LCC To Participants

Gaining Competitive Advantage:
Essentials of Life Cycle Costing Decisions for Asset

Managers
Ali Zuashkiani
CEO of PAMCo
This is Confidential and property of CMORE and/or Dr Jardine from 1

University of Toronto, please do not distribute
2
u
s Asset Management is…
a The coordinated activity of an organization to realize
s value from assets
Coordinated = more than one (group) involved
s Activity = approach, planning, implementation, governance
e Organization = any group with responsibility for assets and their use
Realize = achieve, balancing cost, risk, opportunity and performance
Value = what you are willing to pay for / what you must pay
Assets = tangible and non-tangible
c Value = Output = Product…Quality…Service… Opportunity

Input Cost…Time…Risk
o
m This is Confidential and property of CMORE and/or Dr Jardine from
3
u
s Asset Management includes…
a Whole asset life cycle and related information
Demand forecasting and concept generation (value envisioning)
s Engineering (enables value generation)
Construction & commissioning
s Operations (value extraction)
Maintenance management (value sustaining)
e Support logistics and infrastructure

Reliability
LCC
Evidence based decision making
Asset Investment Planning and Management
Asset Information Management (the information plant)
c Integrated processes
Computerized “solutions” or “systems” (the tools)
o
4
u Asset Management is relatively
s new, but here to stay
a Standards:
s UK – PAS 55 -1 and 2 (2004, 2008) – “specification”
ISO – 55000, 55001 and 55002 (Jan 2014) – “standards”
s Currently undergoing first review for possible amendments
e Other sources of AM Information

GFMAM “Landscape”
GFMAM is global in scope
IAM “Anatomy”
c UK centric but globally influential
AMC Body of Knowledge
o Australia

5
u
GFMAM and IAM
s
a Both have produced very useful documents
s Both align with each other and with ISO 5500x

Consistency of message
s Coverage of the topic includes 39 subjects
e More extensive coverage than ISO 5500x

ISO 55001 includes 24 clauses with 71 “shall” statements
The Landscape and Anatomy documents present information in a way to help foster
understanding and consistency
The IAM’s Anatomy contains more explanation than GFMAM Landscape
The ISO 55001 is a standard that specifies requirements for good asset
c management – it isn’t a teaching or “how to” document
Some guidance is in ISO 55002
o Complemented by GFMAM and IAM

6
u
s ISO 55000: Really 3 Standards
a
s
s
e
c
o
Return on Investment
$
Operating Costs
Variable operating costs:

(Raw materials, power, transportation)
Fixed operating costs:

(People, fixed assets, overheads)
0% Plant Utilization 100%
This is Confidential and property of CMORE and/or Dr Jardine from

Profit = 7.5 % of Sales
$
Break even
Operating Costs
95%
85%
80%

Profit = 10 % of Sales
$
Break even
Operating Costs
95%
75%

Profit = 10 % of Sales
$
Break even
Operating Costs
95%
75%

$
Break even
Operating Costs
95%
65%

$
Break even
Operating Costs
95%
65%

1
u
3
s Life cycle activities
a
s
s
e
c
o
What are factors affecting
your acquisition decisions?
14
Example:
Statement of Problem
A contractor requires specialized equipment for a
period of 3 years. Given the costs and salvage values
in the following table, which is the best alternative?
Equipment Purchase Installation Operating Cost Salvage

Price Cost 1 2 3 Value
A 5000 100 100 100 100 3000
B 3000 100 200 300 400 1500
C 6000 100 50 80 100 3500
NOTE: Costs in $ x 100

© A.K.S. JARDINE
15
Outline
• Concept and definitions

• Evaluating different acquisition options
• Calculating optimum replacement age
• Predicting future Life Cycle Costs
• Implementation issues
16
What is life-cycle?
“Time interval that commences with the identification of

the need for an asset and terminates with the
decommissioning of the asset or any liabilities hereafter”
[1]
17
University of Toronto, please do not distribute 17
What is Life Cycle Costing?
Life Cycle Cost refers to:

the total cost of ownership over the life of an asset.
Also commonly referred to as:
"cradle to grave“
18
What is Life Cycle Costing?
or
"womb to tomb" costs.

Or
even dust to dust!
19
Definition
Life cycle management concept considers the cost

contribution from all phases, when making decisions on
acquiring a new physical asset
LCC refers to all costs associated with a system as

applied to the defined life cycle. [2]
20
The Life Cycle Cost Iceberg [8]
21
Life Cycle Costing Components
Purchase (Construction) & Installation
Reliability Cost!
Operation
Design
& Development
Maintenance
Disposal
The most visible cost is acquisition cost

Training Others are usually in the following order:
▪Installation
▪Training
▪Operation
▪Maintenance
▪Disposal
▪Cost of reliability 22
▪Future development
Importance of Considering LCC When Evaluating
Investment Options
23
Conflicting Objectives
Project Engineers
Maintenance Engineers
Operation
?
24
University ofHuman
Toronto,Resource
please do not distribute 24
Conflicting Objectives
• Project Engineer: Minimize Capital Expenditure

