Inspection of Crude Oil Unit Decisions, Cost Estimation, and Risk Analysis - Research Paper Example

Students Name Tutors Name Topic Date Inspection of crude oil unit decisions, cost estimation, and risk analysis Assumption table   failure of pipeline [Unit] release of flammable fluid new part $ 300,000 cost of repair $ 400,000 cost of contractor $ 80,000 Frequency years 2 number of days down days 35 number of days down days 8 failure of every 5 month months 5 loss of profit per day due poor quality $ 4,000,000 loss of profit per day $ 4,000,000 Corrosion of Boilers Failure to control mixing of chemicals new part $ 500,000 cost of repair $ 30,000 cost of contractor $ 75,000 once year years 1 number of days down days 40 number of days down days 2 failure of every 2 years years 2 loss of profit per day due poor quality $ 500,000 loss of profit per day $ 4,000,000 Releasing high-temperature Corrosion of Cooling towers new part $ 100,000 new part $ 250,000 cost of contractor $ 20,000 cost of contractor $ 70,000 number of days down days 2 number of days down days 10 failure of every 2 years years 2 failure of every 2 years years 2 loss of profit per day $ 4,000,000 loss of profit per day $ 4,000,000 Electrical failure Corrosion of other equipment materials $ 2,000 new part $ 250,000 cost of contractor $ 10,000 cost of contractor $ 70,000 number of days down days 5 number of days down days 10 failure of every 2 years years 2 failure of every 2 years years 2 loss of profit per day $ 4,000,000 loss of profit per day $ 4,000,000 Costs associated with Inspection loss of profit per day $ 4,000,000 Longer annual shutdown for maintenance days 5 equipment replaced 800,000 engineers no. Cost per hour number of hours Activity H 2 1000 1 2000 Activity I 2 1000 3 6000 Activity J 1 1000 6 6000 Activity K 3 1000 5 15000 Activity L 2 1000 5 10000 Activity M 1 1000 5 5000 Activity N 3 1000 3 9000 Activity O 2 1000 8 16000 69000 Assistant engineers Activity J 2 600 6 7200 Activity M 3 600 5 9000 Activity N 3 600 3 5400 21600 Interest rate 10% 2. Individual costs of each failure a). failure of pipeline every 5 months new part 300,000 cost of contractor 80,000 loss of profit $ 140,000,000 140,380,000   b). Failure to control mixing of chemicals every years cost of repair $ 30,000 loss of profit per day due poor quality $ 1,000,000 1,030,000 c) Releasing high-temperature every 2 years new part $ 100,000 cost of contractor $ 20,000 loss of profit per day $ 8,000,000 8,120,000 d) Release of flammable fluid cost of repair $ 400,000 loss of profit per day due poor quality $ 32,000,000 32,400,000 e). Corrosion of Boilers new part $ 500,000 cost of contractor $ 75,000 loss of profit per day $ 160,000,000 160,575,000 f) Corrosion of Cooling towers new part $ 250,000 cost of contractor $ 70,000 loss of profit per day $ 40,000,000 40,320,000 g). Corrosion of other equipment $ new part $ 250,000 cost of contractor $ 70,000 loss of profit per day $ 40,000,000 40,320,000 h). Electrical failure materials $ 20,000 cost of contractor $ 10,000 loss of profit per day $ 20,000,000 20,030,000 3. Summaries of costs above This costs are summarized as well their present values are calculated in the table. 0.41667 0.833 1 1.25 1.667 2 2.083 2.5 2.9167 3 $(000) $(000) $(000) $(000) $(000) $(000) $(000) Failure of pipeline 140,380 140,380 140,380 140,380 140,380 140,380 140,380 Failure to control mixing of chemicals 1030 1,030 Releasing high-temperature 8,120 release of flammable fluid 32,400 Corrosion of Boilers 160,575 Corrosion of Cooling towers 40,320 Corrosion of other equipment 40,320 Electrical failure 20,030 total cost 140,380 140,380 1,030 140,380 140,380 302,795 140,380 140,380 140,380 - Present Value factors at 10% 0.9611 0.9236 0.9091 0.8877 0.853124 0.8264 0.8199 0.7880 0.7573 0.751315 present values 134,915 129,662 936 124,613 119,762 250,244 115,099 110,617 106,311 - Net present value 1,092,158 The present value of failure when inspection is not done $ 1,092,158 of represents loss they will incur. The length of years used to calculate the present value however can affect the PV that is why it is also of critical importance to determine the correct length of years to use in the analysis and our case is 3 years. Option of inspection 0.5 1 2 2.5 3 $(000) $(000) $(000) $(000) $(000) Loss of revenue $ 20,000 $ 20,000 $20,000 $ 20,000 $20,000 materials of maintenance $ 800 $ 800 $ 800 $ 800 $ 800 Engineers $ 69 $ 69 $ 69 $ 69 $ 69 assistant engineers $ 21,600 $ 21,600 $ 21,600 $ 21,600 $ 21,600           20,890,600 20,891 20,891 