr
Operation PM
visits 10.4 35 364 364

Vibration Dept Power

10.4 50 520 520
cost(US$ 165
Training Costs 165/hp-yr)
0.5 255 128 128

Total Motor size(hp) 100

2,188 2,465 216 23,075 16,500 44,444

Good maintenance practice:

Seal replacement = seals + bearings
Bearing replacement = seals + bearings
Shaft replacement = shaft + seals + bearings
Impeller replacement = impeller + seals + bearings
Housing replacement = housing + seals + bearings (cont.)
57
Rigorous LCC Method
Step 5: Gather the cost estimates and cost models.
• Keep all other data as for the single ANSI pump.
• Depreciate asset over 10 yr period.
– Disposal Cost
– Disposal at end of 10 yr remaining life:
– permits & legal costs = $500
– Wrecking and disposal costs =$500
– remediation costs = $1,000
– estimated green/clean costs =$1,000
– Annual sustaining costs = $44,444

58
 Rigorous LCC Method
Step 6: Make cost profile for each year end of study.

Alternative #1- Existing Solo ANSI Pump

Summary of Cost Profiles for Each Alternative

Year 0 1 2 3 4 5 6 7 8 9 10
Capital Acquisition 0
Installation/Commisioning/Sustaining Cost 0 54827 54827 54827 54827 54827 54827 54827 54827 54827 57827
Income 0 0 0 0 0 0 0 0 0 0
Depreciation : None 0 0 0 0 0 0 0 0 0 0
Profit Before Taxes 0 -54827 -54827 -54827 -54827 -54827 -54827 -54827 -54827 -54827 -57827
Tax Provision @ 38% Of Profit Before Tax 0 20834.26 20834.26 20834.26 20834.26 20834.26 20834.26 20834.26 20834.26 20834.26 21974.26
Net Income can be profit or loss 0 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -35852.74
Add Back Depreciation 0 0 0 0 0 0 0 0 0 0
Cash Flow (Net Income + Depreciation) 0 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -33992.74 -35852.74
Discount Factors @ 12% 1 0.89 0.80 0.71 0.64 0.57 0.51 0.45 0.40 0.36 0.32
Present Value 0 -30350.66 -27098.80 -24195.36 -21603.00 -19288.39 -17221.78 -15376.59 -13729.10 -12258.12 -11543.62
Net Present Value $ (192,665) using a 12 % discount rate

59
Rigorous LCC Method
Step 6: Make cost profile for each year end of study.

Summary of Cost Profiles for Each Alternative

Alternative #2- Add Parallel/Redundant ANSI Pump

Year 0 1 2 3 4 5 6 7 8 9 10
Capital Acquisition 13500
Installation/Commisioning/Sustaining Cost 3500 21493 21493 21493 21493 21493 21493 21493 21493 21493 24493
Income 0 0 0 0 0 0 0 0 0 0
Depreciation : None 1350 1350 1350 1350 1350 1350 1350 1350 1350 1350
Profit Before Taxes 0 -22843 -22843 -22843 -22843 -22843 -22843 -22843 -22843 -22843 -25843
Tax Provision @ 38% Of Profit Before Tax 0 8680.34 8680.34 8680.34 8680.34 8680.34 8680.34 8680.34 8680.34 8680.34 9820.34
Net Income can be profit or loss 0 -14162.66 -14162.66 -14162.66 -14162.66 -14162.66 -14162.66 -14162.66 -14162.66 -14162.66 -16022.66
Add Back Depreciation 1350 1350 1350 1350 1350 1350 1350 1350 1350 1350
Cash Flow (Net Income + Depreciation) -17000 -12812.66 -12812.66 -12812.66 -12812.66 -12812.66 -12812.66 -12812.66 -12812.66 -12812.66 -14672.66
Discount Factors @ 12% 1 0.89 0.80 0.71 0.64 0.57 0.51 0.45 0.40 0.36 0.32
Present Value -17000 -11439.88 -10214.17 -9119.80 -8142.68 -7270.25 -6491.29 -5795.80 -5174.82 -4620.37 -4724.20

