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Energy Man. Week 5

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12 views

Energy Man. Week 5

Uploaded by

Danny Pickket
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ENERGY MANAGEMENT

WEEK 5
Economic Analysis and
Life Cycle Costing

Lec. M.Sc. Mech. Eng. Semih Yılmaz


INTRODUCTION
Most CommonEconomic Cost Analysis Methods are;

 Simple Payback Period Method (SPP)

 Time Value of Money (Discounted Cash Flow) Method

 Life Cycle Cost Method (LLC)


COSTS

 Cost Types are;


 Expenses,

Routine Costs

Ongoing Costs

Necessary Costs
 Capital Investments Characteristics

Relatively large, ranging from several thousand to
several million euros, depending on the size of the organization

Benefits of a capital investment are returned over in several years

Relatively irreversible

Can have significant tax implications.
Capital Investments-1
 Capital Investment Categories:
 Acquisition;

Purchase price,

Installation costs,

Training costs,

Charges for engineering work,

Permits must be taken,

Renovations, etc.
Capital Investments-2

 Capital Investment Categories;


 Utilization: Routine costs for operating and maintenance

Energy,

Maintenance,

Repair, etc.
 Disposal:

Retire the machines

Remove assets

Recycling, etc.
Cash Flow Diagrams and Tables

EOY: End of Year

Figure1.1-Cash Flow Diagram.


Figure 1.1 is a cash flow diagram to look at the costs and benefits of purchasing a heat
pump.
The costs/benefits associated with the heat pump are:

• The heat pump costs €10,000 initially


• The heat pump saves €2,500 per year in energy costs for 20 years
• The maintenance costs are €500 per year for 20 years
• The estimated salvage value (hurda değeri) is €500 at the end of 20 years
Cash Flow Diagrams and Tables

Figure1.2-Cash Flow in Tabular Form.


Simple Payback Period Cost Analysis
Simple Payback Period (SPP) analysis determines the number of years
required to recover an initial investment through project returns.
The formula is:
SPP = (Initial cost)/(Annual savings)

 Example 1.1

The heat pump discussed previous slides has an initial cost of €10,000, an energy savings
of €2,500 per year, and a maintenance cost of €500 per year.

SOLUTION:
Thus, the net annual savings is €2,000.
Therefore, its SPP would be;
SPP = (Initial cost)/(Annual savings)

SPP=(€10,000)/(€2,000/yr) = 5 years.
Simple Payback Period Cost Analysis

 Advantages:
 Simple,
 Understandable by workers and managers.

 Disadvantages:
The methodology does NOT consider ;

 time value of money


 any of the costs or benefits of the investment following the payback period.
THE TIME VALUE OF MONEY:
DISCOUNTED CASH FLOW ANALYSIS
 In finance, discounted cash flow (DCF) analysis is a method of valuing a
project, company, or asset using the concepts of the time value of money.

 All future cash flows are estimated and discounted to give their present values
(PVs)—the sum of all future cash flows, both incoming and outgoing, is the
net present value (NPV).

 Present value may also be expressed as a number of years' purchase of the


future undiscounted annual cash flows expected to arise.

Discounted Cash Flow Analysis Calculator


DISCOUNTED CASH FLOW ANALYSIS

The discounted cash flow formula is derived from the future value formula for calculating the
time value of money and compounding returns.

Thus the discounted present value (for one cash flow in one future period) is expressed as:

where
 DPV is the discounted present value of the future cash flow (FV), or FV adjusted for the delay in receipt;
 FV is the nominal value of a cash flow amount in a future period;
 i is the interest rate, which reflects the cost of tying up capital and may also allow for the risk that the payment
 may not be received in full;
 d is the discount rate, which is i/(1+i), i.e., the interest rate expressed as a deduction at the beginning of the
year
 instead of an addition at the end of the year;
 n is the time in years before the future cash flow occurs.

Discounted Cash Flow Analysis Example


Future Worth, Single Sum
 The first task is to determine how to convert a single sum of Money from a present amount
to a future amount.

 Simple question:
“If I borrow €5,000 at 10% interest for five years, how much will I owe at the end of the five
years?”

 In this problem,
• P= present amount,
• i = interest rate is known.
• F= future amount is unknown.
• Also note that; A= a single payment in series of n equal annual payments

 The formula for finding F is:

 Example 1.2
If €5,000 were deposited in an account that paid 10% interest annually,
how much would be in the account at the end of five years?
(P = €5,000 ,i = 10%, n = 5 years, F = ?)

