W16_TH_Cost Analysis of Critical Spare CNG Compressor on Gas Station Project

1. Problem Definition

CNG compressor is one of the critical equipment on gas station. If the compressor fails, gas station cannot sell CNG after CNG storage empty. High level management suggested the project team to analyze the scenario to include spare when running compressor fails. To respond that finding, the Author will do exercise to analyze the benefit to include the critical equipment spare in the cost.

2. Development of Feasible Alternatives

To answer the challenge from the reviewer, we should analyze the benefit if we purchase the critical spare compressor which will be installing if the running compressor fails. To do the analysis, author gathers the equipment data from Gas Station Operation Team and also data form Author`s Blog Week 14 when Brand A Compressor selected as best option. Summary of all data can we see as below:

Table 1. Critical Spare Compressor and Gas Station Operation Data

3. Development of the Outcomes for Alternative

Based on above data, authors need to conduct Life-Cycle Costing calculation.
Life-cycle costs (LCC) are associated with an asset and extend of the cost management information beyond the acquisition (creation) of the asset to the use and disposal of the asset.
The purpose of Life-cycle Cost (LCC) is to optimize the total costs of an asset while satisfying specific performance requirements over a defined period of operational time.

First we need to estimate the annual cost saving by installing the critical spare equipment.
The annual cost saving = Increase production due to higher plant availability – Annual maintenance of critical spare equipment

From Table 1 data above, we calculate:

Saving due to no shut down = 5 days/year x 455.4 million IDR/day = 2,277 million IDR /year

The annual cost saving = 2,277 million IDR – 153.25 million IDR = 2,123.75 million IDR

Calculate LCC using present-worth (PW).

To calculate PW, we need to determine the appropriate discount rate. The appropriate discount rate to be used is MARR = 15%

Calculation examples:

PW cash flow in Year 1 = Year 1 cash flow * (1/ (1+15%)^1)

= 2,123.75 million IDR * 0.8708

= 1,862.94 million IDR

PW for 20 years periods are calculated as below:

Table 2. Present Worth of 20 years Cash Flow

4. Selection of the Acceptable Criteria

The higher total PW is the preferred alternative from an economic perspective.

5. Analysis and Comparison of the Alternatives

From Table 2, the total PW of the “with critical spare compressor” option is 11,001.48 million IDR and PW without critical spare compressor is negative 15,080.87 million IDR. By installing the critical spare compressor will have higher PW than not installing it.

6. Selection of the Preferred Alternative

The estimating team can recommend to install critical spare compressor is the preferred option from an economic perspective, compare with not install the critical spare compressor, since by installing the critical spare compressor will give higher PW of total cash flow balance.

7. Performance Monitoring and Post-Evaluation of Results

When assessing the critical spare requirement, beside the technical analysis, it is important to conduct Life-cycle costs (LCC) analysis to justify how critical the spare requirement is, related to minimize the cost of loss production.

References:

  1. Sullivan, G. W. (2014). Engineering Economy 16th Chapter 6 – Comparison and Selection among Alternatives, pp. 264-331
  2. Wija, Wahyu. (2015). W16_WW_Cost Analysis of Critical Spare Compressor|GARUDA AACE 2015. Retrieved from: https://garudaaace2015.wordpress.com/2015/07/31/w16_ww_cost-analysis-of-critical-spare-compressor/
  3. Hendarto, Tommy. (2017). W14_TH_Analyzing Cost Only Alternative|Emerald AACE 2017. Retrieved from: http://emeraldaace2017.com/2017/11/19/w14_th_analyzing-cost-only-alternative-using-equivalent-worth-for-cng-compressor-with-electric-motor-prime-mover/
 

1 thought on “W16_TH_Cost Analysis of Critical Spare CNG Compressor on Gas Station Project”

  1. WOW Pak Tommy….. “Man on Fire”…….

    Very impressive “Leadership by Example”……. I truly hope that your example will inspire some of the others on your team to start to perform?

    Very disappointed to see a few people not really taking the full advantage that this course offers.

    Keep up the good work and your leadership will be noted in my report to your sponsors and champions.

    BR,
    Dr. PDG, Jakarta

     

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