The Importance Of Life Cycle Costing Information Technology Essay

LCC are summations of cost estimates from inception to disposal for both equipment and projects as determined by an analytical study and estimate of total costs experienced in annual time increments during the project life with consideration for the time value of money

It can also be defined as;

Life Cycle Cost Analysis (LCCA) is an economic evaluation technique that determines the total cost of owning and operating a facility over period of time.

Life cycle cost is the total cost of ownership of machinery and equipment, including its cost of acquisition, operation, maintenance, conversion, and/or decommission

The visible costs of any purchase represent only a small proportion of the total cost of ownership. In many departments, the responsibility for acquisition cost and subsequent support funding are held by different areas and, consequently, there is little or no incentive to apply the principles of LCC to purchasing policy. Therefore, the application of LCC does have a management implication because purchasing units are unlikely to apply the rigours of LCC analysis unless they see the benefit resulting from their efforts.

There are 4 major benefits of LCC analysis:

• Evaluation of competing options in purchasing

• Improved awareness of total costs

• More accurate forecasting of cost profiles

• Performance trade-off against cost.

Option Evaluation:

LCC techniques allow evaluation of competing proposals on the basis of through life costs. LCC analysis is relevant to most service contracts and equipment purchasing decisions.

Improved Awareness:

Application of LCC techniques provides management with an improved awareness of the factors that drive cost and the resources required by the purchase. It is important that the cost drivers are identified so that most management effort is applied to the most cost effective areas of the purchase.

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Improved Forecasting:

The application of LCC techniques allows the full cost associated with a procurement to be estimated more accurately. It leads to improved decision making at all levels, for example major investment decisions, or the establishment of cost effective support policies. Additionally, LCC analysis allows more accurate forecasting of future expenditure to be applied to long-term costing assessments.

Performance Trade-off Against Cost:

In purchasing decisions cost is not the only factor to be considered when assessing the options. There are other factors such as the overall fit against the requirement and the quality of the goods and the levels of service to be provided.

Advantages/ Disadvantages of Life Cycle Cost Analysis (LCCA)

Advantages of LCCA:

Helps you compare projects “apples to apples” financially even if they have different timing and magnitude of costs and savings.

Provides you with a more complete financial picture by considering first cost, and all costs and benefits over the entire lifetime of the project.

Enables you to compare different combinations of measures and choose the one that will maximize your savings and financial return.

Allows you to present the financial benefits of your proposal in terms used by your CFO – for example, net present value (NPV), internal rate of return (IRR), and cash flows.

Reduces your investment risk by projecting a more complete picture of the future.

Disadvantages of LCCA:

Is harder to learn and apply.

Getting input data can be challenging.

Principles

The cost of ownership of an asset or service is incurred throughout its whole life and does not all occur at the point of acquisition. The Figure gives an example of a spend profile showing how the costs vary with time. In some instances the disposal cost will be negative because the item will have a resale value whilst for other procurements the disposal, termination or replacement cost is extremely high and must be taken into account at the planning stage.

• Acquisition costs are those incurred between the decision to proceed with the procurement and the entry of the goods or services to operational use

• Operational costs are those incurred during the operational life of the asset or service

• End life costs are those associated with the disposal, termination or replacement of the asset or service. In the case of assets, disposal cost can be negative because the asset has a resale value.

A purchasing decision normally commits the user to over 95 per cent of the through-life costs. There is very little scope to change the cost of ownership after the item has been delivered.

The Process

LCC involves identifying the individual costs relating to the procurement of the product or service. These can be either “one-off” or “recurring” costs. It is important to appreciate the difference between these cost groupings because one-off costs are sunk once the acquisition is made whereas recurring costs are time dependent and continue to be incurred throughout the life of the product or service.

Examples of one-off costs include:

• Procurement

• Implementation and acceptance

• Initial training

• Documentation

• Facilities

• Transition from incumbent supplier(s)

• Changes to business processes

• Withdrawal from service and disposal

Examples of recurring costs include:

• Retraining

• Operating costs

• Service charges

• Contract and supplier management costs

• Changing volumes

• Cost of changes

• Downtime/non-availability

• Maintenance and repair

• Transportation and handling

The Methodology of LCC

LCC is based on the premise that to arrive at meaningful purchasing decisions full account must be taken of each available option. All significant expenditure of resources which is likely to arise as a result of any decision must be addressed. Explicit consideration must be given to all relevant costs for each of the options from initial consideration through to disposal.