• Shareholders: Maximize earnings through dividends and share
prices
• Accounting: Maximize project net present value
• Maintenance Engineers: Minimize repair hours
• Reliability Engineer: Maximize equipment reliability to avoid failures
• Production: Maximize uptime
• HSE department: minimize safety, health, and environmental
hazards
• Human resource: Minimize required training and new hiring
adapted from [5]

25
How to Resolve the Conflict?
Use language of money!
Net Present Value (NPV) or discounted future cash flows can be used as a
main criteria to evaluate different investment options!
So what we need is to find all costs associated with different life phases for
each option, which means we need to do Life Cycle Costing Analysis!
26
Option Evaluation and review
of Engineering Economics

Time Value of Money
$100 + 10 $110 + 11
$100
= $110 = $121
i = 10% i = 10%
0 1 2
The above concept is familiar to many,

i.e. investments grow in value
© A.K.S. JARDINE
28
Example
Problem: Assume we have a payment to make, 2 years

from now, of $121. What is its value today? (i.e. its
present value)
$121
?
0 1 2
2
Solution: P = 121 1 (Assume i=10%)
1 + 0.1
= $100
© A.K.S. JARDINE 29
To compare different replacement cycles:
• Bring all future costs to their present

value
• Compare all cycles over the same
period of time
• Need to carefully consider all relevant
life-cycle costs
© A.K.S. JARDINE
30
Selecting an Alternative
In the following example, we will consider

two (equivalent) criteria:
(i) Present value

(ii) Equivalent annual cost
© A.K.S. JARDINE
31
Example:
Statement of Problem (Section A3.6, Page 286)
A contractor requires specialized equipment for a
period of 3 years. Given the costs and salvage values
in the following table, which is the best alternative?
Equipment Purchase Installation Operating Cost Salvage

Price Cost 1 2 3 Value
A 5000 100 100 100 100 3000
B 3000 100 200 300 400 1500
C 6000 100 50 80 100 3500
NOTE: Costs in $ x 100

© A.K.S. JARDINE
32
For Equipment A
$5000
$100 $100 $100 $3000
$100
0 1 2 3
• Present Value (PV) = ?

• Assume that discount factor r = 0.9
Recall: r = 1 / 1+i
where i = interest rate appropriate for discounting
(in this case, assume i = 11%)
• PV = 5000 + 100 + 100 (0.9)1 + 100 (0.9)2 + 100 (0.9)3 –
3000 (0.9)3
= $3157 33
© A.K.S. JARDINE
For Equipment B
PV = 3000 + 100 + 200 (0.9)1 + 300 (0.9)2

+ 400 (0.9)3 – 1500 (0.9)3
= $2721
© A.K.S. JARDINE
34
For Equipment C
PV = $3731
Therefore, the best alternative using the
present value concept is B (since it has the
minimum PV).
© A.K.S. JARDINE
35
An Alternate Approach …
• Dealing with the same example, rather than the
present result in terms of the Present Value of a
stream of cash flows, we frequent convert this PV to
an Equivalent Annual Cost (EAC) - sometimes
referred to as Annual Equivalent Evaluation.
• To convert PV to EAC, multiply PV by the Capital

Recovery Factor (CRF):
EAC = PV x CRF
where CRF = i (1+i)n

(1+i)n - 1
© A.K.S. JARDINE
36
Example: Equipment A
EAC = 3157 i (1+i)n Recall: PV = $3157

(1+i)n - 1
= 3157 0.11 (1 + 0.11)3
(1 + 0.11)3 - 1
= 3157 x 0.4092
= $1291.89
Graphically, we have:
$1291.89 $1291.89 $1291.89
0 1 2 3
Note: The PV of this is the same as the PV of the original stream of

cash flows for Equipment A.
© A.K.S. JARDINE
37
Minimizing Life Cycle Costs: types of problems [2]
• Optimum Replacement Age

(constant utilization)
• Optimum Replacement Age

(varying utilization)
• Technological Improvement
• Repair versus Replace
• Joint Optimization of Retirement Age and

Maintenance Tactics
38
Economic Life Problem
Optimum replacement age
Total cost
Annual Cost
Operations and
maintenance cost
Fixed cost
Ownership cost
Replacement Age ( years)
© A.K.S. JARDINE
39
Exercise: Calculating The Economic Life
A=$5000
Trend in OM costs
Year 1 2 3 4 5
Estimated 500 1000 2000 3000 4000
OM Cost
($)
Trend in Resale Values

Year 1 2 3 4 5
Resale 3000 2000 1000 750 500
Value ($)
40
Numerical Example
Purchase price = $48,000

TREND IN O&M COSTS
1 2 3 4 5
Year
Estimated O & M Cost ($) 4500 9000 18000 27000 36000
TREND IN RESALE VALUES

1 2 3 4 5
Year
Resale Value ($) 30,000 21,000 12,000 9500 7500
41
Annual Average O&M Costs
1 2 3 4 5
Year
1 2 3 4 5
Replacement
Age
Average 4,500 (4500 (4500+ (4500+ (4500+

annual O & M +9000)/2 9000+18000)/3 9000+18000+27000) 9000+18000+27000+
Cost ($) =6,750 =10,500 /4 =14,625 36000)/5 =18,900
42
Economic Life
O & M Costs
Economic Life
Ow nership Cost
Total Cost
$30,000
Average Annual Cost
$25,000
$20,000
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Replacement Age
43
Annual Average Ownership Costs
1 2 3 4 5
Year
Resale Value ($) 30,000 21,000 12,000 9500 7500
1 2 3 4 5
Replacement
Age
Average annual (48,000- (48,000- (48,000- (48,000-9,500)/4 (48,000-

