1.0 Asset Life Cycle

Asset Life Study 28th Sept to 1st Oct 2012
ASSET LIFE CYCLE

INTRODUCTION
1
Module Objectives
 By end of this module, participants should be able to

:-
 Describe LCC and its importance
 Illustrate the major components of LCC
 Explain the limitations and barriers of LCC
implementation.
1.0 Asset Life Cycle 2

Definition of Asset Life

 Assets: Resources of any kind owned by a
company that are of value to the company
 The more frequently applied terms to describe the
life of an asset:
 Ownership Life or Service Life
 It is the period of time an asset is kept in service by the
owner(s).
 Implied is a period of useful service from the time of purchase
until disposal
 Vague expectation: Equipment is often retained beyond the
point where it is capable of satisfying its intended function. A
machine can have a physical life longer than its service life; the
machine is still physically sound, but there is no useful function
for it to perform/

Definition of Asset Life

 The more frequently applied terms to describe the life of an
asset (cont.):
 Accounting life
 It is a life expectancy based primarily on bookkeeping and tax
considerations. It may or may not correspond to the period of usefulness and
economic desirability
 Economic life
 It is also referred as economic service life (ESL).
 It is the time period that minimizes the asset’s total equivalent annual cost or
maximizes its equivalent net annual income. At the end of this period, the
asset would be displaced by a more profitable replacement if service were
still required. Economic life is also referred to as the optimal replacement
interval and is the condition appropriate for many engineering economic
studies.

Dependability and LCC

Availability
Dependability
Reliability Maintainability Maint. Support
Failures Repairs PM Replaceable Cost of investment

units, Spares for logistic
Facilities support
Quantity x ((MPHx cost/h)+ Cost of PM

Material cost per unit))
Cost of
z x [(average cost of maint. Support per failure + Corrective
(MPHs x cost/h)+(MPHws x cost/h) + Maintenance
Average cost of spare per failure
Damage to image and reputation, loss of revenue, Consequential

Service provision, warranty cost, liability cost cost

LCC-History

Life Cycle Cost (LCC)

 Definition:-
 Summation of cost estimates from inception to disposal applicable
to both projects or equipment
 LCC analysis enables engineers to justify equipment or process
selection based on TOTAL COST rather than the initial purchase
price

Life Cycle Cost

60% to 80% of
Total LCC !

Why use LCC?
 To achieve lowest cost of long term ownership

 More prudent use of investment.. Increase ROI by having
lowest cost with highest return.


 The products, goods, and services all progress through a life cycle (LC).
 Typical phases a product, good or services progress through over its LC cover:
Needs assessment & Decline &

justification retirement
 LCC: concept of designing products, goods, and services with a full and explicit
recognition of the associated costs over the various phases of their LCs.
 Two key concepts in LCC:

- later design changes are made in the LC the higher the costs
- decisions made early in the LC tend to “lock in” costs that are incurred later in the
LC.
- during design phase:
nearly 70 – 90% of all costs are set and 10 – 30% of cumulative life-cycle costs
10
are being spent


 Downstream product changes are more costly while upstream changes are easier
to make
 Poorer design results in a much more expensive change orders during construction
and prototype development
 Time to consider all LC effects and make design changes is during the needs and
conceptual/preliminary design phases
 Some LC effects to consider during design time include product costs for:
- liability, production, material, testing and quality assurance , an
maintenance and warranty
 Other LC effects include:
- product features based on customer input and product disposal effects on
the environment
 Key point: consider all LCC when designing products and the systems that produce
them


Typical Life cycle for products, goods and services
Concept and Design and Operation and
Manufacturing Installation Disposal
definition development Maintenance
• New Product • Design trade-offs • System integration • Retirement cost

Opportunities • Source selection and verification impact
• Analysis of system •Configuration and • Cost avoidance/cost •Replacement/renewa
concept and options change controls reduction benefits l schemes
• Product selection • Test strategies •Operating and • Disposal and
• Technology • Repair/throwaway maintenance cost salvage value
selection decisions monitoring
• Make/buy decision • Performance • Product
• Indentify cost drivers tailoring modifications and
• Construction • Support strategies service enhancement
assessment • New product • Maintenance
•Manufacturability introduction support and resource
assessment allocation and
• Warranty incentive optimization
schemes