The degree sophistication of LCC will vary according to the complexity of the goods or services to be procured.

The following fundamental concepts are common to all applications of LCC:

• Cost breakdown structure

• Cost estimating

• Discounting

• Inflation

Cost breakdown structure (CBS)

CBS is central to LCC analysis. It will vary in complexity depending on the purchasing decision. Its aim is to identify all the relevant cost elements and it must have well defined boundaries to avoid omission or duplication. Whatever the complexity any CBS should have the following basic characteristics:

• It must include all cost elements that are relevant to the option.

• Each cost element must be well defined for better understanding.

• Each cost element should be identifiable

• The cost breakdown should be structured to allow analysis of specific areas.

• The CBS should be designed to allow different levels of data within various cost categories.

Cost Estimating

Having produced a CBS, it is necessary to calculate the costs of each category. These are determined by one of the following methods:

• Known factors or rates: are inputs to the LCC analysis which have a known accuracy.

• Cost estimating relationships (CERs): are derived from historical or empirical data.

• Expert opinion: it is often the only method available when real data is unobtainable.

Inflation

Inflation for all costs is approximately equal, it is normal practice to exclude inflation effects when undertaking LCC analysis.

However, if the analysis is estimating the costs of two very different commodities with differing inflation rates, for example oil price and man-hour rates, then inflation would have to be considered.

SIMPLE PAYBACK V/S LIFE -CYCLE COST ANALYSIS:

SPB is how long it will take for cumulative energy savings and other benefits to equal or “payback” your initial investment. For relatively less expensive, simpler projects and measures, calculating the simple payback (SPB) can be enough to make a sound decision.

Advantages of Simple Payback:

A simple way to screen relatively low-cost measures based on payback (or return on investment (ROI)

Easier to communicate to a non-technical audience

Disadvantages of Simple Payback:

You can’t compare complex projects and measures where costs and savings vary in both magnitude and timing (e.g. a condensing boiler and a standard boiler).

It does not account for (1) maintenance, interest on loans, and disposal costs; (2) time value of money, and (3) volatility of utility costs.

It can actually make economically sound improvements and project efficiency look economically unviable.

The same can be shown by the below given example:

The figure above compares the savings for a small and a large energy-efficiency project both with 20-year lives.

The small project costs $200,000 and saves $100,000 annually (two-year simple payback) for five years before an additional investment of $200,000 is needed.

The large project costs $700,000 and saves $184,000 annually (3.8-year simple payback) for 20 years, with replacement costs of $200,000 every five years.

Which is a better investment & more cost-effective?

Based on simple payback, the smaller project looks better. The larger project generates significantly more savings

but the savings are in the future. Is it worth the investment?

Life-cycle analysis can transform these future savings into today’s dollars using the concept of “time value of money.”

Considering the 3% inflation rate, the smaller project saves only $550,000 in today’s dollars, while the

large project saves $1,400,000! Would you pass up $850,000?

Life Cycle Costing : UPS for Data Centers

Introduction

What is UPS ?

An uninterruptible power supply, also uninterruptible power source, is an electrical apparatus that provides emergency power to a load when the input power source, typically the utility mains, fails.

A UPS differs from an auxiliary or emergency power system or standby generator in that it will provide instantaneous or near-instantaneous protection from input power interruptions by means of one or more attached batteries and associated electronic circuitry for low power users, and or by means of diesel generators and flywheels for high power users.

The on-battery runtime of most uninterruptible power sources is relatively short 5-15 minutes being typical for smaller units-but sufficient to allow time to bring an auxiliary power source on line, or to properly shut down the protected equipment.

Typical UPS (Offline / Stand by UPS )

The Offline / Standby UPS (SPS) offers only the most basic features, providing surge protection and battery backup. With this type of UPS, a user’s equipment is normally connected directly to incoming utility power with the same voltage transient clamping devices used in a common surge protected plug strip connected across the power line.

Typical UPS (Online)

Online (“True”) UPS

The online UPS, sometimes called a true UPS,  is the best type you can buy. Paradoxically, it is both very similar to, and totally opposite to, the least-expensive type, the standby UPS. It is very similar to it in that it has the same two power sources, and a transfer switch that selects between them. It is the exact opposite from the standby UPS because it has reversed its sources: in the online UPS the primary power source is the UPS’s battery, and utility power is the secondary power source!