30,000)/1 21,000)/2 12,000)/3 =9,625 7500)/5 =
ownership cost =18,000 =13,500 =12,000 8,100
($)
44
Economic Life
O & M Costs
Economic Life
Ow nership Cost
Total Cost
$30,000
Average Annual Cost
$25,000
$20,000
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Replacement Age
45
Economic Life
46
Economic Life Model: Constant utilization
Construction of model:
C1 C2 C3 – Sn
A
0 1 2 3 n years
Replacement Cycle
47
Numerical Example
Purchase price = $48,000

TREND IN O&M COSTS
1 2 3 4 5
Year
TREND IN RESALE VALUES

1 2 3 4 5
Year
Resale Value ($) 30,000 21,000 12,000 9500 7500
48
Numerical Example-continued
EAC(1) = ($48,000 + $4500 − $30,000) / 1 = $ 22,500
EAC(2) = ($48,000 + $4500 + $9000 − $21,000) / 2 = $ 20,250
where, EAC stands for Equivalent Annual Cost
Replacement
1 2 3 4 5
Time (n)
EAC(n)
$ 22,500 $ 20,250 $ 22,500 $ 24,250 $ 27,000
49
Numerical Example-continued
Equivalent Annual Life Cycle Cost
$30,000
$25,000
$20,000
EAC(n)
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Economic Life Replacement Year
50
C1 C2 C3 A – Sn
0 1 2 3 n years
Replacement Cycle
Note:
Above assumes costs in year are paid at the end of year.
51
Concept of Economic Life
N = 1 year
A – S1 A – S1 A – S1 A – S1 A – S1 A – S1 A – S1 ……..
c1 c1 c1 c1 c1 c1 c1 ……..
0 1 2 3 4 5 6 Years
N = 2 years
A – S2 A – S2 A – S2 A – S2 ……..
c1 c2 c1 c2 c1 c2 c1 ……..
0 1 2 3 4 5 6 Years
N = 3 years
A – S3 A – S3 A – S3 ……..
c1 c2 c3 c1 c2 c3 c1 ……..
0 1 2 3 4 5 6 Years
© A.K.S. JARDINE
52
C1 C2 C3 A – Sn
0 1 2 3 n years
Replacement Cycle
53
PV of above cycle:
C1(n) = C1r1 + C2r2 + C3r3 + -------- + Cnrn + ( A – Sn ) rn
In general:
n
C (n) =
1  Ci r i + r n ( A − Sn )
i =1
© A.K.S. JARDINE
54
Consider the second cycle:
C1 C2 C3 A – Sn
0 n years 2n years
First Cycle n years
PV of 2nd cycle discounted to start of 2nd cycle:
C1r1 + C2r2 + C3r3 + -------- + Cnrn + ( A – Sn ) rn

n
In general:
C 2 (n) =  Ci r i
+ r n
( A − Sn )
i =1
© A.K.S. JARDINE
55
Optimal Replacement Interval for Capital
Equipment: Minimization of Total Cost
Replace Replace Replace

C1 C2 Cn C1 C2 Cn C1 C2 Cn C1
0 1 2 … n-1 n 1 2 … n-1 n 1 2 … n-1 n 1…
Cycle 1 Cycle 2 Cycle 3
© A.K.S. JARDINE
56
Similarly, we can obtain: C3(n) , C4(n) , etc
Thus PV of this chain of replacement is:
C(n) = C1(n) + C2(n)rn + C3(n)r2n + C4(n)r3n + ……….
Summing to infinity then for the geometric progression we get:
C1(n) Since C1(n) = C2(n) = C3(n) ……

C(n) = ----------- n
1 - rn Ci r i
+ r n
( A − Sn )
C(n) = i =1
1 − rn
© A.K.S. JARDINE
57
Example
A=$5000, r=0.9
Trend in OM costs
Year 1 2 3 4 5
Estimated OM 500 1000 2000 3000 4000
Cost ($)
Trend in Resale Values
Year 1 2 3 4 5
Resale Value 3000 2000 1000 750 500

($)
58
Example
Have A Ci, Si, r:
C(n) 1.2
22500 1 23701
0.8
0.6
21735
0.4
19421 20790
Economic life
0.2
1 2 3 4 5 years
Thus the economic life of the asset is 2 years with
an associated total discounted cost of $19,421
EAC = 19,421 * i Recall r = 1 / (1 + i) r = 0.9
Therefore i = 0.11 and EAC = $2,136

