Thursday 18th Aug, 2022

Life cycle costing – A case study

Life cycle costing helps organisations estimate the costs incurred over the projected lifespan of a project. Eric Lau, a committee member of the Australian Society for Bulk Solids Handling, aims to demystify the process.

Life cycle costing or total cost of ownership includes the whole of life implications of planning, design, construction, operating, maintaining and disposing of an asset. The ‘operate and maintain’ phase is usually the longest part of the life cycle and typically accounts for more than 70 per cent of the total cost of ownership [1, 2].

However, many projects focus on the capital expenditure (CAPEX) and the operational expenditure (OPEX) is overlooked. The total cost of ownership of an asset can be more effectively reduced in the early planning and design stages compared to when it is operating.

Life cycle costing is an important process that should be carried out to estimate the costs incurred over the projected lifespan of the asset. The life cycle costing is used to examine the aggregate costs to design, install, operate, maintain and dispose of an asset in order to provide a more complete comparison for selecting the most appropriate option [3].

If the lowest immediate cost option has high servicing costs or reduced availability which decrease the profits over the long term, it may not be favoured. The level of detail in life cycle costing calculations can make the process tedious, extremely complicated and impractical. The life cycle costing process for a rail mounted bridge reclaimer is presented below.

Methodology

Several standards and guidelines describe the process of life cycle costing. ISO 15686-5 establishes a methodology for life cycle costing of building and constructed assets.

AS/NZS 4536 is an application guide to life cycle costing and was published prior to ISO 15686-5. AS/NZS 4536 took into consideration SAE ARP 4293, ASTM E917 and IEC 60300-3-3. Both AS/NZS 4536 and ISO 15686-5 exclude income which is part of the broader whole life costing. When assets being compared have different potential incomes, these must be assessed as part of the overall evaluation. Life cycle costing is an input to the evaluation and a component of the whole life costing.

Definitions

The following definitions are reproduced from AS/NZS 4536 and ISO 15686-5.

Discount rate: rate reflecting the time value of money that is used to convert cash flows occurring at different times to a common time.

A discount factor, q, is calculated from the real discount rate per annum, d, and the number of years, y, between the base date and the occurrence of the cost.

Nominal cost: the expected price that will be paid when a cost is due to be paid, including estimated changes in price due to forecast changes in efficiency, inflation/deflation, technology and the like. The nominal cost is calculated by multiplying the real cost by the inflation/deflation factor, f.

where a is the expected increase in general prices per annum and y is the number of years between the base date and the occurrence of the cost.

Discounted cost: the resulting value when real cost is discounted by the real discount rate, or when nominal cost is discounted by the nominal discount rate.

Nominal discount rate: the rate to use when converting nominal costs to discounted costs. The rate, Q, includes a component for general price inflation.

Real cost: the cost expressed in values of the base date, including estimated changes in price due to forecast changes in efficiency and technology, excluding general price inflation or deflation.

Real discount rate: the rate to use when converting real costs to discounted costs. The rate does not include a component for general price inflation.

Net Present Value (NPV): sum of the discounted future cash flows.

where Cy is the cost in year y and p is the period of analysis.

Net Present Cost (NPC): sum of the discounted future costs. Where costs only are taken into account, the NPV may be called the Net Present Cost.

Purpose and scope

The purpose of this analysis is to quantify the costs that have been and will be incurred over the lifespan of a bridge reclaimer. It can be used as an input for evaluating the options for replacement of the machine. Tax, depreciation and income have been excluded from the analysis. The energy costs were not included as part of the operational costs.

The following assumptions were used for this case study:

• The costs have been expressed as real costs without inflation/deflation.

• A discount rate of 8 per cent was used.

• An exchange rate of AUD$1 to US$ 0.70 was used.

• Operational and capital costs have been estimated where data is not available.

• Forecasts have been used for future costs.

The bridge reclaimer was acquired in Year 0 for $7.5M. The original design calculation based the fatigue life on 20 years.

