Life Cycle Costing

Life Cycle Costing
Dr. M.Hodkiewicz, August 2006

University of Western Australia
Notes adapted from courses developed by Dr. M.Hodkiewicz and Dr.J.Sikorska, University of Western Australia
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
Hodkiewicz, UWA – “AM Life Cycle Costing” 2

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 Barringer

http://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.

IDENTIFY LIFE
CYCLE PHASES
IDENTIFY
FUNCTIONS IN
EACH PHASE
COST THESE
FUNCTIONS
APPLY COSTS BY
LCC Process
FUNCTION TO
YEAR BY YEAR
SCHEDULE
summary
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
ADVANCE DETAIL PRODUCTION/
CONCEPTUAL UTILIZATION &
DEVELOP- DESIGN/ CON-
DESIGN SUPPORT
MENT PROTOTYPE STRUCTION
RESEARCH
PHASE OUT &

DISPOSAL

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

DEVELOP COST
REQUIREMENTS & IDENTIFY DATA PRIORITIES FOR
PROFILE &
PERFORMANCE REQUIREMENTS PROBLEM
SUMMARY
MEASURES RESOLUTION
SPECIFY SYSTEM IDENTIFY HIGH

LIFE CYCLE & ESTIMATE COSTS COST IDENTIFY
IDENTIFY FOR EACH CONTRIBUTORS & ADDITIONAL
ACTIVITIES BY CATEGORY CAUSE-EFFECT ALTERNATIVES
PHASE RELATIONSHIPS
EVALUATE
DEVELOP COST SELECT COST CONDUCT
FEASIBLE
BREAKDOWN MODEL FOR SENSITIVITY
ALTERNATIVES &
STRUCTURE (CBS) ANALYSIS ANALYSIS
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
IDENTIFY
REQUIREMENTS/ DEVELOP COST
IDENTIFY DATA PRIORITIES FOR
FUNCTIONS & PROFILE &
REQUIREMENTS PROBLEM
PERFORMANCE SUMMARY
RESOLUTION
MEASURES
IDENTIFY HIGH
IDENTIFY LC ESTIMATE COSTS COST IDENTIFY
ACTIVITIES BY FOR EACH CONTRIBUTORS & ADDITIONAL
PHASE CATEGORY CAUSE-EFFECT ALTERNATIVES
RELATIONSHIPS
EVALUATE
SELECT COST CONDUCT
IDENTIFY COST FEASIBLE
MODEL FOR SENSITIVITY
CATEGORIES ALTERNATIVES &
ANALYSIS ANALYSIS
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%
BUSINESS NEED
within 3 years.
• Organizational Strategic Plan: To achieve profit

ORGANISATIONAL improvements through expanding capacity so as to
STRATEGIC PLAN meet increased demand, funded through private
finance, which will be repaid through future profits.
ASSET
MANAGEMENT
STRATEGIC PLAN
• 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
PROJECT PLAN development/adoption of optimal operating and
maintenance strategies.

Link between project plan & Business
BUSINESS NEED Need
ORGANISATIONAL
STRATEGIC PLAN
ASSET • AM strategy: To upgrade the core infrastructure to

MANAGEMENT produce x t/hr product with y quality at $ z/t.
STRATEGIC PLAN
• Project Plan: Replace or upgrade the A pumps to

PROJECT PLAN produce w l/s for with a minimum of 95% availability
and 60% efficiency over 5 years.

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])
Engineering
design data CMMS data
Management
planning data
Reliability
data
LIFE CYCLE
Accounting COST DATA
data
Logistic
support data
Customer/
Market data Production
data
Construction
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.
MH4
• Uncertainty over assumptions concerning failure
frequency and failure effects on production.

Slide 35
MH4 Possible inclusion of discussion on Activity based costing

Melinda 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: 1 i=interest rate
r= n=number of years (≥0)
1+ i
• Present value:
FV
PV = = FV ⋅ r n
• Future value:
(1 + i )
n
• Repetitive PV
FV = PV (1 + i ) = n
n
expenditure:
r
⎡1 − r n +1 ⎤ A is repetitive
PV = A ⎢ ⎥ expenditure
⎣ 1 − r ⎦

Comparison of present and future values
FV
PV = = FV ⋅ r n
(1 + i )
n
PV
FV = PV (1 + i ) = n
n