© A.K.S. JARDINE
59
Fleet Statistics
S Fleet
Utilization: 60,000 km/year per tractor
Fleet size: 19
Tractor weight: 18,000 kg
Current policy: 5 years replacement cycle
K Fleet
Utilization: 110,000 km/year per tractor
Fleet size: 17
Tractor weight: 23,000
Current policy: 5 year replacement cycle
© A.K.S. JARDINE
60
Title: BEST ESTIMATE RESALE VALUES
Number of Years: 5
Acquisition Cost: 85000
Age of O&M Cost Rate for Trade-in EAC
Vehicle (In Today’s Cash Flow Value Best Year
Dollars) Discounting Highlighted
1 Year Old 29352 10% 60000
2 Year Old 45246 10% 40000
3 Year Old 52626 10% 25000
4 Year Old 53324 10% 20000
5 Year Old 42363 10% 15000
© A.K.S. JARDINE
61
DATA ANALYSIS:
Equivalent Annual Cost vs Age of Trucks
EAC - $$ (Thousands)
80
75
70
65
60
1 2 3 4 5
Age of Trucks (years)
© A.K.S. JARDINE
62
Combustion engine
© A.K.S. JARDINE
63
64
Example 2
© A.K.S. JARDINE
65
66
Conclusion
• For combustion engine :
• Minimum EAC is @ 15 years and is $ 5,364,911
• For electric engine:

• Minimum EAC is @ 15 years and is $ 3,167,937
• “Best buy” is electric engine and economic benefit per year is:
$ 2,196,938
»Thus over a 15 year life the overall benefit is:

»$ 32, 954, 070 per engine. (15 x 2,196,938)
»Fleet size is 4
»OVERALL ECONOMIC BENEFIT = $ 131,816,280
© A.K.S. JARDINE
67
Haul Truck
© A.K.S. JARDINE
68
Haul Truck Replacement
Input Data: 100T Haul Truck
Acquisition Cost: $700,000
Interest Rate Appropriate for Discounting: 11%
Year O&M Cost Resale (or Equivalent
($/year) Trade-In) Annual Cost
value at End ($)
of Year
1 188,858 450,000 523,244
2 217,770 300,000 491,415
3 329,963 275,000 471,321
4 279,279 250,000 448,800
5 300,000 (est) 150,000 450,678
6 350,000 (est) 100,000 451,224
69
6
© A.K.S. JARDINE
Feller Buncher
© A.K.S. JARDINE
70
Economic Life: before and after tax
calculation (Feller Buncher data)
EAC (Before tax)

220000
200000
EAC
180000
EAC (After tax)

160000
140000
120000
1 2 3 4 5 6 7 8 9 10
Year
© A.K.S. JARDINE
71
Example of the Use of AGE/CON:
Determining Optimal Replacement Age for Municipal Dump Trucks
In this case, optimal replacement age is after 7 years of operation

© A.K.S. JARDINE
72
A Further Example:
Determining Optimal Replacement Age for 4x4 Pick-up Trucks
In this case, optimal replacement age is after 5 years of operation

© A.K.S. JARDINE
73
Establishing The Economic Life
of a Fleet of Mobile Equipment

75
Kiruna trucks - INCO
Objectives
• Determine the optimal replacement policy for

the fleet of Kiruna Haulage Trucks
• Introduce capital equipment replacement in an

overall maintenance strategy
• Present a framework to be applied to other

capital equipment fleets at Inco
© A.K.S. JARDINE
76
An Optimal Replacement Policy
• Ensures the efficient use of capital equipment

by minimizing the total costs/age of a mobile
fleet
• Allows for better planning in vehicle
replacement
• Employs a structured decision making
technique for replacement cycles
• Allows for flexibility and practicality in
replacement decisions
© A.K.S. JARDINE
77
Model Variables
• Two Major Components:
1. Ownership Costs
• A → Acquisition Cost of the Kiruna Truck
• CCA → Capital Cost Allowance, the depreciation rate of

the truck
• Un → Undepreciated Capital Cost in year n
• Sn → Salvage Value in year n
© A.K.S. JARDINE
78
Model Variables
2. Operating and Maintenance Cost
• Cj → Maintenance Cost in year j, comprised of labour,

material and other costs
– Labour costs → work hours associated with a work order,

multiplied by a standard rate
– Material costs →total of all part costs used in performing
maintenance, as recorded on a work order
– Other Costs →Warranty, Subcontracting, and
miscellaneous charges
© A.K.S. JARDINE
79
Values for the Model Variables
• Recall from the model development, the key variables

in the model:
Variable Value
A $1.8 M
i 12%
r 0.89286
Sn 0
CT 33.7%
CCA 30%
© A.K.S. JARDINE
80
Forecasted O&M Costs
• Forecasts presented below (in red):
Age of Truck O&M Costs % Increase

