Cost Analysis Methodology

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Cost Analysis Methodology Free Essay

Concerning the application of life cycle costing, it is important to indicate its use in organizations with large and developed infrastructure. It is becoming increasingly difficult to ignore the fact that the district cooling system for large assets is affected by external influences in a number of ways. Temperature changes, a need for a faster pumping of water, maintenance, and environmental effects determine the costs, which are often unallocated. As a result, many organizations conclude that district cooling is not worth such substantial investment and it does not actually save power consumption. It is certainly not true, as such companies fail to consider external constraints, which are included in the life cycle costing approach. The flexibility of cost distribution is important, as long as it underlines the value of the entire direct cooling system. Beyond a doubt, the installation of a district cooling system without consideration of its life cycle costs is evidently inappropriate; thus, such cost analysis approach is the best match for a district cooling system. This approach proved to be effective for district heating systems; it is worth mentioning that heat production and distribution imply greater expenses owing to the costs spent on fuel, electricity, and a certain percentage of heat loss during its distribution. Therefore, the economic persistence cannot be ignored in this regard, with the adoption of the economically-driven cost analysis model being an adequate solution. Furthermore, environmental impacts are also pivotal, as they require a specific track of energy consumption and carbon footprint produced by the installation, maintenance, and performance of a district cooling system. Tracking these measures largely determines the justification of a district cooling system in terms of the environmental impact and cost effectiveness for the target infrastructure. Therefore, life cycle cost analysis should be a preexisting procedure for projecting a district cooling system. However, more specific needs for LCC are also present.

A district cooling system is obviously cheaper, as it can be sourced with sea water, which is usually assumed to imply costs equal to null. Nonetheless, the electricity used to keep it cooled is equal to 0.8kWh/m3 on average. A common practice suggests that multiple factors are included in calculation meanwhile the power consumption for cooled water distribution is not recognized or considered as an operating cost, which is common for any district cooling system. In fact, these expenses should also be included, as they contribute to the overall value of the system. The life cycle costing model considers that aspect, so that an organization can observe or at least forecast its expenditures on the district cooling system in the long run, especially if it has the goal of reducing costs or the environmental impact within a distinct period. Moreover, predictions regarding energy loss are also important, as they justify cost-effectiveness of the system. Thus, the LCC approach independently calculates energy expenses caused by the need to provide more water in case of its heating or evaporating. Undoubtedly, that requires additional use of electric power accompanied by more expenses. Since thermal energy is regarded as waste in this case, it is equal to zero, with only electric power taken into consideration. That is why it can be calculated via multiplying the amount of resupplied water by the average consumption of electricity. In such a way, additional costs on water evaporating are 0.8kWh/m3 x water resupply x price on electricity. This aspect is also often neglected, but it is a normal phenomenon of the daily operating of a district cooling system; hence, these expenditures should be separately forecasted or tailored to cost annual amortization. This approach is more sophisticated; however, it enables an organization to view additional expenses in a larger context.

In order to speak about the life cycle costing model in detail, it is necessary to give an account of the commonly used equations for the determination of the life cycle costs. First, the amortization factor should be taken into account. It can be calculated as a= i x (i+1)n : ((i+1)n - 1) where i is interest rate, and n is a number of the asset years. Similarly, electric power cost should be calculated. A standard formula is Aelectric= (c)(w)(f)(m)(365), where c iselectric cost, w is specific consumption of electric power khW/m3 , f is asset availability, and m is asset capacity m3 /d. On a separate note, labor costs should be also calculated in the following way: Alabor= (y)(f)(m)365, where y is specific cost of operating labor. It is worth saying that the operating labor cost for thermal-related operations is $0.1/m3 and $0.05/m3 . These calculations can be commonly applied to any district cooling system budgeting; thus, LCC is a sufficiently flexible cost analysis model. Still, the annual fixed costs are expected to be included in LCC analysis, as they also determine the value of a district cooling system. The annual cost can be calculated as Afixed= (a) (DC), where DC is direct capital cost. The use of life cycle costing analysis describes all associated expenses and should be conducted prior to investing in a district cooling system. It is informative to note that these calculations are independent from each other, and the calculation of deviations based on mutual relations between the aforementioned components is individual for each organization. Hence, such calculations can determine the most optimal investment choice and cost allocation, provided that the district cooling system is sufficiently justified from the perspective of finance. The implementation of related methodology is essential; thus, it should be also discussed.

