Page 308 - Improving Machinery Reliability

Life Cycle Cost Studies 219

tal investmentloperation) will save, on the average, US$12,000 per year in out-of-
pocket production losses for products that cannot be shipped during the outages.
Pumps under consideration, with expected 20 year lives, are 1) another ANSI pump
at US$8,000 installed cost or 2) an ANSI enhanced pump at US$18,000 installed
cost. Another choice is 3) do nothing. Which course of action should we recommend
using the concepts described above? Consider alternatives given in Table 5-10; note
year 0 is now, and year 1 is next year. By this financial analysis, installing an ANSI
pump results in the largest NPV.
These spreadsheets are the usual justifications prepared by accounting depart-
ments; however, this analysis does not take into account life cycle costs. Accounting
departments will use this technique unless engineers provide details about how
equipment survives or dies in operating environments. Adding expected failure rates
and renewals makes the accounting analysis smarter and gets the analysis closer to
real world conditions.
Should the ANSI pump be installed based on the favorable NPV? That depends
upon the company’s demand for cash and other details to be described below.

What Goes Into Life Cycle Costs?

LCC includes every cost that is appropriate, and appropriateness changes with
each specific case that is tailored to fit the situation. LCC follows the process shown
in Figure 5-5. The basic tree for LCC starts with a very simple tree based on the
costs for acquisition and the costs for sustaining the acquisition during its life is
shiown in Figure 5-6.
Acquisition and sustaining costs are not mutually exclusive. Whenever equipment
or processes are acquired, it must be understood that they always require extra costs
to sustain the acquisition. Acquisition and sustaining costs are found by gathering
the correct inputs, building the input database, evaluating the LCC, and conducting a
sensitivity analysis to identify cost drivers.
Frequently the cost of sustaining equipment is two to twenty times the acquisition
cost. Consider the cost for a simple ANSI pump. The power cost for driving the pump
during its lifetime is many times larger than the acquisition cost of the pump. Are
ANSI pumps bought with an emphasis on energy efficient drivers and energy effi-
cient rotating parts, or is the acquisition simply based on the lowest purchase price?
The often-cited rule of thumb is 65% of the total LCC is set when the equipment
is specified! This means do not consider the specification process lightly. Realize the
first obvious cost (hardware acquisition) is usually the smallest amount of cash that
will be spent during the life of the acquisition and most sustaining expenses are not
obvious. Every example has its own unique set of costs and problems to solve for
minimizing LCC. Minimizing LCC pushes up NPV and creates wealth for share-
holders. Finding LCC requires finding details for both acquisition and sustaining
costs with many details involved in the effort.

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