Cumulative life-cycle costs committed and dollars spent

Life-cycle design change costs and ease of change
14

LCC Components
Can be obtained from Have to be inferred from

Quotation Maintenance and process records


 Acquisition Cost Tree.
- R &D
# program management
# R& D, Advanced R& D
# Engineering design
# Equipment dev. & test
# Eng. data
- Non-recurring investment costs
# Spare parts & logistics
# Manufac. & Operations & Maint.
# Facilities & construction
# Initial training
# Technical data
- Recurring investment costs
# Upgrade parts
# Support equipment upgrades
# System integration of
improvements
# Utility improvement costs
# Green & clean costs


• Sustaining Cost Tree.
- Sched & unsched
maintenance costs
# labour & mat. overhead
# Replacement & renewal
# Replacement/renewal
transportation
# System/equipment
modification # Eng.
dacumentation
- Facility usage costs
# Energy & facility usage
# Support & supply maint.
# Operations
# Ongoing training for maint.
operations
# Technical data management
- Disposal costs
# Permit & legal
# Wrecking/disposal
# Remediation
# Write-off/asset recovery
# Green & clean

Applications
 Exists on two levels:
 The lower level of LCC as “Management Tool” to aid the decision making
process
 The higher level as “Management System” whose continuous operation
dictates that responsibility for asset management should be retained
 LCC has a potential use during the management of a typical project, all
stages, except project initiation.
 LCC as a decision-making tool

- primary use: in effective choice between a number of competing project
alternatives
- effective use during early design stages as all options are open to
consideration


Applications
 LCC as a decision-making tool (cont.)
- in addition:
○ability to influence cost decreases continually as the project progresses,
from 100% at project sanction to 20% or less by the time construction starts
○once an asset is delivered, there is a very slim chance to change the total
cost of ownership because the decision to own or to purchase an asset
normally commits users of the total cost of ownership.
 LCC as a management tool

- to identify the actual costs incurred in operating assets
- the primary objective is to relate running costs and performance data
- could be useful for clients who want to estimate the future running costs of their
assets and to provide feedback to the design process

LCC Application
 evaluation and comparison of alternative design;

 assessment of economic viability of projects/products;
 identification of cost drivers and cost effective
improvements;
 evaluation and comparison of alternative strategies for
product use, operation, test, inspection, maintenance, etc.;
 evaluation and comparison of different approaches for
replacement, rehabilitation/life extension or disposal of
aging facilities;
 optimal allocation of available funds to activities in a
process for product development /improvement;
 assessment of product assurance criteria through
verification tests and their trade-offs;
Life Cycle Cost Limitation
 Not two analysis will give same results as there are no right or
wrong answers.
 LCC outputs depends on the accuracy of estimates which
normally have high variance
 LCC should not be used for budgeting but rather as a
comparison between two options.


Current Practice
 Has not received a wide practical application
 Currently used extensively only in private finance initiative (PFI) public
procurement
 Internationally the building sectors have not fully adopted LCC
 Little evidence LCC applications in other industries
Barriers Facing LCC Implementation
• Industry Barriers
- capital cost is always separated from running cost
- no clear definition of the buyer, seller, and their responsibilities
towards operating and maintenance costs
- lack of motivation in cost optimisation because the design and cost
estimating fees are usually a percentage of the total project cost
- private finance initiative (PFI) and build operate and transfer (BOT)
seems to overcome the obstacles

Barriers Facing LCC Implementation (cont.)
 Client Barriers
- lack of understanding – possibility of subjective decision-making
- multiple aspects of needs desired – most aspects cannot be assessed in LCC
– mainly in conflict with LCC objective (non-financial even intangible such as
aesthetics – in most cases in conflict with results of LCC)
 Analysis Difficulties
- difficulty of obtaining the proper level of information – lack of
appropriate, relevant and reliable historical information and data
- costs of data collection are enormous
- time needed for data collection and the analysis process may leave
inadequate time for the essential dialogue with the decision maker and
there-run of alternative options – computer models are valuable option
- need to be able to forecast a long way ahead of time many factors
- uncertainty surrounding