1 134,258 -
2 341,271 154
3 444,073 30
4 669,650 51
5 803,682 20
6 767,651 -4
7 806,034 5
8 846,335 5
9 888,652 5
© A.K.S. JARDINE
81
82
83
Light Truck LCC Project
84
Trends in O&M Costs
$1.20 Total Maint. & Downtime Cost per km vs. Cum.
Km driven
$1.00
$0.80
$0.60
$0.40
y = 2E-05x + 0.0951
R² = 0.659
$0.20
$-
0 10,000 20,000 30,000 40,000 50,000
85
Economic Life
$35,000
EAC of Non-Capital
EAC of Capital
$30,000
Total Cost
$25,000
Equivalent Annual Cost
$20,000
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Replacement Age
86
Economic Life-Savings
$35,000
$5,094/year/Truck! EAC of Non-Capital
EAC of Capital
$30,000 Or
Total Cost
$25,000
$ 254,710/year
For The Whole Fleet!
$20,000
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Replacement Age
87
Economic Life-Savings
• Estimated savings for the total 640 light

trucks in the company: $3,000,000/ year
• NPV of the saving: $33,000,000
88
Implementation Steps
$35,000
70% of the total EAC of Non-Capital
EAC of Capital
$30,000 potential savings
Total Cost
$25,000
$20,000
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Replacement Age
89
• Most benefits are obtained by extending the
replacement age from 2 years to 3 years
90 90
• So we suggest that the replacement time be extended
to year 3 for all trucks in the fleet
91 91
Implications For Data Collection
$35,000
EAC of Non-Capital
EAC of Capital
$30,000
Total Cost
$25,000
$20,000
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Replacement Age
92
$35,000
EAC of Non-Capital
EAC of Capital
$30,000
Total Cost
$25,000
$20,000
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Replacement Age
93
• So we suggest that the current group of 8 trucks be

kept for another year so we would be able to obtain
actual O&M costs for the fourth year
• Similar analysis should be done one year from now to
see if the optimum replacement age has been changed
94
Implications For Labour Requirements
$35,000
EAC of Non-Capital
EAC of Capital
$30,000
Total Cost
$25,000
$20,000
$15,000
$10,000
$5,000
$-
1 2 3 4 5
Replacement Age
95
Increase in O&M costs = $1917/truck/year or

$95,874 /year/fleet
96
On average 17% of O&M costs, are downtime cost. Benchmarks

say that on average half of the maintenance costs is labor and the
other half is spare part costs so it leaves us with:
$95,874 * (1-0.17)/2= $39,788 increase in labor costs which is

almost equivalent of 1/3 of a full time employee.
97
Crane Specification used for Life Cycle
Costing Analysis
• Manufacturer: Kaverit Cranes Ltd.
• Capacity Rating: 40 Tons / 5 Tons
• Number of Cranes for this analysis are 8 (out

of 225)
• No Current Life Cycle Costing management

Trends in Annual Life Cycle Costs

Equivalent Annual Cost and LCC Results
$200,000
Economic Life 20 EAC of Non-Capital
Total savings for 8 cranes
$180,000 Annual savings of 80,000 for the fleet EAC of Capital
Annual Savings of 8 cranes out $of118,499.9
$ 14,812 225!
$160,000 Total Cost
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$-
Replacement Age
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

LCC: How many spares to keep?
Repair Shop
Store
102
Repair Shop
Store
103
Repair Shop
Store
104
Comparing Different Options
Option Description Total expected cost over

the next 15 years
1 Do nothing $141 m
2 Limited upgrade $76 m
3 More extensive upgrade $42 m
4 One new transformer $31 m
5 Two new transformers $26 m
105
Bus Economic Life
Terms of reference:
To determine the economic life for the range of GMC

buses operated by the Société de Transport de la Communauté
Urbaine de Montréal (STCUM)
© A.K.S. JARDINE
106
Economic Life Calculations:
Transit Fleet Replacement
Table A: Table B:
“High” Trend in Resale Values “Low” Trend in Resale Values
© A.K.S. JARDINE
107
Economic Life Calculation:
Low Resale Value Trend Acquisition cost at start of replacement cycle
© A.K.S. JARDINE
108
Savings Are Huge!
Current Optimum Total Annual

Replacement Age Replacement Age Savings
20 years 13 years $ 9,400,000 /year
© A.K.S. JARDINE
109
Optimal Replacement Policy for Capital Equipment
Taking Into Account Technological Improvement:
Finite Planning Horizon
Fixed future operating time, n periods
Replace with technologically improved

equipment
A-Sp,T
Cp,1 Cp,2 Cp,3 Ct,1 Ct,2 Ct,n-T
0 1 2 3... T T+1 T+2 . . . n-1 n
© A.K.S. JARDINE
110
Optimal Replacement Policy for Capital Equipment
Taking Into Account Technological Improvement:
Infinite Planning Horizon (Section 4.6, Page 163)
Total discounted costs C(T,n)
Replacement with
technologically improved
Cp,1 Cp,2 Cp,T Ct,1 Ct,2 Ct,n Ct, Ct, Ct,n
© A.K.S. JARDINE
111
Caterpillar 992D Wheel Loader
© A.K.S. JARDINE
112
Repair vs. Replace (Section 4.6.5, Page 166)
Cash Flows Associated with Acquiring New

Equipment at Time ‘T’
R A-Sp,T A-Sn A-Sn
Cp,1 Cp,2 Cp,3 … Cp,T Ct,1 Ct,2 Ct,3 … Ct,n Ct,1 Ct,2 Ct,3 … Ct,n
0 1 2 … T-1 T 1 2 … n-1 n n+1 n+2 …n-1 2n

