Evaluate New Machinery Purchases Using Life Cycle Costing Tools

By Fred K. Geitner, P.Eng.

Capital costs of new projects attract the most attention of both management and vendors. However, it must be recognized that operating and maintenance (O&M) expenses are also as significant. Unfortunately, evaluating the total cost of ownership of a plant asset on a common basis with the capital cost is difficult: so managers tend to give priority to initial cost. In extreme cases, the potential O&M costs might not be considered at all when specification and purchasing decisions are being made and are driven only by initial capital cost and schedule considerations. Consequently, poor reliability and performance of our machinery equipment do not show up until the plant is actually up and running.

Less expensive systems are more likely to have inferior materials, poor workmanship, and weaker designs. Designers frequently do not elect to use redundant equipment because it is “too expensive,” even though averting lost production by providing spare machinery, for example, may pay for the initial cost many times over.

Life Cycle Costing (LCC) is a promising evaluation tool that makes it possible to compare alternatives by quantifying the long-term outlook. In refinery and petrochemical plant operations, for instance, maintenance and downtime costs often exceed the initial equipment cost. LCC identifies and quantifies project costs over the life of the project. It includes future costs of O&M, downtime, production losses, replacement, decommissioning, and incremental operating costs associated with material choice, and initial costs.

Life cycle costing has always been applied in an intuitive way in the form of cost-benefit deliberations. The main value of a formal LCC is that it quantifies life cycle elements in a uniform manner so that their relevance can be established and receive appropriate attention. LCC should be applied as early as possible in the life of a project to achieve the greatest benefit.

Unreliable equipment causes a significant loss in production and waste. However, reliability is frequently a fuzzy concept to project engineers, and they often do not know how to address it. By using LCC, the use of more reliable equipment can be justified using a credible analysis approach that is acceptable to accountants and business planners.

Increasing the useful lifetime of any system costs money and involves trading against other benefits. Figure 1 provides a simple illustration of such trade-offs. It shows that life cycle costs and benefits depend on good design integration and support. Hardware is only one factor in the overall picture.

 

In general, a LCC analysis follows the 12 basic steps listed in Table 1. The relative importance of each of these steps, and hence their level of application, will vary according to the requirements of a particular LCC analysis.

 

The following is a simple example of an LCC tool used in sensitivity analysis (Table 1, Step 10). Frequently, it is not obvious what repairs on process equipment really cost. Consider a population of centrifugal pumps which are important elements in pipeline, refinery, and petrochemical plant operations. Long-term records show that the MTBR of these pumps is 25 months. We want to find the equivalent capital cost of the repairs. The life of a pump is assumed to be 15 years. This calculation discounts annual repair costs back to the date of purchase. Other data from the operation are:
MTTR = 5 d; CG = $7,500; i = 6.5%; CY can be calculated as follows:

The present value of the repair costs, CPV, can be determined by looking up the present value factor as a function of interest rate, years of life, and annual costs. This example employs the PV function in Microsoft Excel.2

CPV = PV (rate, years, CY )

 

CPV = PV(0.065, 15, 3,578) = $33,643

Our sensitivity analysis now has a basis. Look for the benefits that could be derived from attempting to reduce repair costs. Evaluations will compare purchasing a more expensive and hence (hopefully) more reliable pump or by making repairs more efficiently and hence less costly.

Finally, many reliability professionals are talking about Life Cycle Costing today. Frequently, that is where this subject remains – in the talking phase. A few basic and simple administrative procedures can help to familiarize plant personnel with LCC concepts. However, to implement LCC practices, a company policy must be established.

 

References

  1. Bloch, H.P. and Geitner, F.K., Maximizing Machinery Uptime, Elsevier – Gulf Publishing, Amsterdam – Tokyo, 2006.
  2. Microsoft Corp., Excel Ver. 5.0, Help Function PV. Redmond, Wash., 1997.
  3. Bloch, H.P., Improving Machinery Reliability, 3rd ed., Gulf Publishing Co., Houston, TX, 1998.
  4. Galster, D. and Geitner, F.K., Using Life Cycle Costing Tools, CHEMICAL ENGINEERING, pp. 80-86, Feb. 2000.
  5. Pipeline and Gas Technology Magazine, June 2005