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

Students Name Tutors Name Topic Date Inspection of crude oil unit decisions, cost estimation, and risk analysis When selecting which option is best for accompany, there is need to analyze the financial benefits of each option. This decision will chart the future direction of the returns and best analytic tools should be used. Crude oil unit is faced with a choice between three options that is inspect of the unit after every three months, wait until one unit fails and carry on inspections or repair failures as they occur. The option of inspection is faced with a decision of outsourcing or having permanent staff to carry out inspection. Assumptions It is imperative that the management of the crude oil unit should have detailed understanding of the costs structures of each failure within the unit. This ensures that the appropriate resources are availed in time to avoid further losses. The following tables show assumed costs. It should be noted that, this are mere assumptions for this assignment. Assumption for various failures The table 1 below shows loss incurred by each failure; it associated duration taken to rectify situation, the cost the part to be replaced and frequency of the failure 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 $ 810,000 loss of profit per day $ 80,000 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 $ 60,000 loss of profit per day $ 400,000 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 $ 340,000 loss of profit per day $ 850,000 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 $ 1,170,000 loss of profit per day $ 1,000,000 Table 1: costs of failure of each units Fro the table above it can be noted that all failures occur after every 2 years except pipeline system that occurs every 5 months and failure to control mixing of chemicals which occurs annually. Costs associated with Inspection The following assumptions have been made in relation to inspection. loss of profit per day $ 1,000,000 Longer annual shutdown for maintenance days 5 equipment replaced 800,000 Activity no. engineers Cost per hour number of hours Total 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 Table 2: cost associated with The table shows loss of profit per day, duration that inspection will take that is 5 days and tools and equipment that will expensed at every inspection. It also shows the activities that require engineers and the associated cost. There is a column for number of engineers or assistant engineers another column for Cost per hour per a profession, then another column for number of hours for each professional. The last column shows the total cost of each activity. 2. Individual costs of each failure a). failure of pipeline every 5 months It is assumed that failure of the pipeline system will occur at least every 5 months and they failure of pipeline every 5 months new part 300,000 cost of contractor 80,000 loss of profit $ 2,800,000 3,180,000 Table 3: Cost Associated With Failure of Pipeline The table above shows total cost of each failure of the pipeline system. This takes into account the loss of profit, cost of contract and the equipment that will replaced as new part  b). Failure to control mixing of chemicals every years cost of repair $ 30,000 loss of profit due poor quality $ 120,000 150,000 Table 4: cost associated with each failure of mixing of chemicals Table 4 above shows the show the total costs incurred when there an error in mixing chemicals in the crude oils unit. The total cost per failure is calculated as $150,000 c) Releasing high-temperature every 2 years new part $ 100,000 cost of contractor $ 20,000 loss of profit $ 680,000 800,000 Table 5: Loss per failure of temperature every 2 years Table 5 above shows that any failure of temperature results to a loss of 800,000. Although it is assumed that it will occur in every two years. It can occur any time in the life of the crude oil unit. d) Release of flammable fluid cost of repair $ 400,000 loss of profit due poor quality $ 6,480,000 6,880,000 Table 6: loss due release of flammable fluid Table 6 above shows the show the total costs incurred when there release of flammable fluid in the crude oils unit. The total cost per failure is calculated as $6,880,000. It should inflammable can bring down entire unit if not discovered with shortest time possible. e). Corrosion of Boilers The table 7 below shows total cost of failure of boilers as result of Corrosion. The total cost is $16,575,000 in which $16,000,000 is due to loss of profit. new part $ 500,000 cost of contractor $ 75,000 loss of profit $ 16,000,000 16,575,000 Table 7: Loss due to boilers The new equipment will cost $ 500,000 and contractor charges will be $ 75,000 f) Corrosion of Cooling towers new part $ 250,000 cost of contractor $ 70,000 loss of profit $ 8,500,000 8,820,000 Table 8: loss due failure of cooling towers Table 8 above shows the show the loss made when cooling towers fails in the crude oil unit. The loss per failure is calculated as $8,820,000. g). Corrosion of other equipment new part $ 250,000 