(Years)
Today
© A.K.S. JARDINE
113
Repair vs. Replace
A = $ 1,083,233 (Unit operational)
R A-Sp,T A-Sn A-Sn
Cp,1 Cp,2 Cp,3 …Cp,T Ct,1 Ct,2 Ct,3 … Ct,n Ct,1 Ct,2 Ct,3 … Ct,n
0 1 2 … T-1 T 1 2 … n-1 n 1 2 . . . n-1 2n (Years)

Today Cash Flows Associated with Acquiring New Equipment at Time T
R = $390,000 (includes arms + Z•bars) Excludes Front Variable Maintenance Costs

Frame, Rear Frame and Bucket components (excludes operator, fuel, wear parts)
Cp,1 = $ 138,592 Sp,0 = $ 300,000 Ct,1 = $ 38,188 S1 = $ 742,500
Cp,2 = $ 238,033 Sp,1 = $ 400,000 Ct,2 = $ 218,583 S2 = $ 624,000
Cp,3 = $ 282,033 Sp,2 = $ 350,000 Ct,3 = $ 443,593 S3 = $ 588,000
Sp,3 = $ 325,000 Ct,4 = $ 238,830 S4 = $ 450,000
••••
••••
© A.K.S. JARDINE
114
The Solution
R A-Sp,T A-Sn A-Sn
Cp,1 Cp,2 Cp,3 …Cp,T Ct,1 Ct,2 Ct,3 … Ct,n Ct,1 Ct,2 Ct,3 … Ct,n
0 1 2 … T-1 T 1 2 … n-1 n 1 2 . . . n-1 2n (Years)

Today Cash Flows Associated with Acquiring New
Equipment at Time T
Change-over time to new loader, T

T=0 T=1 T=2 T=3
Overall 449,074 456,744 444,334 435,237
EAC ($)
Note: n = 11 yrs
© A.K.S. JARDINE
115
The Bad News
Most likely additional component to be replaced at re-build:

Front frame ($99,870)
R = $ 489,970 (was $ 390,000)
Change-over time to new loader, T

T=0 T=1 T=2 T=3
Overall 449,074 471,725 459,319 450,217
EAC ($)
Minimum
© A.K.S. JARDINE
116
A New Approach to Forecasting
OM & A Costs in an Electrical
Utility
Predicting Future Life
Cycle Costs

The Challenge - Improve ability to forecast O & M in the mid
to long-term period (3 to 10 years)
• The Key Business Drivers for Improving:
– Regulators developing Incentive Based Rate Methodologies which

could set rates for prolonged period, about 5-years (Long-term
forecasts demanded by regulators and Intervener community to
provide context for decisions)
– Utilities must ensure rates adequate to recover expected future costs

and leverage opportunity for improving utility earning potential if can
find efficiencies within the rate period
– Improve planning of utility based operational work and staffing

needs in the mid to long-term period
Note 1: Mid-Life Overhauls are charged to O&M since considered part of routine maintenance, due to fact that the overhauls 118
This is Confidential
do not extend life beyond expected and property
EOL and also consistent of CMORERate
with Depreciation and/or Dr Jardine
approved from
by Regulator.
The Challenge - Improve ability to forecast O & M in the mid
to long-term period (3 to 10 years)
• Key Issues:
– Recent trend toward increasing Planned and Corrective
O&M
– Demographics indicate increasing number of end-of-life

assets and improved correlations to O&M needed
– Recent trend toward increasing number of mid-life

overhauls (Refer Note 1)
– Recent failures necessitate undertaking a one-time

specific asset remedial program
Note 1: Mid-Life Overhauls are charged to O&M since considered part of routine maintenance, due to fact that the overhauls 119
This is Confidential
do not extend life beyond expected and property
EOL and also consistent of CMORERate
with Depreciation and/or Dr Jardine
approved from
by Regulator.
Basically we were looking for some thing like this!
60
50
40
30
20
10
0
2009 2012 2015 2018 2021 2024 2027 2030 2033 2036
Year
120
Transformers Life Cycle Costs
Midlife Refurbishment
End of Life OM&A

Related Cost
Other Overhauls?
Other Overhauls?
CM CM
PM
20
Installation 10 30 40 50 60 Age
121
How to find the model parameters?
CM
PM
20 122
Installation 10 30
This is Confidential and property of CMORE 40
and/or Dr Jardine from 50 60 Age
Running The Model
2008 2015 2020 2025 2030 2035 2040 2045 2050 2055
C(2009)
C(2012) C(2014) 123
C(2010) C(2015)
C(2011) C(2013)
Predicted Future Utility OM&A Costs Based on The Model
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Year 124
FUTURE IMPORTANT TRENDS
125
Important Trends: Increasing EOL Costs Trend
Histogram of Transformers Ages

and End of Life Zone
80
70
60
50
Frequency
40
30
20
10
126
2
8
11
14
17
20
23
26
29
32
35
38
41
44
47
50
53
56
59
62
65
68
71
74
77
80
Predicted Future EOL Costs By The Model
127
Important Trends: Decreasing Overhaul Costs Trend
Histogram of Transformers Ages

and Major Overhaul Zone
80
70
60
50
Frequency
40
30
20
10
0
2
8
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
e
or
M
128
Total Predicted Overhaul Costs
Excluding One-Time Specific Asset Remedial Program
$5,000,000
$4,500,000
$4,000,000
Cost in 2008 dollars
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
09
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Year
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
129
Joint Optimization of Retirement Age and
Maintenance Tactics
130
130
Limited Hard Data:
Eliciting Tacit Knowledge
131
131
A Coated Steel Main LCC Model
O&M Costs= f ( no. of leaks, consequence of leaks)

