Whole-of-Life Cycle Costs of Engineered Products and Infrastructure - Report Example

Business combination Name of the professor Name of University Date: Abstract Life cycle estimate can be amorphous as a cost management approach where all costs related to the product life cycle are properly managed over the life cycles of a given product or project. This paper discusses product life cycle giving component life cycle of any engineering project and a case study of PV project life cycle costing. The paper ends with merits and demerits of a product life cycle giving reasons why it is essential for managers in decision-making process. 1.0 Introduction Life cycle estimate can be amorphous as a cost management approach where all costs related to the product life cycle are properly managed over the life cycles of a given product or project. It always begins at the conception of the project until the project is abandoned a process known as the cradle to grave of the product. 1.1 There are four main stages in any product or project. First is product planning and initial concept design. This stage involves the process of identifying any underlying conditions, limitation, constraints and assumptions such as minimum asset performance and maximum asset costs that might confine the array of tolerable options to be analyzed (Silva & Tenreyo Pg 260). It is useful in decision making on whether the engineering project should be carried on or not. They include research and development cost and market research costs. Secondly, product design and development, it starts at the point where preparation of the development contract until the point where equipments are ready to be introduced to the business. It is also involved factory trial stage. Costs here include product design costs, prototyping costs and market testing costs (Silva & Tenreyo Pg 260). The third stage is the production stage, here all the mechanized costs associated to producing the products such as undeviating materials, labor, operating cost and administrative cost would be incurred. Lastly, is the distribution and customer support cost. This last stage is where product is sent to the market and cost of distributing product to the market incurred at this stage. Logical support cost is also incurred at this stage, it involves delivery, and transportation costs, warehousing costs, dismantling costs and costs for abandonment of the project, and some equipment may need to be disposed off ( Deardorff, A. pg 61). 1.2 Elements of life cycle costing One of the main reasons of calculating this technique is mostly to analyze all the costs that have to be a bear by the corporation in possessing a new asset (Deardorff, A. pg 61). According to XX, this technique serves as a decision-making tool in which it combines the conflicts by stressing on the facts, money and time. In a given scenario, for a company to calculate life cycle cost of an equipment, the company should include not only the purchase cost that is the price of the machine, but also any other related costs incurred afterwards through the lifespan of the product. This includes repair and maintenance cost, operating costs and disposal cost needs to be calculated using net present value at discounted factor. In life cycle costing, three major elements need to be factored in (Silva & Tenreyo Pg 370). They include; Initial cost this constituent represents the gaining cost, building cost, design cost and installation cost of the equipments. They are normally one-time cost since they are incurred only once by the company at the beginning of project commencement (Silva & Tenreyo Pg 370) Operation and maintenance cost The operation and costs include maintenance costs, labor cost and the company throughout the life span of the project will incur training cost continuously. Asset maintenance is very necessary so that an asset can perform quite better and realized its full potential. Apart from the maintenance cost, training cost is necessary. The company incurs it in order to furnish its workers with the required skills and acquaintance that pertains to the usage of the newly acquired asset. In circumstances where the acquired product assets require continuous update, the employee’s knowledge is also necessary to be updated. Disposal costs At the conclusion of the useful life of the asset, there are certain costs that need to be borne by the company, such as recycling costs and/or dismantling costs. The company also will incur these costs once. However, if the company has decided to sell off the asset, the company will obtain gain in disposal if the proceeds obtained from disposing of an asset exceed the salvage value of the asset (Deardorff, A. pg 71). 2.0 A case study of design and life cycle of cost analysis of solar PV system in a company Normally Photovoltaic’s offers customers the ability to generate and consume clean electricity, which is quite reliable. This is because the source of energy is usually the sun; the electricity produced by the PV system is one of the most attractive options for many countries, which are closer to equator since they enjoy long hours of sunshine. For instance, this kind of energy is emission and pollution frees something, which is a positive response to the current worldwide needs to the reduced global environmental emission. In fact, each one kW of PV produced electricity offset up to around 16 kg of NOx 9 kg of SO2, 0.6kg of other parts and saved 600 to 2,300 kg of CO2 emissions per year. Second, the maximum PV generation matches the peak loads in these countries. Third, for those applications requiring large quantity of electricity and are put for away from existing power lines, the consumer may be asked to pay up to $18,000 per kilometer to extend power lines. Kilometer to extend power lines. Meanwhile, two factors increased the number of off-grid PV systems for commercial, industrial and residential applications. The first is the reduced PV module cost. In 2000, the price per peak watt dropped to $3 to $7/Wp. The second is the fact that several countries encourage off-grid installations and provide a good portion of their costs. For instance, UK and Japan provide up to 50% and 33% subsidy for private houses. 2.1 Major components of an off-grid PV system A number of the issue to be well thought-out by the consumer for an off-grid PV system are whether they want it to use direct current (DC) or alternative current (AC). The consumer should also know that the conversion of the DC to AC consumes up to 20% of the total power produced by PV. Therefore, a typical off-grid battery charger-controller adds the DC to AC inverter would produce up to 220 volts of AC power. Number Power Hours Energy Table 1.0 Cost break down Appliances of items Watt) (kWh Lighting 12600 95.400 Ceiling Fans 6 300 24, 7.200 Television 1, 205 12, 3.00 Refrigerator 1, 350 6, 2.100 Freezer 1, 250 4, 1.00 Water Heater 1, 2000 1.5, 3.00 Washing Machine 1, 500 1.5, 0.750 Air conditioner 3, 6000 8, 48.00 Cumulative 10, 250 70.450 The chart on top shows the cost collapse of the PV solar system. This can be calculated using Internal Rate of Return (IRR) where the future cash flow is being equated with the initial cash outlay. Energy cost should be factored in to determine the viability cost and this should be compared with hydroelectric power cost or wind power cost using capital budgeting formulas like Pay Back period, Internal rate of return and Net present value. The management will choose the best decision where the cheapest project will be taken by the organization. Feasibility study should be carried out, and decision be supposed not only be based on cost but other social benefits, which come with the project. For instance, the above cost of producing PV power is very expensive compared with the normal hydroelectric power production or coal power production. However, pollution aspect, efficiency and environmental friendliness are far much better than the coal and hydroelectric power. In order to prevent greenhouse gas emission and other environmental issues, the company may opt to produce PV power as seen in the above example. The sustainability costs are also cheaper compared to another cost. 3.0 Merits and Demerits of life cycle costing of a project Merits a) A management tool LCC help managers to pick the best venture option amid many alternatives, which ensure efficient planning and potential benefit (Frankel & Wei, pg 31). b) Facilitate effective procurement decision. LCC assesses and anticipate future resources requirement for production. Therefore, it helps management in determining what to purchase. As a result, managers can make effective and efficient decision, and redundant purchasing can be avoided (Frankel & Wei, pg 31). c) Assist management to identify factors that increase costs. LCC requires detail research on cost on each product stage involved. Hence, this helps in identifying hidden cost. d) Bosses can recognize costs that can lessen costs in other stages of product life cycle. For example, by focusing the cost on designing stage, the corporation can reduce after sales cost such as assurance(Frankel & Wei, pg 31). However, the life cycle also costing have some drawbacks as follows; i. Challenging It needs more effort from management, and significant decisions have to be completed in order to get accurate data. This is because there is a lack of awareness in the management on how to calculate life cycle costs (Frankel & Wei, pg 44). ii. Time consuming. It is time consuming to gather information on the actual costs involved in the product life cycle from all the related departments. iii. Not easy to design products that have longer lives. This is due to the difficulty in predicting the changes in external & internal environment. (E.g. customers’ needs and preferences, the inflation effect, influence of competitors’ action) iv. Difficult to estimate operational & maintenance cost. It is difficult to determine the discount rate as management need to compare the nominal value and discounted value. Hence, it will incur more cost and be more time-consuming (Frankel & Wei, pg 34). Reference Silva & Tenreyo 2003 Market Structure and Foreign Trade: Increasing Return, Imperfect Competition, and International Economy”, Cambridge,USA Pg 252-320 Frankel, J. & Wei, S (2003), “Management accounting”, Mimeo, University of California- Berkeley Pg 61-78 Deardorff, A. 2007, “Determinants of project costing: in management decision making process?” In The Regionalization of the World Economy, ed. by Jeffrey Frankel. Chicago:University of Chicago Press Pg 31-45 Read More