cost of contractor $ 70,000 loss of profit $ 10,000,000 10,320,000 Table 9: loss due other equipments The table 9 above shows loss made incase there is failure of other equipment. h). Electrical failure materials $ 20,000 cost of contractor $ 10,000 loss of profit per day $ 5,850,000 5,880,000 Table 10: loss due failure of electric power Table 10 above shows that any electric results to a loss of $5,880,000. Although it is assumed that it will occur in every two years. It can occur any time in the life of the crude oil unit. Cost benefit analysis Cost-benefit analysis will be done by the use of net present value of costs. The net present value method enable us estimate lowest loss among the options by comparing its present value options. This is achieved by discounting costs to their present value using an interest rate of 10%. Essentially, the management picks the option with the lowest PV. The PV method will provide information based on forecasts for the future of the project, enabling the management to estimate the net financial loss expected from such option. Present value of failures in three years The analysis period is assumed to be three years and the present values of the failures occurred during this period. These costs are summarized as well their present values are calculated in the table. 0 0.41667 0.8333 1 1.25 1.667 2 2.083 2.5 2.917 (000) (000) (000) (000) (000) Failure of pipeline 3,180 3,180 3,180 3,180 3,180 3,180 3,180 Failure to control mixing of chemicals 150 150 Releasing high-temperature 800 release of flammable fluid 6,880 Corrosion of Boilers 16,575 Corrosion of Cooling towers 8,820 Corrosion of other equipment 10,320 Electrical failure 5,880                   total cost 3,180 3,180 150 3,180 3,180 49,425 3,180 3,180 3,180 Present Value factors of 10% 0.9611 0.924 0.909 0.888 0.853 0.826 0.820 0.788 0.757 present values 3,056 2,937 136 2,824 2,714 40,847 2,607 2,506 2,408 Net present value 60,034 Table 11: present value of total failure The present value of failure within three when inspection is not done $ 60,034,000 of represents loss they will incur. The net present value of a project represents minimum loss unit will incur in present terms by using its future cash flow and discounting their value. 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 Option of inspection                0.5 1 1.5 2 2.5 3 (000) (000) (000) (000) (000) (000) Loss of revenue $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 materials of maintenance $500 $500 $500 $500 $500 $500 Engineers $69 $69 $69 $69 $69 $69 assistant engineers $21.6 $21.6 $21.6 $21.6 $21.6 $21.6 total cost   5,591 5,591 5,591 5,591 5,591 5,591 Present Value factors of 10% 0.953 0.909 0.867 0.826 0.788 0.751 present values   5,330 5,082 4,844 4,620 4,405 4,200                 Net present value   28,485                           Table 12: loss due inspection within three years The present value of inspection is $28,485,000. This is lower than the cost incurred when inspection is not done. Comparison between inspection and all failures The present value of the inspection is lower than present value of failures in three years which is $ 60,034,000 and $28,485,000 respectively. However it should be noted that only costs have taken. Up to this point we can state that the inspection will cost less as compared to acting at every failure. Case scenario Case scenario is basically a game of ‘what-if’ in which the crude oil unit takes into consideration impacts of if a certain part fails and other does not fail within three years. This process begins with a specific set of assumptions. From this point, the values are altered to reflect a number of possible scenarios such boiler does spoil within two years; corrosion of cooling towers does occur within two years and first failure that is failure of pipeline then inspection. Basing a project decision on these scenario statements, one is confronted by several options in interpreting their significance. Best case and worst case scenarios are built, usually with best case scenarios assuming high discount rate and worst case scenarios assuming the opposite. In the scenarios presented, the net present values of the scenarios are compared. One school of thought calls for comparative analysis of cumulative net project profit. Under this school of thought, the scenario values show that the worst case scenario would result in a net loss for the period being considered. If the potential occurrence of the worst case scenario is high, this may justify choosing another option. Another method considers potential benefits to the potential risk involved, with a base rule of thumb standing if the base scenario profits are more than twice the potential loss, then the option might be worth pursuing. Therefore, the following is case scenarios for the project as mentioned Case scenario- boiler does not occur within three years but cases occur In this case, we assume that all other failures occur expect boiler in the next three years then the following will be evaluation 0.4167 0.833 1 1.25 1.667 2 2.083 2.5 Failure of pipeline 