Equivalent Annual Cost ($/year)
=Expected (no. of leaks)  Expected (consequence of a leak)
Total Cost= O&M Costs + Capital Costs
Total Cost
Capital Cost O&M Cost
Economic Age Replacement Age (year)

132
Savings Are Huge
Estimated Annual Savings Due to LCC Optimization

Based on:
Current Use of proper Not backfilling Following Total
maintenance coating with sand optimum leak
practices survey frequency
$4,500,000 $900,000 $480,000 $500,000 $6,480,000

/year
133
Case Study – Replacement of Large
Diaphragm Meters
3 policies evaluated:
• Policy 1: Always replace a failed meter with a new
meter of the old technology
• Policy 2: Always repair a failed old technology meter
once
• Policy 3: Always replace a failed meter with a new
meter of the new technology
Conclusion: Find Policy 3 to be the best alternative from a

life cycle costing perspective.

Equivalent Annual Costs
The equivalent annual costs for the policies are:
• Policy 1: $ 98/year per meter (Replace failed meter with new meter of
old technology)
• Policy 2: $ 91/year per meter (Repair once failed meter of old

technology)
• Policy 3: $ 73/year per meter (Replace failed meter with new meter of
new technology)

Net Present Values
Given that there are approximately 23,000 meters in service the Net Present
Values of the 3 policies are:
• Policy 1: $ 36.7 million (Replace failed meter with new meter of old
technology)
• Policy 2: $ 34.0 million (Repair failed meter of old technology once)
• Policy 3: $ 27.3 million (Replace failed meter with new meter of new
technology)
Conclusion: Policy 3 is best one since it minimizes the life cycle costs

SOURCES OF DATA
• Meter list data with attributes
• Meter repair data
• Meter return data
• Meter installation/removal data

FITTTED WEIBULL DISTRIBUTIONS
New to First 2nd Installation to

Removal 2nd Removal
Shape 1.96 2.87

Scale (year) 20.2 13.4
Mean (year) 18 12
Median (year) 17
12

PDF OF METER REMOVAL CYCLES
PDF For Meter 1st Removal PDF For Meter 2nd Removal
0.045 0.09 Mean
0.04 Mean 0.08
0.035 0.07
0.03 0.06
P 0.025 P 0.05
D D
0.02 0.04
F F
0.015 0.03
0.01 0.02
0.005 0.01
0 0
0 3 6 9 1215182124273033363942454851545760 0 3 6 9 1215182124273033363942454851545760
Age (Year) Age (Year)

EAC OF THE 3 POLICIES AT DIFFERENT
DISCOUNTING RATES
EAC of All Policies
EAC for Policy 1:Replace failed meter with new meter of old tech
300
250
Equivalent Annual Cost ($/year)
200
EAC for Policy 2:Repair a failed
old tech meter once
150
100
EAC for Policy 3:Replace failed meter

50
with new meter of new tech
0
0.1
0.6
1.1
1.6
2.1
2.6
3.1
3.6
4.1
4.6
5.1
5.6
6.1
6.6
7.1
7.6
8.1
8.6
9.1
9.6
10.1
10.6
11.1
11.6
12.1
12.6
13.1
13.6
14.1
14.6
15.1
15.6
16.1
16.6
17.1
17.6
18.1
18.6
19.1
19.6
Discounting Rate (%)

OPTIMAL POLICY AND SENSITIVITY
ANALYSIS
• The optimal policy is Policy 3: Always replace a failed meter with a new
technology meter.
• The cost savings in EAC of the optimal policy (Policy 3) compared to

Policies 1 and 2 are: $25.64 (26%) and $18.46 (20%) respectively.
• Sensitivity analysis found that the optimal policy is very robust around
the values of parameters given.

EXAMPLES OF PARAMETERS CHECKED
FOR SENSITIVITY
• Discount factor range: 0.1% to 19.6%
• CCA rate: 0.5% to 15%
• Tax rate: 10% to 60%
• Price of old tech meter: $750 to $950
• Repair cost of old tech meter: $150 to $350
• Installation cost of old tech meter: $265 to $465
• Price of new tech meter: $714 to $914
• Installation cost of new tech meter: $83 to $283
• Mean lifetime of old tech meter: 12.5 years to 30 years
• Mean lifetime of old tech repaired meter: 5 years to 17.5 years
• Mean lifetime of new tech meter: 15 years to 30 years

SENSITIVITY ANALYSIS
• Conclusion of the sensitivity

analysis: It is not necessary to worry
about the accuracy of the estimates of
the parameters since the optimal meter
repair/replacement policy is robust to
the parameters in their feasible ranges.