 Solution 1: Using Equation above,

F = 5,000x(1 + 0.10)5 = €8,053

 Solution 2: Using the F/P factor and Table 1.1, with i = 10% and n = 5,
Interest Factors for i=%10

Table1.1-Interest Factors for i=%10


Formulas and Factors for P,F and A

Table1.2- Formulas and Factors for P,F and A


Life Cycle Cost (LCC)
 Life cycle costing(LCC) is:

 the process of economic analysis


 to asses the total cost of ownership of a product,
 including its cost of installation, operation, maintenance, conversion,
and/or decommission.

 By using LCC, total cost of the product can be calculated


over the total span of product life cycle.

 LCC is a economic tool which combines both engineering art


and science to make logical business decision.

 This analysis provides important inputs in the decision


making process in the product design, development and use.
Life Cycle Cost (LCC)
 For product supplier:

 Product suppliers can optimize their design by evaluation of alternatives


and by performing trade-off studies.
 Also they can evaluate various operating and maintenance cost
strategies (to assist product users).

 For customer:

 By using LCC, customers can evaluate and compare alternative


products.
 Therefore customers can assess economic viability of projects or
products.
Why use LCC?
Typical conflict in most of the company:

 Project Engineering wants to minimize capital costs as the only criteria,


 Maintenance Engineering wants to minimize repair hours as the only criteria,
 Production wants to maximize operation hours as the only criteria,
 Reliability Engineering wants to nullify failures as the only criteria,
 Accounting wants to maximize project net present value as the only criteria,
 Shareholders want to increase stockholder wealth as the only criteria.

 LCC can be used as a management decision tool for synchronizing the


divisional conflicts by focusing on facts, money, and time.
Why use LCC?
Typical conflict in most of the company:

 Project Engineering wants to minimize capital costs as the only criteria,


 Maintenance Engineering wants to minimize repair hours as the only criteria,
 Production wants to maximize operation hours as the only criteria,
 Reliability Engineering wants to nullify failures as the only criteria,
 Accounting wants to maximize project net present value as the only criteria,
 Shareholders want to increase stockholder wealth as the only criteria.

 LCC can be used as a management decision tool for synchronizing the


divisional conflicts by focusing on facts, money, and time.
Cost element
For an equipment, there are TWO cost elements:

1) Initial Cost, and


2) Operation & Maintenance Cost
 The identification of cost elements and their sub-division
are based on the purpose and scope of the LCC study.
Cost element

Initial Cost:

 Design & development cost,


 Investment on asset, or cost of
equipment,
 Installation cost or erection &
commission cost.
Cost element

Operation & Maintenance Cost:


 Labour cost,
 Energy cost,
 Spare & maintenance cost,
 Raw material cost.
Real Cost of The Equipment

Acquisition Cost

Training Cost Special Test


Equipment Repair
Cost Cost
Facilities
Cost
Supply Support Transportation and
Inventory and Distribution Handling Cost
Cost

Disposal Technical
Cost Data Post

22
WHAT IS THE REAL COST OF OUR EQUIPMENT ? 22
EXAMPLE on LCC
Example 1.3

An energy efficient air compressor is proposed by a vendor. The compressor will cost
€30,000 installed, and will require €1,000 worth of maintenance each year for its life
of 10 years.
Energy costs will be €6,000 per year.

A standard air compressor will cost €25,000 and will require €500 worth of
maintenance each year. Its energy costs will be €10,000 per year.

If your company uses a MARR(interest rate) of 10%, would you invest in the energy
efficient air compressor?

Alternative 1: Energy efficient air compressor


Alternative 2: Standard air compressor

MARR:Min. Attractive Rate of Return or annual interest rate


EXAMPLE on LCC
Solution for 1.3:
Cash flows:

(Note: In a Life Cycle Cost Analysis, all cash flows are costs, and the signs are ignored.)
Analysis:
LCC(Alt 1) = €30,000 +€7,000(P/A10,10)
= €30,000 + €7,000(6.1446) Table 1.1
= €73,012
LCC(Alt 2) = €25,000 + €10,500(P/A 10,10)
= €25,000 + €10,500(6.1446)
= €89,518

 The decision rule for LCC analysis is to choose the alternative with thelowest LCC.
 Since Alternative 1 (Energy efficient air compressor) has the lowest LCC, it should be chosen.
Interest Factors for i=%10

Table1.1-Interest Factors for i=%10


Thanks for Your Attention

Questions?
and
Your ideas?

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