The main consideration for the LCC model is based on the determination of the cost difference, which is compensated after the installation of a district cooling system. The main purpose of LCC calculations is to identify whether the deployment of district cooling leads to better cost savings and reduced environmental impact. Consequently, life cycle cost analysis should be compared with the same cost parameters for the initial infrastructure. This comparison justifies investment in a district cooling system and the allocation of expenditures. One may argue that potential projections can be irrelevant and may distract decision-makers from investing in a district cooling system. In fact, a common practice also suggests that district cooling/heating systems are cost-effective in any settings, and even rough forecasts will demonstrate it, in case a project is initially worth investing. At the same time, financial expenses are not a single pillar of LCC-based decision-making, since the environmental factor has to be also recognized. That is why the environmental impact should be measured. Specific BEES software is used to calculate the carbon dioxide footprint for the installation, operation, and maintenance of a district cooling system, with these measures used as the orienting margin. The life cycle costing analysis model is attached to these measures, as expenses on the reimbursement of the environmental footprint or the rejection of a district cooling system are also unallocated costs, which contribute to the general cost-benefit relationships. The environmental factor is a strongly ambiguous component of contemporary life cycle costing analyses for such assets, once the installation of a district cooling system can present a high carbon footprint at the initial stage and subsequently minimize carbon dioxide emissions during its entire life cycle. Thus, the life cycle costing analysis model should be used for viewing potential outcomes for a district cooling system and the already installed asset. In addition, the decision about the choice of the most optimal outcomes should be made.

With regard to the collected data, first, it is necessary to mention that the first data for the cost analysis has been collected according to the equations mentioned previously. Henceforth, it is essential to pay attention to additional expenses such as the equipment cost of the membrane and the annual membrane replacement cost. The membrane is replaced once in three years, which is why the number of years included in the life cycle cost should be divided by three. In the same vein, the equipment costs for membrane are also allocated according to this principle. It is becoming increasingly apparent that the use of standard LCC equations provide distinct and expenses-driven calculations with consideration of every single factor involved in the installation, maintenance, operating, and support of a district cooling system. Therefore, such cost analysis can be recognized as relevant. It is possible to argue that net present value should also be considered in this regard; however, life cycle costing equations are based on certain tangible aspects of a district cooling system rather than on purely financial projections. In fact, the second data set presents calculations based on the formula which can be explained in the following way. Ct is a net cash inflow during a certain period (life cycle of the asset in this case), C0is an overall amount of investment for a district cooling system, r is a discount rate (cost savings in this case), and t is a particular period during which the asset is deployed, operating, and provided with required maintenance. This approach also included the calculation of the direct and indirect capital cost according to the approach of LCC; however, they do not consider operation and maintenance costs. This neglect has been already discussed, and it is worth saying that such cost analysis methodology is applicable for measuring an organization's feasibility to adopt a district cooling system without making projections regarding its life-long support.

Overall, it is appropriate to make a general comment on the fact that life cycle costing analysis methodology is particularly effective for measuring the entire expenses of an organization on the implementation and life-long use of a district cooling system. This approach considers all expenses possible without specific deviations, which should be determined independently. Thus, the life cycle costing analysis model is effective for making a decision regarding the justification of the installation of a district cooling system. The other important consideration is an environmental factor, which is also an individual component for consideration. It does not directly comprise life cycle costs, but its persistence at a particular stage of a district cooling system life cycle may suggest different decision-making for an organization. Hence, LCC can be used as a comparative metric, but it is relevant to say that it should be compared to the initial costs and environmental impact. In case such justification can be hardly detected, it means that a district cooling system is redundant for a chosen setting or industrial environment, and an alternative should be designed. Eventually, LCC is used for making the forecast of costs within the entire performance of a district cooling system regardless of the organization's finance and other internal changes. That is why traditional calculation of net present value is not applicable in this regard, but can be used for addressing a strictly financial perspective of a district cooling system project. Organizations should consider this difference, as long as net present value is not associated with external and unexpected factors. In such a way, the life cycle costing analysis model is the best methodology for projecting a district cooling system without respect to the settings, in which it is planned to be installed.

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