According to XX, this technique serves as a decision-making tool in which it combines the conflicts by stressing on the facts, money and time. In a given scenario, for a company to calculate life cycle cost of an equipment, the company should include not only the purchase cost that is the price of the machine, but also any other related costs incurred afterwards through the lifespan of the product. This includes repair and maintenance cost, operating costs and disposal cost needs to be calculated using net present value at discounted factor.

In life cycle costing, three major elements need to be factored in (Silva & Tenreyo Pg 370). They include; Initial cost this constituent represents the gaining cost, building cost, design cost and installation cost of the equipments. They are normally one-time cost since they are incurred only once by the company at the beginning of project commencement (Silva & Tenreyo Pg 370) Operation and maintenance cost The operation and costs include maintenance costs, labor cost and the company throughout the life span of the project will incur training cost continuously.

Asset maintenance is very necessary so that an asset can perform quite better and realized its full potential. Apart from the maintenance cost, training cost is necessary. The company incurs it in order to furnish its workers with the required skills and acquaintance that pertains to the usage of the newly acquired asset. In circumstances where the acquired product assets require continuous update, the employee’s knowledge is also necessary to be updated. Disposal costs At the conclusion of the useful life of the asset, there are certain costs that need to be borne by the company, such as recycling costs and/or dismantling costs.

The company also will incur these costs once. However, if the company has decided to sell off the asset, the company will obtain gain in disposal if the proceeds obtained from disposing of an asset exceed the salvage value of the asset (Deardorff, A. pg 71). 2.0 A case study of design and life cycle of cost analysis of solar PV system in a company Normally Photovoltaic’s offers customers the ability to generate and consume clean electricity, which is quite reliable. This is because the source of energy is usually the sun; the electricity produced by the PV system is one of the most attractive options for many countries, which are closer to equator since they enjoy long hours of sunshine.

For instance, this kind of energy is emission and pollution frees something, which is a positive response to the current worldwide needs to the reduced global environmental emission. In fact, each one kW of PV produced electricity offset up to around 16 kg of NOx 9 kg of SO2, 0.6kg of other parts and saved 600 to 2,300 kg of CO2 emissions per year. Second, the maximum PV generation matches the peak loads in these countries. Third, for those applications requiring large quantity of electricity and are put for away from existing power lines, the consumer may be asked to pay up to $18,000 per kilometer to extend power lines.

Kilometer to extend power lines. Meanwhile, two factors increased the number of off-grid PV systems for commercial, industrial and residential applications. The first is the reduced PV module cost. In 2000, the price per peak watt dropped to $3 to $7/Wp. The second is the fact that several countries encourage off-grid installations and provide a good portion of their costs. For instance, UK and Japan provide up to 50% and 33% subsidy for private houses. 2.1 Major components of an off-grid PV system A number of the issue to be well thought-out by the consumer for an off-grid PV system are whether they want it to use direct current (DC) or alternative current (AC).

The consumer should also know that the conversion of the DC to AC consumes up to 20% of the total power produced by PV. Therefore, a typical off-grid battery charger-controller adds the DC to AC inverter would produce up to 220 volts of AC power.

Read More