20,891 20,891 10.0% 0.9535 0.9091 0.8668 0.7880 0.7513 19,918 18,991 18,108 16,461 15,695 Present value 89,174 The present value of inspection is $89,174,000. This is lower than the cost incurred when inspection is not done. Case scenario- boiler does spoil within two years 0.41667 0.833 1 1.25 1.667 2 2.083 2.5 2.9167 3 $(000) $(000) $(000) $(000) $(000) $(000) $(000) Failure of pipeline 140,380 140,380 140,380 140,380 140,380 140,380 140,380 Failure to control mixing of chemicals 1030 1,030 Releasing high-temperature 8,120 release of flammable fluid 32,400 Corrosion of Cooling towers 40,320 Corrosion of other equipment 40,320 Electrical failure 20,030 total cost 140,380 140,380 1,030 140,380 140,380 142,220 140,380 140,380 140,380 - Present Value factors at 10% 0.9611 0.9236 0.9091 0.8877 0.853124 0.8264 0.8199 0.7880 0.7573 0.751315 present values 134,915 129,662 936 124,613 119,762 117,537 115,099 110,617 106,311 - Net present value 959,451 The figures used above do not include the boiler values in computation to determine the case scenario. Obviously, the situation remains the same, as the expected PV is already higher than the PV of inspecting. Case scenario- boiler does spoil within two years 0.41667 0.833 1 1.25 1.667 2 2.083 2.5 2.9167 3 $(000) $(000) $(000) $(000) $(000) $(000) $(000) Failure of pipeline 140,380 140,380 140,380 140,380 140,380 140,380 140,380 Failure to control mixing of chemicals 1030 1,030 Releasing high-temperature 8,120 release of flammable fluid 32,400 Corrosion of other equipment 40,320 Electrical failure 20,030 total cost 140,380 140,380 1,030 140,380 140,380 101,900 140,380 140,380 140,380 - Present Value factors at 10% 0.9611 0.9236 0.9091 0.8877 0.853124 0.8264 0.8199 0.7880 0.7573 0.751315 present values 134,915 129,662 936 124,613 119,762 84,217 115,099 110,617 106,311 - Net present value 926,129 Case scenario- first failure then inspection 0.41667 $(000) Failure of pipeline 140,380 Failure to control mixing of chemicals Releasing high-temperature release of flammable fluid Corrosion of Cooling towers Corrosion of other equipment Electrical failure total cost 140,380 Present Value factors at 10% 0.9611 present values 134,915 Net present value 134,915 Since inspection will start during repair of the failed equipment. It will have a figure of $89,174. Comparison of costs of failure and inspection From the graph above it can be noted inspection is necessary as the cost and opportunity associated with inspection is lower as compared to the cost od failure of pipe, boiler and flammable gas. Recommendation regarding the proposed inspection The company should inspect regularly. The numbers does not tell the whole story because the computations will not be able to determine the future events well beyond the 2 years used in computing the NPV. There is big damage even in this situation and the management has everything to win if they are blessed with a more favorable situation. Do we out outsource inspection services or hire our staff Now that the decision is to inspect regularly which is cheaper option – outsourcing or hire staff? In the case of outsourcing, the total cost in outsourcing should be lower than the cost of making the doing it internally. The decision about whether to hire staff or outsource inspection services will depend on the costs and other factors. However, in this scenario the decision is whether to buy using quantitative analysis. The following is the quantitative analysis of the scenario Relevant Items TOTAL Relevant items Hire outsource Engineers 69000 Assistant Engineers 21600 Overhead 800000 700000 Cost of outsourcing 75000 Total costs 896,000 775,000 The decision here is that the inspection services should be outsourced as opposed to hiring staff because the total cost of outsourcing amounts to 775,000 is opposed to 896,000 for the hiring. Apart from the quantitative analysis above that should be considered by the company, qualitative factors needs to be taken into consideration. Some of the qualitative factors that should be considered include the quality of the inspection done supplied by the outsourced company. Reliability of the supply as well as supply schedule should also be taken into consideration. The company should also consider the possibility of the company creating a competitor who will produce the product at competitive prices and take it to the market. The company should consider the fact that they are likely to reduce producing costs by becoming innovative a fact that they cannot have when outsourcing. Read More