Operation

Two machines reclaim and blend secondary crushed ore from the chevron stacked stockpiles by travelling along the stockyard rails as shown in Figure 1. The ore is then conveyed to bins feeding the grinding mill circuit. Due to the limited bin storage capacity and the mill demand, high availability is expected from the reclaimers to avoid production loss. More reclaim capacity was required to maintain the feed bin levels compared to the design calculations.

Maintenance

Maintenance plans aligned with the original equipment manufacturer (OEM) recommendations were created in the Computerised Maintenance Management System (CMMS) for critical mechanical and electrical components of the reclaimers. These plans included preventive and foreseeable corrective work.

Condition monitoring and regular inspection of wear components were necessary due to the ore variability. Structural and mechanical integrity inspections were also scheduled in accordance with the machine risk management plan.

Upgrades

Both reclaimers were upgraded in year 11 to increase the peak capacity from 2000 tonnes per hour to 3200 tonnes per hour. This included modifying volumetric capacity of the buckets and the harrows, optimising the bucket wheel fixed ring openings, increasing the bridge conveyor belt speed from 3.7 to 5.1 metres per second and installing new coolers on the bucket wheel and traverse drive gearboxes. The design fatigue life after the upgrade was extended to Year 24.

Following the upgrade, the reclaimers experienced electrical, mechanical, structural and operability issues which reduced the reliability. Improvements and repairs to fix fabrication and design defects were made to increase the reliability.

Life cycle costing

In developing the life cycle costing for the reclaimer shown in Table 1. The acquisition, operation, maintenance and disposal phases were taken into account. The maintenance costs were spread over operational and capital expenditure. 

The total operational and capital expenditure over the 24 years is AUD$28.8M. When applying the discount factor, the net present cost in Year 0 is $15.9M and is double the acquisition cost of $7.5M. Therefore, when performing an evaluation, the operational and capital expenditure over the life of the asset should be considered. The access to actual data or lack of relevant costs linked to the asset is often an issue. Due to the costs reporting practices, not all operational and capital expenditure were linked to the reclaimer. Some of the expenditures were allocated to other functional locations and cost centres.

A life extension strategy to Year 24 was implemented for the reclaimer in order to defer capital investment in Year 20 for a replacement machine which was estimated at $15M. To reduce breakdowns and the risk of failures, an ongoing inspection and repair plan was required. The asset management and capital plans were updated with the reclaimer’s end of life so that a replacement study and project are initiated prior.

Following the major upgrade in Year 11, the reclaimer experienced production losses and additional operational and capital funds were spent for remediation. Some of the issues could have been identified and addressed in the engineering and construction phases resulting in reduced life cycle costs for the machine.

Life cycle costing is used as an asset management tool by several organisations to realise value from their assets through coordinated activities as defined by ISO 55000.

Several methods detailing life cycle costing have been published in literature. Additional work is required to refine the simple life cycle model presented in this paper. Using the energy costs and the data for the second reclaimer will provide a more complete model. However, there are many challenges to achieving an accurate model such as availability of reliable data, inconsistent practices, sensitivity of the model to the factors used and validation of the life cycle costing method.

References

[1] Y. Asiedu & P. Gu, 1998. Product life cycle cost analysis: State of the art review, International Journal of Production Research, 36:4, 883-908, DOI: 10.1080/002075498193444.

[2] Navarro-Galera, A., Ortúzar-Maturana, R.I. & Muñoz-Leiva, F., 2011. The Application of Life Cycle Costing in Evaluating Military Investments: An Empirical Study at an International Scale. Defence and Peace Economics, 22(5), pp.509–543.

[3] A. Dimache, L. Dimache, E. Zoldi, T. Roche, 2007. Life Cycle Cost Estimation Tool for Decision-Making in the Early Phases of the Design Process, Advances in Life Cycle Engineering for Sustainable Manufacturing Businesses: Proceedings of the 14th CIRP Conference on Life Cycle Engineering, Waseda University, Tokyo, Japan, pp 455-459.

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