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 $75000

Interest = 15% Maintenance Costs: Year 0: $5000
Year 1: $10000
Year 2: $15000
10000 15000
PV = 75000 + 5000 + + = $100, 038
(1 + .15) (1 + .15)
1 2

Example: Equipment A
$5000
$100 $100 $100 $3000
$100
0 1 2 3
Interest rate = 11%, What is Net Present Value) = ?
NPV = 5000 + 100 + 100/(1+0.1)1 + 100/(1+0.1)2 + 100/(1+0.1)3

– 3000/(1+0.1))3
= $ 3150
FV
PV = = FV ⋅ r n
(1 + i )
n

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 cost
Cm = 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 FACILITY USAGE

DISPOSAL COSTS
MAINTENANCE COSTS
LABOUR, MATERIAL ENERGY & FACILITY PERMITS & LEGAL

& OVERHEAD USAGE COSTS COSTS - DISPOSAL
REPLACEMENT & SUPPORT & SUPPLY WRECKING/

RENEWAL COSTS DISPOSAL
REPLACE/ RENEW
OPERATIONS COSTS REMEDIATION
TRANSPORTATION
SYSTEM/EQUIPMENT ONGOING TRAINING WRITE OFF/ ASSET

MODIFICATIONS FOR MAINT & OPS RECOVERY
ENGINEERING TECHNICAL DATA GREEN & CLEAN

DOCUMENTATION MANAGEMENT COSTS

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

PV $
En
er
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
V a gy C
lve os
t
M P u r ep
ai m
nt p air
e r
In na epa
iti nc ir
al e
in co
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p e al nt
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En ow ing n
vir nti co
on me st
m
en cos
D
isp tal t
os cos
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co
st
Comparison graph
Hodkiewicz, UWA – “AM Life Cycle Costing”

10
20
30
40
50
60
70
80
90
100
% of total PV cost
68
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 operating
5. Investigate why the CV fails
6. Determine the effect of the failure

Examine pump & system curves
System Curve with valve 15%
open to get 80 m3/hr
Desired flowrate 80
m3/hr
Ref:[1]

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)
Cost $ Change CV Trim Impeller VFD Repair CV
(A) (B) (C) (D)
New Valve 5000 (Yr 0)
Modify impeller 2250 (Yr 0)
VFD 20000 (Yr0)
Installation of VFD 1500 (Yr 0)
Maintain VFD 500

(All yrs)
Valve repair 4000
(All yrs)

Estimate costs required for options A, B, C (2 of 2)
Change CV Trim Impeller VFD Repair CV

(A) (B)
(C) (D)
Impeller diameter 430 mm 375 mm 430 mm 430 mm
Pump Head 71.7 m 42.0 m 34.5 m 71.7 m
Pump efficiency 75.1% 72.7% 77% 75.1%
Flow 80 m3/hr 80 m3/hr 80 m3/hr 80 m3/hr
Power consumed 23.1 kW 14.0 kW 11.6 kW 23.1 kW

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

Results of analysis

(A) (B) (C) (D)
Present LCC value $91,827 $59,481 $74,313 $113,930
Initial investment $5000 $2250 $21500 $0

cost
Total PV Energy $88704 $53760 $44544 $88704
cost
Total PV Cost $107704 $70010 $84044 $134704
Energy as % Total 82% 77% 53% 66%

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?
(A) (B) (C) (D)
Present LCC value $91,827 $59,481 $74,313 $113,930
Initial investment $5000 $2250 $21500 $0

cost
Total PV Energy cost $88704 $53760 $44544 $88704
Total PV Cost $107704 $70010 $84044 $134704
Energy as % Total 82% 77% 53% 66%

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’ point
Pump duty point for 438mm impeller: 120 l/s at 58 m head
System Curve

Best efficiency point
Throttled valve, pump operating
at less than BEP efficiency System Curve with valve 15%
open to get 80 m3/hr
Best efficiency point for pump

Losses resulting in efficiency reduction
IMPELLER DISCHARGE
SHROUD-CASING
SPACE
DISCHARGE
RECIRCULATION
LEAKAGE FLOW
THROUGH THE
WEAR RING
IMPELLER Effect of reduced flow on the

SUCTION flow field of an end-suction
pump
(Makay 1980).
SHAFT CENTRELINE
SUCTION
RECIRCULATION