Project Definition:

This project will examine two scenarios:

2 x 250 kVA + 1 x 60 KVA UPS with 30 minutes of runtime

1 x 400 kVA + 2 x 80 KVA UPS with 30 minutes of runtime.

The system design life is 10 years as per the Manufacturers Datasheets. Both UPS Alternatives will be compared in three steps.

Step 1: Is a pure UPS purchase cost comparison.

Step 2: Will bring in outside and variable costs that can have a large impact on the overall cost.

Step 3: Will discuss costs associated with the lack of adaptability of typical designs.

The data indicates that purchase cost comparisons alone are insufficient predictors of lifecycle cost and

that outside and variable costs must be examined.

LCC Working

Life Expectancy

The life expectancy varies with UPS type. Table 1 shows the UPS lifetime based upon experience at

Emersons Network Power and resulting from many years of UPS installations. These values will be used in the lifecycle costs.

Table 1 – Life expectancy

UPS 1: Model : 2 x 250 kVA + 1 x 60 kVAon-line UPS unit with 30Min.

UPS 2: Model : 1 x 400 KVA + 2 x 80 KVA on-line UPS unit with 30Min

UPS 1

UPS 2

Design Life (years)

10

10

Expected Life time (years)

8

8

As shown in Table 1 both has the Same Life time in terms of Design Life & Expected Life time.

Step 1 – UPS System Costs

In this step the costs associated with the UPS purchase cost, and other items or services specifically

related to the UPS. Tables 2 and 3 only account for the UPS System Cost. The tables in Step 2 account for

UPS infrastructure costs and adjusted lifecycle costs.

Table 2 – Lifetime UPS system cost for an UPS 1 (2 x 250 kVA+ 1×60 kVA, 30-minute solution)

Cost Category

Amount (INR)

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Total Cost

Initial UPS Cost (2 x 250KVA)

2,342,532

–

–

–

–

–

–

–

2,342,532

Battery Cost ( 2 x 250 KVA)

1,072,226

–

–

1,393,894

–

–

1,812,062

–

4,278,182

Initial UPS Cost (1 x 60 KVA)

474,356

–

–

–

–

–

–

–

474,356

Battery Cost ( 1 x 60 KVA)

134,647

–

–

175,041

–

–

227,553

–

537,242

Battery Frame Cost

150,000

–

–

–

–

–

–

–

150,000

Maintenance Cost

Under warrenty

Under warrenty

134,120

149,544

166,741

185,917

207,297

231,136

1,074,755

Monitoring Cost

20,119

20,119

20,119

20,119

20,119

20,119

20,119

20,119

160,950

Installation Cost

542,998

–

–

15,689

–

–

20,396

–

579,084

Total Cost

4,736,878

20,119

154,239

1,754,287

186,860

206,035

2,287,427

251,255

9,597,100

Total UPS System Cost : INR 9,597,100

Table 2 indicates that a UPS solution for the Life time period includes;

Annual Maintenance costs.

Battery Replacement cost every 3 years.

Monitoring Cost.

Table 3 – Lifetime battery system cost for UPS 2 (1 x 400 kVA+ 2×80 kVA, 30-minute solution)

Cost Category

Amount (INR)

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Total Cost

Initial UPS Cost (1 x 400KVA)

1,780,400

–

–

–

–

–

–

–

1,780,400

Battery Cost ( 1 x 400 KVA)

801,280

–

–

1,041,664

–

–

1,354,163

–

3,197,107

Initial UPS Cost (2 x 80 KVA)

1,211,616

–

–

–

–

–

–

–

1,211,616

Battery Cost ( 2 x 80 KVA)

342,720

–

–

445,536

–

–

579,197

–

1,367,453

Battery Frame Cost

145,000

–

–

–

–

–

–

–

145,000

Maintenance Cost

Under warrenty

Under warrenty

170,545

190,158

212,026

236,409

263,596

293,909

1,366,642

Monitoring Cost

20,680

20,680

20,680

20,680

20,680

20,680

20,680

20,680

165,441

Installation Cost

519,958

–

–

14,872

–

–

19,334

–

554,164

Total Cost

4,821,654

20,680

191,225

1,712,910

232,706

257,089

2,236,969

314,589

9,787,822

Total UPS System Cost INR 9,787,822

Table 3 indicates that a UPS solution for the Life time period includes;

Annual Maintenance costs.

Battery Replacement cost every 3 years.

Monitoring Cost.

