Life Cycle Cost Issues

Life cycle costs (LCC) are all costs from project inception to disposal of equipment. LCC applies to both equipment and projects. LCC costs are found by an analytical study of total costs experienced during the life of equipment or projects. A LCC training course is available for teaching engineers the fundamentals. For free software click here for information. 

You can download, at no cost, an Excel file for making life cycle cost calculations.  The spreadsheet will help you obtain the important metric called net present value (NPV).  When you attempt to open the file in Excel, you may get a security warning.  If the security warning appears in Excel, go to Tools/Macros/Security/Security Level and set the level to Low.  Save the file on your disk and then restore your security level to High or Medium.  Some cells on the spreadsheet are locked to prevent inadvertent damage by the user.  Any cell with a “yellow” background can be changed.  The default on the spreadsheet is set for a project life of 20 years, a tax rate of 38%, and a discount rate of 12%.  These default values are typical values and they can be changed to suit your needs.

You must know about the life and death of equipment to be able to price-out the costs.  This is why knowledge of reliability is a practical prerequisite for life cycle cost.  If you’ve got no clue about when things will fail, then you’ll never get costs into the correct time buckets.  In general, engineers who design products and systems have a blind spot and cannot admit their equipment will fail—thus their life cycle cost numbers are frequently incorrect (the same is true of vendors who say their equipment will not fail—but you should purchase their recommended spares with the initial complement of equipment!)

The object of LCC analysis is to choose the most cost-effective approach from a series of alternatives so the least long term cost of ownership is achieved. LCC analysis helps engineers justify equipment and process selection based on total costs rather than the initial purchase price of equipment or projects. LCC provides best results when both art and science are merged together with good judgment (as is true with most engineering tools).  Remember the first alternative for accountants is the “Do Nothing” case and this is the last alternative for engineers—thus LCC is a natural field of combat.  Engineers must make their first alternative a computation of the “Do Nothing” case to form the datum for their improvement alternatives.  Also remember that the single LCC number for the figure of merit is net present value (NPV) and it can be positive or negative—in general, since most engineers are only working with small parts of a projects, their NPV’s will be negative and thus the lesser negative value is the preferred course of action.

The LCC concept is addressed in the British Standards as Terotechnology. The British Standard BS:3811, "Maintenance Management Terms in Terotechnology", BSI, London, 1984 defines terotechnology as: "A combination of management, financial, engineering, building and other practices applied to physical assets in pursuit of economic life-cycle costs."   Other military documents concerning life cycle cost are available for no cost downloads on this site.  Also look at the reliability standards section on this site for LCC documents available for purchase.

LCC helps engineers think like MBAs and act like engineers for making the correct selection of equipment for achieving the lowest long term cost of ownership to generate wealth for stockholders.

LCC costs have two major elements: 1) acquisition costs and 2) sustaining costs. Acquisition and sustaining costs are not mutually exclusive. Frequently the cost of sustaining equipment is 2 to 20 times the acquisition cost. Often 65% of the total LCC is set when equipment is specified (even though only ~10% of the expenditures have been made).

Consider the following examples for LCC used for the paper "Life Cycle Cost and Good Practices" presented at the National Petrochemical and Refiners Association Maintenance Meeting (May 21, 1998) presented by Barringer & Associates, Inc.:

LCC Information

The life cycle cost simulation software produced the following results, and the free software will solve the problems highlighted by cells shown in yellow. The full set of software will solve all the problems in the following table giving details for net present value and effectiveness as a function of reliability and availability:

 

Good Maintenance

Installation/Use Practice

Fix When Broken

Installation/Use Practice

Good

Better

Best

Good

Better

Best

ANSI Pump

Solo NPV

-$2,684,838

-$277,688

-$197,328

-$3,771,088

-$292,286

-$201,700

Solo R*A

~0%

43%

65%

~0%

38%

61%

Dual NPV

-$340,851

-$125,753

-$121,634

-$205,528

-$122,566

-$120,078

Dual R*A

~0%

43%

65%

~0%

38%

61%

ANSI Enhanced Pump

Solo NPV

-$2,267,845

-$246,576

-$185,964

-$1,987,263

-$253,709

-$187,836

Solo R*A

~0%

51%

70%

~0%

48%

68%

Dual NPV

-$310,021

-$126,696

-$124,681

-$251,370

-$123,250

-$121,803

Dual R*A

~0%

52%

70%

~0%

48%

-68%

API Pump

Solo NPV

-$1,487,132

-$211,437

-$177,185

-$1,466,641

-$213,621

-$177,869

Solo R*A

~0%

65%

78%

~0%

63%

77%

Dual NPV

-$258,181

-$135,543

-$133,564

-$225,720

-$133,286

-$134,669

Dual R*A

~0%

65%

78%

~0%

63%

77%

 The best net present value is obtained for the dual ANSI pump using a fixed with broken strategy, however, the dual ANSI enhanced pump is preferred considering the tradeoff value of effectiveness, which is approximately the product of reliability*availability.

For more details, refer to several life cycle cost papers available as a recent technical papers from Barringer & Associates, Inc.   The list of papers show the results of alternatives and how failure details are found by use of Monte Carlo simulation tools, such as RAPTOR, which are available on this site.

A Monte Carlo simulation of the ANSI pump case is available for free download at. The Life Cycle Cost MonteCarlo simulation is a small subset of MonteCarloSimulationS can be downloaded by mouse click--this self expanding compressed file is 905K in size and expands to ~6Meg. Download the compressed file. In Windows Explorer, double click on the self-extracting file (don't do this from Excel!) and it will expand to the 6Meg size which is then usable by Excel.

This freebie demonstration software shows how to use random numbers in a spreadsheet environment to determine the life cycle cost by year. If you find this freebie model is helpful for solving your problems, see details below for purchasing the full set of software. The software will work for Excel 5.0 and above. The life cycle cost file contains is for an ANSI pump and you can select:

·         Better or best grades of installation and use
·         Fix when broken or good maintenance replacement strategies
·         Solo or dual pump operation
·         Wind-down clocks are used for each of 10 elements in a pump model with capabilities for handling failures and suspensions
·         The model will accommodate 100 failures
·         Net present value spreadsheets receive the output from the simulation for making financial calculations

This free software is a limited set of a larger file which contains more options for life cycle analysis.

You can also download some technical papers from this site.  The first group of papers listed below tells how to use RAPTOR software for life cycle cost decisions and the second group of papers shows other methods for finding life cycle costs.

1.      How To Justify Equipment Improvement Using Life Cycle Costs and Reliability Principles

2.      Why You Need Practical Reliability Details To Define Life Cycle Costs For Your Products and Competitors Produces

3.      How To Justify Machinery Improvements Using Reliability Engineering Principles

And

1.      Life Cycle Cost and Good Practices

2.      Life Cycle Cost & Reliability for Process Equipment

3.      Life Cycle Cost Tutorial

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Last revised 06/07/2010