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 categories
SUSTAINING
COST TREE
1
SCHED & UNSCHED FACILITY USAGE
DISPOSAL COSTS
MAINTENANCE COSTS
2
LABOUR, MATERIAL ENERGY & FACILITY PERMITS & LEGAL 3

& OVERHEAD USAGE COSTS COSTS - DISPOSAL
REPLACEMENT & SUPPORT & SUPPLY WRECKING/

RENEWAL COSTS DISPOSAL
All (1,2,3)
REPLACE/ RENEW
OPERATIONS COSTS REMEDIATION
TRANSPORTATION
SYSTEM/EQUIPMENT ONGOING TRAINING WRITE OFF/ ASSET

MODIFICATIONS FOR MAINT & OPS RECOVERY
ENGINEERING TECHNICAL DATA GREEN & CLEAN

DOCUMENTATION MANAGEMENT COSTS

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])

Cost/yr
El
ec
Pu tri
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
m ci
ty
p S
be e
Co ar i al
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en M ll e
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st
s 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of total
Lo Cost/yr
st
G
El ro
ec ss
M
0
5000
10000
15000
20000
25000
30000
35000
40000
tri
ca ar
lp gi
ow n
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fo st
rL s
ab
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Hodkiewicz, UWA – “AM Life Cycle Costing”
at
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rt
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gi st
st
ics
For Option 1: Do nothing (ANSI)
co
st
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
92
100%
% of total
Comparison of Option 1 and 2
40000 100% 18000 100%
35000 90% 16000 90%
30000 80% 14000 80%
70%
% of total
70%
% of total
Cost/yr
12000
Cost/yr
25000 60% 60%
20000 50% 10000
50%
15000 40% 8000 40%
30% 6000 30%
10000 20% 4000
5000 20%
10% 2000 10%
0 0% 0 0%
st
at
n
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s
st
at
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tri
Lo
tri
Lo
ec
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El
El
Total Sustaining Total Sustaining
cost= $ 54,827/yr 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])
350000
300000
250000
200000
NPV
150000
100000
50000
0
0 1 2 3 4 5 6 7 8 9 10
Years
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

• Discount factor: 1 i=interest rate
r= n=number of years (≥0)
1+ i
• Present value:
FV
PV = = FV ⋅ r n
• Future value:
(1 + i )
n
• Repetitive PV
FV = PV (1 + i ) = n
n
expenditure:
r
⎡1 − r n +1 ⎤ A is repetitive
PV = A ⎢ ⎥ expenditure
⎣ 1 − r ⎦

Real rate of interest
• Discount factor: 1
r=
1+ i
• Real rate of interest:
t = (i – p)/(1+p)
i=interest rate
p = inflation rate

Infinite expenditure
Consider the situation where the same expenditure,
A, is made every year for an infinite (or very long)
period of time:
1
Let r =
1+ i
n starts
⎡1 − r n +1 ⎤ from 0
PV = A ⎢ ⎥
⎣ 1− r ⎦
A
As n → ∞, PV →
1− r
• Annuity factor ANn = (1-rn)/i
• Capital recovery factor: i (1 + i ) n

CRF =
(1 + i ) −1
n
• Equivalent Annual Cost:
EAC = CRF × PV
i = Interest rate
r = 1/(1+i) = discount factor
n = number of years
AN = 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

End
Thank you

Life Cycle Costing

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Life Cycle Costing

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Life Cycle Costing

Dr. M.Hodkiewicz, August 2006

Hodkiewicz, UWA – “AM Life Cycle Costing” 2

Hodkiewicz, UWA – “AM Life Cycle Costing” 3

Hodkiewicz, UWA – “AM Life Cycle Costing” 4

• Papers on LCC from Barringer

Hodkiewicz, UWA – “AM Life Cycle Costing” 5

Lifecycle Costing – An Introduction

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

• “Time interval that commences with the

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• Life cycle management philosophies consider

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PHASE OUT &

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DEFINE SYSTEM IDENTIFY

SPECIFY SYSTEM IDENTIFY HIGH

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• What is the context of the analysis?

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• What are the technical (operational, safety,

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• Organizational Strategic Plan: To achieve profit

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ASSET • AM strategy: To upgrade the core infrastructure to

• Project Plan: Replace or upgrade the A pumps to

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• Typical assessment measures include:

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• Select appropriate phases, not all may be relevant for the

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• Most Asset owners have existing cost breakdown

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MH4 Possible inclusion of discussion on Activity based costing

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Truck costs $75000

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

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

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