Net Present Value $ (89,993) using a 12 % discount rate

60
 Rigorous LCC Method
Step 6: Make cost profile for each year end of study.

Alternative #3- Add ANSI Pump Summary of Cost Profiles for Each Alternative
Alternative #3- Replace ANSI Pump With Solo API Pump
Year 0 1 2 3 4 5 6 7 8 9 10
Capital Acquisition 18000
Installation/Commisioning/Sustaining Cost 12900 44444 44444 44444 44444 44444 44444 44444 44444 44444 47444
Income 0 0 0 0 0 0 0 0 0 0
Depreciation : None 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800
Profit Before Taxes 0 -46244 -46244 -46244 -46244 -46244 -46244 -46244 -46244 -46244 -49244
Tax Provision @ 38% Of Profit Before Tax 0 17572.72 17572.72 17572.72 17572.72 17572.72 17572.72 17572.72 17572.72 17572.72 18712.72
Net Income can be profit or loss 0 -28671.28 -28671.28 -28671.28 -28671.28 -28671.28 -28671.28 -28671.28 -28671.28 -28671.28 -30531.28
Add Back Depreciation 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800
Cash Flow (Net Income + Depreciation) -30900 -26871.28 -26871.28 -26871.28 -26871.28 -26871.28 -26871.28 -26871.28 -26871.28 -26871.28 -28731.28
Discount Factors @ 12% 1 0.89 0.80 0.71 0.64 0.57 0.51 0.45 0.40 0.36 0.32
Present Value -30900 -23992.21 -21421.62 -19126.45 -17077.18 -15247.49 -13613.83 -12155.20 -10852.86 -9690.05 -9250.70

Net Present Value $ (183,328) using a 12 % discount rate

61
Rigorous LCC Method
Step 7: Make break-even chart for alternatives.

62
Rigorous LCC Method
Step 7: Make break-even chart for alternatives.
– Useful for showing effects and variable costs
– Choose alternatives that payback quickly and payback big returns

• The parallel ANSI pump costs less than solo ANSI pump after 2 yr mark
• Solo API pump costs less than solo ANSI pump after 7 yr mark
• But, parallel ANSI pump continues to have lower cost.

Therefore Parallel ANSI Pump Is Desirable

63
Rigorous LCC Method
Step 8: Prepare Pareto charts of the most important cost
contributors.
– Purpose : Identify vital few cost contributors so that details can be
itemized for sensitivity analysis and ignore trivial issues.
– Pareto Laws says that 10% to 20% of element cost analysis
identifies 60% to 80% of total costs.

64
Rigorous LCC Method
Step 8: Prepare Pareto charts of the most important cost
contributors.
– Pareto chart looks substantially different than solo ANSI pump Pareto chart
– Electrical power becomes most cost significant item

65
Rigorous LCC Method
Step 8: Prepare Pareto charts of the most important cost
contributors.
– Pareto chart looks similar to solo ANSI pump Pareto chart
– But different magnitude

66
Rigorous LCC Method
Step 9: Prepare sensitivity analysis of high costs and their
reasons.
– Sensitivity analysis study the key parameters effecting LCC
– Unreliability is reduced by having a higher grade pump.
– Small incremental reductions made by making repair work faster.
– But unreliability can be avoided if use Alternative 2.

67
 Rigorous LCC Method
Step 9: Prepare sensitivity analysis using spider plot
Nominal Values
Capital Investment ($17,000)
MARR: 12%
Market Value = $0
Useful Life = 10
Annual Expenses = ($21,493)
Calculation (example):

