Page 43 - An Introduction To Predictive Maintenance

Financial Implications and Cost Justification 33

2.4.1 Benefits versus Costs

Preventive maintenance is an investment. Like anything in which we invest money
and resources, we expect to receive benefits from preventive maintenance that are
greater than our investment. The following financial overview is intended to provide
enough knowledge to know what method is best and what the financial experts will
need to know to provide assistance.

Making preventive investment trade-offs requires consideration of the time-value of
money. Whether the organization is profit-driven, not-for-profit, private, public, or
government, all resources cost money. The three dimensions of payback analysis are
(1) the money involved in the flow, (2) the period over which the flow occurs, and (3)
the appropriate cost of money expected over that period.

Preventive maintenance analysis is usually either “Yes/No” or choosing one of several
alternatives. With any financial inflation, which is the time we live in, the time-value
of money means that a dollar in your pocket today is worth more than that same dollar
a year from now. Another consideration is that forecasting potential outcomes is much
more accurate in the short term than it is in the long term, which may be several years
away. Decision-making methods include the following:

• Payback
• Percent rate of return (PRR)
• Average return on investment (ROI)
• Internal rate of return (IRR)
• Net present value (NPV)
• Cost–benefit ratio (CBR)

The corporate controller often sets the financial rules to be used in justifying capital
projects. Companies have rules like, “Return on investment must be at least 20 percent
before we will even consider a project” or “Any proposal must pay back within 18
months.” Preventive maintenance evaluations should normally use the same set of
rules for consistency and to help achieve management support. It is also important to
realize that the political or treasury drivers behind those rules may not be entirely
logical for your level of working decision.

Payback

Payback simply determines the number of years that are required to recover the orig-
inal investment. Thus, if you pay $50,000 for a test instrument that saves downtime
and increases production worth $25,000 a year, then the payback is:
$,000
50
= 2 years
$,000
25
This concept is easy to understand. Unfortunately, it disregards the fact that the
$25,000 gained the second year may be worth less than the $25,000 gained this year