Implementation Strategies – Processes [9]
Implementation of LCC requires change in the way a variety of people work:
– Finance – shift emphasis from looking at single projects to looking at entire

assets
• A given project might have benefit when viewed on its own, but when
combined with a view of all other projects it might not
• Benefits and costs are viewed over the entire life cycle of an asset. A
modification to an asset (e.g.: a plant) should be viewed as a change to
plant LCC, not just the narrow project view
– Accounting – shift from accounting for only tangible costs to also tracking less
tangible and risk costs
• Consider future liabilities from using an asset in a new way like
environmental clean up costs, costs of future disability claims, etc.
• Keep records for the long term
144
Implementation Strategies – Processes (continued) [9]
– Operations – shift from “getting the job done” by adding to it the collection
of accurate data to support LCC models
– LCC modeling – someone must run the model and its various trade off
studies
• Where will this person reside? Accounting? Finance? Project
Engineering? Operations?
• What model will be used? One you create yourselves? Commercially
available?
145
Implementation Strategies – People [9]
Maybe we can
scale this down so
my area isn’t
This is too involved
much. I’m
You want me outta’ here!
to do what?
That’s absurd!
Bargaining
Denial Anger
Change
Rats! This
doesn’t look
like it’s going
Oh well – if
away anytime
you can’t beat
soon.
‘em, join ‘em.
Let’s find out
how to make Acceptance
this painless.
Depression
146
Any Questions?
ali.zuashkiani@utoronto.ca
cmore.mie.utoronto.ca
Thank You
Resources
[1] Asset Management Part 1: Specification for the optimised management of

physical infrastructure assets, PAS 55-1, 2004, Institute of Asset Management, UK
[2] M.Hodkiewicz, “Life Cycle Costing”, IPAMC 2007, August 2007, Tehran
[3] Blanchard & Fabrycky, “Systems Engineering and Analysis”, 4th ed. 2006,,
Prentice Hall.
[4] Jardine & Tsang, “Maintenance, Replacement & Reliability”, 2006. CRC Taylor
Francis Group.
[5] Barringer Paul, “Life cycle cost tutorial”, IMEC 2006
[6] Stephen J. Kirk and Alphonse J. Dell’Isola, Life Cycle Costing for Design
Professionals, McGraw-Hill, Inc., 1995.
[7] Yoshio KAWAUCHI; Marvin RAUSAND “Life Cycle Cost (LCC) analysis in oil and
chemical process industries”
[8] B.S. Blanchard and W.J. Fabrycky, Systems Engineering and Analysis, Prentice
Hall, 1990
[9] James V Reyes-Picknell, “Implementing a Life Cycle Plan for Asset Management”,
Federated Press 2008
148

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Gaining Competitive Advantage:

Essentials of Life Cycle Costing Decisions for Asset

This is Confidential and property of CMORE and/or Dr Jardine from 1

c Value = Output = Product…Quality…Service… Opportunity

e Support logistics and infrastructure

e Other sources of AM Information

m This is Confidential and property of CMORE and/or Dr Jardine from

s Both align with each other and with ISO 5500x

e More extensive coverage than ISO 5500x

m This is Confidential and property of CMORE and/or Dr Jardine from

Variable operating costs:

Fixed operating costs:

0% Plant Utilization 100%

This is Confidential and property of CMORE and/or Dr Jardine from

0% Plant Utilization 100%

This is Confidential and property of CMORE and/or Dr Jardine from

0% Plant Utilization 100%

This is Confidential and property of CMORE and/or Dr Jardine from

0% Plant Utilization 100%

This is Confidential and property of CMORE and/or Dr Jardine from

0% Plant Utilization 100%

This is Confidential and property of CMORE and/or Dr Jardine from

0% Plant Utilization 100%

This is Confidential and property of CMORE and/or Dr Jardine from

Equipment Purchase Installation Operating Cost Salvage

A 5000 100 100 100 100 3000

B 3000 100 200 300 400 1500

C 6000 100 50 80 100 3500

NOTE: Costs in $ x 100

• Concept and definitions

“Time interval that commences with the identification of

Life Cycle Cost refers to:

Also commonly referred to as:

"womb to tomb" costs.

Life cycle management concept considers the cost

LCC refers to all costs associated with a system as

The most visible cost is acquisition cost

• Project Engineer: Minimize Capital Expenditure

adapted from [5]

Use language of money!

This is Confidential and property of CMORE and/or Dr Jardine from 27

The above concept is familiar to many,

Problem: Assume we have a payment to make, 2 years

• Bring all future costs to their present

In the following example, we will consider

(i) Present value

Equipment Purchase Installation Operating Cost Salvage

A 5000 100 100 100 100 3000

B 3000 100 200 300 400 1500

C 6000 100 50 80 100 3500

NOTE: Costs in $ x 100

• Present Value (PV) = ?

PV = 3000 + 100 + 200 (0.9)1 + 300 (0.9)2

• To convert PV to EAC, multiply PV by the Capital

where CRF = i (1+i)n

EAC = 3157 i (1+i)n Recall: PV = $3157

Note: The PV of this is the same as the PV of the original stream of

• Optimum Replacement Age

• Optimum Replacement Age

• Repair versus Replace

• Joint Optimization of Retirement Age and

Optimum replacement age

Replacement Age ( years)