3,180 3,180 3,180 3,180 3,180 3,180 3,180 Failure to control mixing of chemicals 150 150 Releasing high-temperature 800 release of flammable fluid 6,880 Corrosion of Cooling towers 8,820 Corrosion of other equipment 10,320 Electrical failure 5,880                   total cost 3,180 3,180 150 3,180 3,180 32,850 3,180 3,180 3,180 Present Value factors at 10% 0.961 0.924 0.909 0.888 0.853 0.826 0.820 0.788 0.757 present values 3,056 2,937 136 2,824 2,714 27,149 2,607 2,506 2,408 Net present value 46,336 The figures used assume boiler does not fail within three years values in computation to determine the case scenario. The net present value in case the boiler does fail within three years is $52,744,000. If compared to inspection cost of $28,485,000, then the situation remains the same, as the expected PV is already higher than the PV of inspecting. Therefore, on these bases, it is recommended that the project shall be undertaken under this scenario. Case scenario- Corrosion of cooling towers does spoil within two years 0.417 0.833 1 1.25 1.667 2 2.083 2.5 2.917 Failure of pipeline 3,180 3,180 3,180 3,180 3,180 3,180 3,180 Failure to control mixing of chemicals 150 150 Releasing high-temperature 800 release of flammable fluid 6,880 Corrosion of Boilers 16,575 Corrosion of other equipment 10,320 Electrical failure 5,880                   total cost 3,180 3,180 150 3,180 3,180 40,605 3,180 3,180 3,180 Present Value factors at 10% 0.961 0.923 0.909 0.888 0.853 0.826 0.820 0.788 0.757 present values 3,056 2,937 136 2,823 2,713 33,558 2,607 2,506 2,408 Net present value 52,744 The figures used above do not include the Corrosion of Cooling towers values in computation to determine the case scenario. The net present value in case the cooling tower does fail within two years is $52,744,000. If compared to inspection cost of $28,485,000, then the situation remains the same, as the expected PV is already higher than the PV of inspecting. Therefore, on these bases, it is recommended that the project shall be undertaken under this scenario. Case scenario- first failure then inspection In this case we assume that the inspection will be undertaken once the crude oil unit experiences failure. Therefore the failure is failure of pipeline system and its cost benefit is shown below; Option of inspection                               0.41667 0.91667 1.41667 1.91667 2.41667 2.9146 Loss of revenue 3,180,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 materials of maintenance   $500,000 $500,000 $500,000 $500,000 $500,000 Engineers   $69,000 $69,000 $69,000 $69,000 $69,000 assistant engineers   $21,600 $21,600 $21,600 $21,600 $21,600                total cost   3,180,000 5,590,600 5,590,600 5,590,600 5,590,600 5,590,600 Present Value factors 10% 0.961065 0.916340 0.873696 0.833036 0.794269 0.757455 present values  3,056,188 5,122,889 4,884,483 4,657,172 4,440,440 4,234,628                Net present value  26,963,406                       Since inspection will start during repair of the failed equipment that is net present value of will be 26, 963,406. This means immediately after any failure of pipeline inspection should be done instead of waiting for the sixth month to begin inspection. 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 of failure of pipe, boiler and flammable gas. Recommendation regarding the proposed inspection The company should inspect regularly. However, the numbers does not tell the whole story because the computations will not be able to determine the future events well beyond the 3 years used in computing the PV. Outsource inspection services or hire our staff After realizing that inspection is a better option in all cases, then 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. Summary of results Option Costs Total failures in three years $ 60,034,000 Inspection from beginning 6 months $28,485,000 boiler does not occur within three years $52,744,000 cooling towers does not fail within three years $52,744,000 Inspection begins after 5 months that is when failure pipeline is experienced 26, 963,406 Recommendation regarding the proposed inspection The company should inspect regularly. However, the numbers does not tell the whole story because the computations will not be able to determine the future events well beyond the 3 years used in computing the PV. Outsource inspection services or hire our staff After realizing that inspection is a better option in all cases, then 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 Conclusion In conclusion, crude oil unit will fare well with outsourced inspection. However, they must find away to cut down on the expenses. The costing model presented in this report is supposedly the most viable alternative that fully integrates a transparent costing system that is easy to implement. The costing method in addition has the potential to enable senior management and the decision makers on the path that is most strategic for maintenance of the crude oil unit. It is envisaged that this method will evolve over time to provide a more flexible and low cost approach. Read More