Annual Capital 1. Change in MARR

% Change MARR Market Value Useful Life
Expenses Investment
-50% $ (175,190) $ (138,440) $ (94,477) $ (77,720) $ (129,940) Total Cost= Capital investment + PV (Annual
-45% $ (170,789) $ (138,440) $ (100,076) $ (83,792) $ (130,790) expenses, change in MARR, useful life ) + Market
-40% $ (166,572) $ (138,440) $ (105,366) $ (89,864) $ (131,640) value (P/F, change in MARR, useful life)
-35% $ (162,530) $ (138,440) $ (110,365) $ (95,936) $ (132,490)
-30% $ (158,654) $ (138,440) $ (115,089) $ (102,008) $ (133,340)
-25% $ (154,935) $ (138,440) $ (119,552) $ (108,080) $ (134,190) 2. Change in Annual Expense
-20% $ (151,365) $ (138,440) $ (123,769) $ (114,152) $ (135,040)
-15% $ (147,938) $ (138,440) $ (127,755) $ (120,224) $ (135,890) Total cost= Capital Investment + Change in
-10% $ (144,646) $ (138,440) $ (131,520) $ (126,296) $ (136,740) annual expense (P/A, MARR, useful life) + Market
-5% $ (141,482) $ (138,440) $ (135,078) $ (132,368) $ (137,590) Value (P/F, MARR, Useful Life)
0% $ (138,440) $ (138,440) $ (138,440) $ (138,440) $ (138,440)
5% $ (135,515) $ (138,440) $ (141,617) $ (144,512) $ (139,290)
10% $ (132,700) $ (138,440) $ (144,619) $ (150,584) $ (140,140)
15% $ (129,991) $ (138,440) $ (147,455) $ (156,656) $ (140,990) Show spread sheet template
20% $ (127,382) $ (138,440) $ (150,136) $ (162,728) $ (141,840)
25% $ (124,868) $ (138,440) $ (152,668) $ (168,800) $ (142,690)
30% $ (122,447) $ (138,440) $ (155,061) $ (174,872) $ (143,540)
35% $ (120,112) $ (138,440) $ (157,323) $ (180,944) $ (144,390)
40% $ (117,860) $ (138,440) $ (159,459) $ (187,016) $ (145,240)
45% $ (115,688) $ (138,440) $ (161,478) $ (193,088) $ (146,090)
50% $ (113,591) $ (138,440) $ (163,386) $ (199,160) $ (146,940)

68
Rigorous LCC Method
Sensitivity plot for Redundant ANSI Pump.
➢ Useful life, annual expense and MARR is sensitive to present worth. These
factors should be the focus
➢ Market value and capital investment is not sensitive for the given range (±50%)

Note: Include sensitivity analysis for all options

69
Rigorous LCC Method
Step 9: Prepare sensitivity analysis of high costs and their
reasons.

% Head

70
Rigorous LCC Method
Step 9: Prepare sensitivity analysis of high costs and their
reasons.

Alternatives Versus Effectiveness and LCC = NPV

Parameter Solo ANSI Pump Parallel ANSI Pump Solo API Pump

Availability 0.999 0.9999 0.9993

Reliability 0.37 0.603 0.51

Maintainability 0.8 estimated 0.8 estimated 0.8 estimated

Capability 0.8 estimated 0.8 estimated 0.8 estimated

System Effectiveness 0.2366 0.3904 0.3262

Life Cycle Cost - $ 192,665 - $ 89,993 - $ 183,328

Effectiveness = availability x reliability x maintainability x capability

Capability = efficiency x utilization

71
System MTBF for Parallel system

72
System MTTR for Parallel system

73
Life Cycle vs. Effectiveness

74
Rigorous LCC Method
Step 10: Study of risk of high cost items and occurrence.

Failure Data Converted to Mean Time Between Failures

6
Failure rate (failures / 10 hours) MTBF (years)

Item Low High Low High

Ball Bearing 4 70 1.6 28.5
Couplings 3 40 2.9 38.0
Housing
Impeller 0.7 8 14.3 16.3
Motors 5 900 0.1 22.8
Seals 20 30 3.8 5.7
Shafts 3 20 5.7 38.1

75
Rigorous LCC Method
Step 11: Select preferred course of action using LCC
– Having parallel/redundant ANSI pump is the most attractive alternative
because it avoids process failure and reduces the high cost of unreliability.
– Buy equipment that is energy efficient, yet reliable or correctly sized.
– High hydraulic efficiency makes for substantial reduction in power
consumption which is usually the hidden cost, but clearly identified using
LCC.

76
 77
Internal