October 1, 2022 | By Scott Jenkins
When evaluating capital projects in the Chemical Process Industries (CPI), there are many scenarios where there are significant differences between the alternatives in terms of capital cost, operation cost, maintenance cost. and dismantling. In these cases, decisions must be made based not only on the initial cost of an investment, but rather on the investment throughout its useful life. Life Cycle Cost Analysis (LCCA) is a tool that can be used to aid in decision making in these cases. This one-page reference provides a brief overview of the basic concepts of the LCCA methodology.
The ACLC aims to compare different investment project alternatives on a common basis: the total discounted cost, which adds the initial and future costs of the project, adjusted to take into account the time value of money. This method can be applied to chemical processing facilities to analyze the whole process, sections of the process or its unit operations individually.
Several factors are considered when developing an LCCA, including: quantification of the present value of initial costs, operating costs, maintenance and repair costs, disposal costs and replacement, residual value and benefits associated with each alternative. A general formula for the LCC, along with definitions of its constituent terms, can be found in the shaded box.
The components of the LCC equation are further explained below:
Current value. Present value is defined as the equivalent value over time of all cash flows since the start of the project. As the overall cost of the project is affected by costs incurred at the start of the project (or the base year) and future costs (any year after the start of the project), these expenses should be leveled. Future costs are all costs incurred at any time between the first year and the study period. They include recurring and one-time costs, affected by the discount rate.
Initial cost. The initial cost includes all capital investments to be made until the project is operational. This includes direct costs, such as equipment, materials, buildings and construction works, as well as indirect costs, such as leases, studies, permits, engineering, project management, taxes and overhead costs.
Operation cost. Operating costs include all annual costs necessary for the operation of the installation, excluding maintenance and repair costs. These include raw materials, utilities (water, electricity, gas, etc.), labor and operating services, and indirect costs (such as lease, insurance, security , royalties, overheads).
Cost of maintenance and repair. Maintenance and repair costs relate to the maintenance of the project itself and take into account that some of these costs may be annual or scheduled at intervals of several years in the future. Mechanical, instrumentation and electrical engineers can provide information on maintenance requirements and frequency of equipment involved in the project, while civil engineers can provide information on maintenance requirements for buildings, foundations and structural components; cost engineers must then estimate labor rates and hours for the required maintenance tasks. There is also a risk factor to account for unscheduled repairs that depends on the failure rates of equipment parts.
Downtime costs (e.g. lost production, penalties, etc.) due to maintenance and repairs may also be considered, if found to be significantly different between the alternatives assessed.
Disposal and replacement costs.Disposal costs relate to the removal of existing structures or nature on the site as well as the transport of waste generated by construction or demolition (debris, residues, etc.). More important, however, are the replacement costs. Each component in a project has a useful life, and replacement costs are generated by removing and replacing project components that have completed their useful life.
Residual value. The residual value includes the costs associated with the project after the end of the study period. These values can be positive, negative or zero. If the values are positive, it means that there are disposal costs linked to the end of the project (for example, clean-up costs), while negative values mean that there is a value linked to the end of the project. plant at the end of the study period (for example, the plant has a useful life longer than the study period) and a zero value indicates that no value is associated with the end of the study.
Advantages. Benefits include any other value gained by the project over its lifetime. Only benefits that can be converted into monetary value can be included in the ACLC. For example, the value of emission reduction certificates or tax incentives received from implementing a design alternative would be considered.
Editor’s note: This month’s “Facts at your Fingertips” was adapted from the following article: Giardinella, S., Baumeister, Z. and Baumeister, A. Using Lifecycle Cost Analysis for Best Project Value, Chem. Eng., December 1, 2020, p. 32–39.