Economic Service Life

 Once determined ESL should be the estimated life for the asset
used in the study
 Determination of ESL:
 Calculate the total AW of costs if the asset is in service 1 year, 2
years, 3 years, and so on, up to last year the asset is considered
useful.
 Total AW of costs is the sum of capital recovery (CR), which is
AW of the initial investment and any salvage value, and the AW
of the estimated annual operating cost (AOC)
 Total AW = - capital recovery – AW of annual operating costs
 = - CR – AW of AOC



 A 3-year-old asset current market value is $13,000. Estimated future
market values and annual operating costs for the next 5 years are as
given in the Table 3.1, columns 2 and 3. Determine the ESL of the asset if i
= 10% per year.
Table 3.1: Computation of ESL

Year j MVj AOCj Capital Recovery AW of AOC Total AWk
(1) (2) (3) (4) (5) (6) = (4) + (5)
1 $ 9000 $ - 2500 $ - 5300 $ - 2500 $ - 7800

2 8000 - 2700 - 3681 - 2595 - 6276
3 6000 - 3000 - 3415 - 2717 - 6132
4 2000 - 3500 - 3670 - 2886 - 6556
5 0 - 4500 - 3429 - 3150 - 6579


ESL
27


ESL
28

1.0 Asset Life Cycle

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Asset Life Study 28th Sept to 1st Oct 2012

ASSET LIFE CYCLE

 By end of this module, participants should be able to

1.0 Asset Life Cycle 2

Definition of Asset Life

1.0 Asset Life Cycle 3

Definition of Asset Life

1.0 Asset Life Cycle 4

Dependability and LCC

Reliability Maintainability Maint. Support

Failures Repairs PM Replaceable Cost of investment

Quantity x ((MPHx cost/h)+ Cost of PM

Damage to image and reputation, loss of revenue, Consequential

1.0 Asset Life Cycle 5

1.0 Asset Life Cycle 6

Life Cycle Cost (LCC)

1.0 Asset Life Cycle 7

Life Cycle Cost

1.0 Asset Life Cycle 8

Why use LCC?

 To achieve lowest cost of long term ownership

1.0 Asset Life Cycle 9

Life Cycle Cost (LCC)

Needs assessment & Decline &

 Two key concepts in LCC:

1.0 Asset Life Cycle 10

Life Cycle Cost (LCC)

1.0 Asset Life Cycle 11

Life Cycle Cost (LCC)

• New Product • Design trade-offs • System integration • Retirement cost

Life Cycle Cost (LCC)

1.0 Asset Life Cycle 13

Life Cycle Cost (LCC)

Life-cycle design change costs and ease of change

1.0 Asset Life Cycle 14

Can be obtained from Have to be inferred from

1.0 Asset Life Cycle 15

Life Cycle Cost (LCC)

1.0 Asset Life Cycle 16

Life Cycle Cost (LCC)

Life Cycle Cost (LCC)

 LCC as a decision-making tool

1.0 Asset Life Cycle 18

Life Cycle Cost (LCC)

 LCC as a management tool

1.0 Asset Life Cycle 19

 evaluation and comparison of alternative design;

Life Cycle Cost Limitation

1.0 Asset Life Cycle 21

Life Cycle Cost (LCC)

Life Cycle Cost (LCC)

1.0 Asset Life Cycle 23

Economic Service Life

1.0 Asset Life Cycle 24

Economic Service Life

1.0 Asset Life Cycle 25

Economic Service Life

Table 3.1: Computation of ESL

(1) (2) (3) (4) (5) (6) = (4) + (5)

1 $ 9000 $ - 2500 $ - 5300 $ - 2500 $ - 7800

1.0 Asset Life Cycle 26

Economic Service Life

1.0 Asset Life Cycle 27

Economic Service Life