Step 2 – Infrastructure Cost

In addition to the costs clearly associated with the purchase of components and services for the UPS

system, there are a number of facility infrastructure costs that are not always recognized as a cost

associate with the UPS system. These costs are estimated in Tables 4 and 5, and an adjusted lifecycle

cost including the UPS system costs and the facilities costs is computed.

Table 4 -Lifetime UPS system cost for an UPS 1 (2 x 250 kVA+ 1×60 kVA, 30-minute solution)

UPS 1

Present Annual Costs

Present Worth of a Uniform Series Compound Amount

Cost in year 1

4,736,878

4,736,878

Annual Maintenance cost

100590

706110.8373

Monitoring cost

20,119

141,229

Battery cost for 250 KVA Annually

268056.5

1881674.119

Battery cost for 60 KVA Annually

33,662

236,295

Annual battery installation cost

3922.25

27532.98769

Total Life Cycle Cost

 

7,729,720

Table 4 demonstrates the Total Costing of UPS1 which includes all the Infrastructure costing over a Period of 8 years. The Total Cost mentioned above includes the cost mentioned in Table 2.

Table 5 -Lifetime UPS system cost for an UPS 2 (1 x 400 kVA+ 2×80 kVA, 30-minute solution)

UPS 2

Present Annual Costs

Present Worth of a Uniform Series Compound Amount

Cost in year 1

4,821,654

4,821,654

Annual Maintenance cost

127908.75

897880.0533

Monitoring cost

20,680

145,167

Battery cost for 400 KVA Annually

260416

1828040.161

Battery cost for 80 KVA Annually

111,384

781,881

Annual battery installation cost

3718

26099.21556

Total Life Cycle Cost

 

8,500,722

Table 5 demonstrates the Total Costing of UPS1 which includes all the Infrastructure costing over a Period of 8 years. The Total Cost mentioned above includes the cost mentioned in Table 3.

>> Things to do : NPV to be worked for All the Above Tables.

Part 3 – Adaptability

In this step we cover the costs that are often taken for granted or not considered when installing a UPS solution. These costs vary dramatically and the value must be estimated on a case-by-case basis depending on the circumstances of the installation. A rigid design that cannot adapt to changing requirements creates an “Adaptability Penalty” that should be understood and considered when comparing the life cycle costs of alternative UPS technologies for a given installation.

Speed of Deployment: An engineered design, by nature takes a long time to implement. A modular

adaptable UPS solution is easier to design and implement, with less risk to delays. This time to implementation may have large cost in certain circumstances.

If there is a deadline driven by unforeseen circumstances such as an earthquake, hurricane, or a terrorist attack.

If there is a possibility that the system must be moved prior to its expected lifetime.

Standard rating UPS system which is pre-tested can be wheeled into standard office space and operational in hours whereas UPS 2 which is Non-Standard system design, specification, fabrication, and installation can take months. In some cases, this time difference is unimportant and no value can be assigned. In other cases, the cost of time may be Lakhs of Rupees per week. The value of time must be assessed on a caseby-case basis.

Equating Supply and Demand: A rigid design is difficult to change after installation and is normally built

out to its ultimate plan configuration up-front. The plan value is often unknown as it requires determining the power requirement years in advance. Since under sizing a rigid design is not acceptable, this means that the design configuration of the system must be larger than the mean expected value in order to assure that the system can meet the high-side estimates. Managing risk in this way is part of good decision making given the options available, but the result is that the average data center and network room spends most of its life loaded to a small fraction of its design value.

The average data center or network room has its UPS infrastructure oversized to 4X of its required UPS capacity. This means that the lifecycle cost of the average UPS system is 4 times what is needed. In return for this large cost the system has a very long UPS run time and has the ability to accept a very large increase in load.

Commercially available Standard UPS Modules (250kVA, 60 kVA, 80 kVA) systems can be transported simply via truck and normal elevators, wheeled into unimproved space, connected to a DC bus in minutes and meet all the requirement necessary to ensure adaptation to changing UPS needs.

In contrast, Non-Standard UPS systems (400 kVA) require long range up-front planning including specialized physical space, Cranes/Service Lifts, ventilation, safety planning, and engineering. The costs associated with incrementally expanding systems are so large that it is normally less expensive to simply build out the entire system upfront.

Conclusion

Balance: Comparison of NPV of Both the cases & providing the final outcome in terms of;

Total Life cycle cost considered from Table 1, 2, 3,4 & 5.

Step 3 – Adaptability of work.