Stainless Steel - Life Cycle Costing

Topics Covered

Introduction
Life Cycle Cost Components
Evaluation of Life Cycle Cost
LCC Calculation by Computer Program
An Example Life Cycle Cost Analysis
Sensitivity Analysis
Example Summary

Introduction

Life cycle cost (LCC) analysis is a method of determining the type of most economic material for the construction of a product.

Generally, the material is selected for a given application based on the cheapest purchase price. However, it is now understood that the cheapest purchase price may not be the most economic choice while considering the additional costs, due to regular maintenance and installation of the product. In case of equipment installed in processing plants and factories, a further cost must be included for unscheduled down-time of the equipment.

Life Cycle Cost Components

The total LCC can be divided into components as follows:

LCC = acquisition cost + fabrication and installation cost + maintenance cost + replacement cost + cost of lost production – residual value.

Values of each of these components must be known to calculate a realistic result.

Evaluation of Life Cycle Cost

LCC calculation depends on the concept of the "time value of money" – a dollar spent next year will cost less than a dollar spent today. This indicates that future expenditures can be reduced by a factor that depends on various inputs, such as the time period for delayed expenditure, prevailing inflation rate and cost of funds to the organization. Calculation of expenditures by manual methods is very complex and, hence, this tool was left to accounting specialists in the past. However, with the widespread use of PC spread sheets and personal computer programs during recent times, calculation of LCC has become very simple.

LCC Calculation by Computer Program

The International Chromium Development Association has produced a PC program, which is available from the Australian Stainless Steel Development Association (ASSDA). Copies of this program can also be obtained from stainless steel suppliers free of cost. The program is compatible with any IBM PC.

All inputs can be viewed through a monitor, and any changes in the program are immediately reflected in the calculated LCC value, providing comparative costs for up to three alternatives.

An Example Life Cycle Cost Analysis

A simple rectangular mixing tank is the best example for the use of LCC analysis using the ICDA LCC software. The requirements for this tank must meet the requirements for other components of the water treatment plant.

The design brief includes the evaluation of three alternative materials as follows:

• Stainless steel - duplex Type 2205
• Stainless steel - austenitic Type 304
• Mild steel with applied fiberglass lining

Designs involving type 2205 steels are substituted with type 304 steels, as grade 2205 is not readily available as channel or angle products required for tank reinforcement. These components will not be in contact with the corrosive environment and, hence, there are no chances of corrosion.

The "Summation of Present Value Costs" in Table 1 denotes the resulting LCC analysis - type 304 stainless steel is highly inexpensive, closely followed by type 2205. Mild steel, on the other hand, is substantially more expensive, owing to its high maintenance and replacement costs. However, the material cost of the mild steel fabrication is the cheapest by far.

The negative replacement costs of the stainless steel alternatives in the table shows the significant residual scrap value of the metal, reduced from the initial material costs. The "Value of Lost Production" in the table is shown as zero, which implies that all replacement and maintenance is performed in scheduled shutdowns for maintenance of other plants. Unexpected shutdowns, causing lost production, can add to the “Total Operating Cost” option.

Sensitivity Analysis

ICDA software is capable of providing a "sensitivity analysis" of the LCC output. This is an evaluation of the effect on the output if each input is varied by ±20%. In order to examine these values, it is essential to know which input is independent of the calculated costs, and which input provides a realistic output. However, further efforts are required to achieve more precision in critical inputs. According to the sensitivity analysis of the water treatment plant mixing tank, time before replacement is more critical to achieve high precision output. It was assumed that type 304 and 2205 would last up to 20 years. This shows that a clear knowledge on the actual operating conditions is essential for correct selection.

Example Summary

Copies of the LCC program floppy disk can be added to the mixing tank example, along with other examples. This example can be retrieved and modified if necessary, and the results can be printed.

A summary describing the breakdown of inputs and outputs is shown in the following table:

Table 1. Life cycle summation of present value costs

The table below outlines the life cycle cost comparisons of three alternative materials:

Table 2. Life cycle cost comparison