d) Release of flammable fluid cost of repair $ 400,000 loss of profit due poor quality $ 6,480,000 6,880,000 Table 6: loss due release of flammable fluid Table 6 above shows the show the total costs incurred when there release of flammable fluid in the crude oils unit. The total cost per failure is calculated as $6,880,000. It should inflammable can bring down entire unit if not discovered with shortest time possible. e). Corrosion of Boilers The table 7 below shows total cost of failure of boilers as result of Corrosion.

The total cost is $16,575,000 in which $16,000,000 is due to loss of profit. new part $ 500,000 cost of contractor $ 75,000 loss of profit $ 16,000,000 16,575,000 Table 7: Loss due to boilers The new equipment will cost $ 500,000 and contractor charges will be $ 75,000 f) Corrosion of Cooling towers new part $ 250,000 cost of contractor $ 70,000 loss of profit $ 8,500,000 8,820,000 Table 8: loss due failure of cooling towers Table 8 above shows the show the loss made when cooling towers fails in the crude oil unit.

The loss per failure is calculated as $8,820,000. g). Corrosion of other equipment new part $ 250,000 cost of contractor $ 70,000 loss of profit $ 10,000,000 10,320,000 Table 9: loss due other equipments The table 9 above shows loss made incase there is failure of other equipment. h). Electrical failure materials $ 20,000 cost of contractor $ 10,000 loss of profit per day $ 5,850,000 5,880,000 Table 10: loss due failure of electric power Table 10 above shows that any electric results to a loss of $5,880,000.

Although it is assumed that it will occur in every two years. It can occur any time in the life of the crude oil unit. Cost benefit analysis Cost-benefit analysis will be done by the use of net present value of costs. The net present value method enable us estimate lowest loss among the options by comparing its present value options. This is achieved by discounting costs to their present value using an interest rate of 10%. Essentially, the management picks the option with the lowest PV. The PV method will provide information based on forecasts for the future of the project, enabling the management to estimate the net financial loss expected from such option.

Present value of failures in three years The analysis period is assumed to be three years and the present values of the failures occurred during this period. These costs are summarized as well their present values are calculated in the table. 0 0.41667 0.8333 1 1.25 1.667 2 2.083 2.5 2.917 (000) (000) (000) (000) (000) Failure of pipeline 3,180 3,180 3,180 3,180 3,180 3,180 3,180 Failure to control mixing of chemicals 150 150 Releasing high-temperature 800 release of flammable fluid 6,880 Corrosion of Boilers 16,575 Corrosion of Cooling towers 8,820 Corrosion of other equipment 10,320 Electrical failure 5,880                   total cost 3,180 3,180 150 3,180 3,180 49,425 3,180 3,180 3,180 Present Value factors of 10% 0.

9611 0.924 0.909 0.888 0.853 0.826 0.820 0.788 0.757 present values 3,056 2,937 136 2,824 2,714 40,847 2,607 2,506 2,408 Net present value 60,034 Table 11: present value of total failure The present value of failure within three when inspection is not done $ 60,034,000 of represents loss they will incur.

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