costs as a utility adjusts to new technologies and practices. Although these costs are not quantifiable, they do affect the organization.
3.6 Hardware and Software Life Expectancy
Automation systems include components with varying life spans and require replacement at different times. Table 2.2 provides an estimate of typical life spans for various automation components.
4.0 COST–BENEFIT ANALYSIS
Payback period, return on investment (ROI), and net present value (NPV) are commonly used analyses that incorporate tangible costs and benefits. These analyses are commonly used in the private sector and focus on the financial benefits or payback of a particular investment. The focus on immediate and measurable returns has deemphasized the incorporation of intangible costs and benefits to the analysis. Although comprehensive coverage of the topics of financial analysis is beyond the scope of this chapter, this section discusses different types of analysis and how they apply to automation projects.
4.1 Financial Analysis
The following dissolved oxygen control example, in which the following cost estimates were made, will be used to demonstrate the financial concepts in this section:
• Initial investment = $500,000,
• Power savings = $200,000 per year,
TABLE 2.2 Life expectancies of typical control system devices.
• Additional maintenance requirements = $50,000 per year,
• Equipment life = 10 years, and
• Discount rate = 5% per year.
4.1.1 Simple Payback Period
The simple payback period is a relatively straightforward calculation in which the initial investment is divided by net annual savings. The underlying assumption is that the interest rate is 0%. The calculation is as follows:
Payback periods of less than 5 years typically are considered good investments. If the payback period is more than 6 or 7 years, however, the project task force should thoroughly evaluate the accuracy of all estimates before making a strictly economic decision.
4.1.2 Return on Investment
Many agencies look to a ROI analysis to support automation expenditures as they would when comparing two or more investment alternatives. Experience shows that it is often difficult to justify automation projects on an ROI type of comparison, where decisions are based solely on a monetary cost–benefit.
The ROI formula for the dissolved oxygen control example is
4.1.3 Life Cycle Costs and Net Present Value
In the NPV approach, costs and benefits are evaluated over the life cycle of the investment and are expressed in terms of a net present cost or value. Costs include capital expenditures, operating costs, maintenance, training, and salvage value amortized over the life of the project. Benefits can include labor savings, energy savings, chemical costs, reduction in fines, and so on; these can also be expressed as a present value. Other financial considerations include the cost of money, inflation rates, life of the project, and lost opportunity costs.
All costs and benefits need to be calculated in terms of present dollars. Most books on engineering economics will have various formulae for calculating present worth and related parameters. The formula relating future values to present worth is
Where
P = present worth of money,
F = future payment or savings,
I = interest rate per interest period or discount rate, and
n = number of interest periods.
In this instance, the present worth of the net benefit is $1,158,260.24 (Table 2.3), which compares to an initial investment of $500,000.
The U.S. Office of Management and Budget’s (1992) Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs states, “The standard criterion for deciding whether a government program can be justified on economic principles is [NPV]”.
4.2 Risk Analysis
Automation projects are often implemented to reduce risks associated with different potential failures. Risk analysis provides an approach to quantifying risks to the utility and communicating how the project can reduce the utility’s risk exposure. A typical risk analysis considers the probability or frequency of expected failure, the consequence of that failure, and combines the two into an overall risk assessment. Figure 2.2 shows a high-level example of risk analysis.
TABLE 2.3 Calculation of present worth (P/F factor = P/F).
FIGURE 2.2 Risk analysis example.
Risk is defined as the probability of failure multiplied by the consequence of failure. In the example diagram in Figure 2.2, the darker shaded areas correspond to higher risks. An example project shows a corresponding reduction in risk. Risk analysis is a reasonably straightforward analysis and there are many references available on the subject.
4.3 Approaches to Incorporate Intangible Benefits
There are several approaches being considered and used to incorporate tangible and intangible costs and benefits, appropriately weighting each, that can provide a framework for appropriate decision making. These include approaches based on asset management principles (U.S. GAO, 2004), triple bottom line (Savitz and Weber, 2006), and “the balanced scorecard” (Kaplan and Norton, 1996).
4.3.1 Asset Management
Many utilities are now incorporating asset management principles to managing capital infrastructure. These principles are aimed at minimizing the total cost of asset ownership while achieving desired service levels. Fundamental components of implementing asset management concepts include the following:
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