Week 6_ Agbato Oluwabusayo_Determining the most economic investment _Week 17 _SeeGod Meregini

Problem Recognition/Evaluation

In my company, one of the services rendered by my department involves purchasing pumps for various company applications. I was leading a group of purchasing team in evaluating which pump to purchase that would result in an overall economic savings for the company.

For this specific purchase, the selected pump would only be utilized for one year and would have no market value at the end of the year.

Development of Feasible Alternatives/Solutions

Examination of three feasible investments is used based on total life-cycle costs.

In carrying out this analysis, an assumption is that the engineering economic analysis is present economy studies because comparison is done for only one year hence the time value of money is not a factor.

Alternative 1-

Purchasing Pump A

Alternative 2 –

Purchasing Pump B

Alternative 3-

Purchasing Pump C

Probable Outcomes of Alternatives / Solutions.

A number of meetings were held with various key stakeholders in the purchasing departments and financial divisions within the company including various vendors in order to know the technical and commercial details of the pumps.

Costs used are factored but have same equivalence with original for the purpose of showing the final result.

Key Technical/Commercial Parameters	Pump A	Pump B	Pump C
Purchase price	$166,000	$168,500	$170,000
Annual Maintenance	$8,000	$9,500	$10,500
Efficiency	70%	80%	90%

Selection Criteria in determining the solution

1. The total annual cost of owning and operating should be the most economical.

2. The selected pump should have higher operability.

Analysis and Comparison of the alternatives

The analysis was based on the fact that electric power costs $0.08 per kWh and that the pump would operate at 4,500 hours per year. Also, the pumps to be purchased are capable of delivering 100 hp.

With the knowledge that 1hp = 0.746KW, calculations for each alternatives are given below.

Alternative 1- Purchasing Pump A

Annual expense electric power =(100hp/0.7)(0.746kW/hp)($0.08/kWh)(4,500 hours/yr) = $38,365.68.

Maintenance costs = $8,000

Purchase Price = $ 166,000

Total annual cost of owning and operating = $212,366

Alternative 2 – Purchasing Pump B

Annual expense electric power =(100hp/0.8)(0.746kW/hp)($0.08/kWh)(4,500 hours/yr) = $33,570.

Maintenance costs = $9,500

Purchase Price = $168,500

Total annual cost of owning and operating = $211,570

Alternative 3- Purchasing Pump C

Annual expense electric power =(100hp/0.9)(0.746kW/hp)($0.08/kWh)(4,500 hours/yr) = $29,840.

Maintenance costs = $10,500

Purchase Price = $170,000

Total annual cost of owning and operating = $210,340

Selection of Preferred Alternative

Based on the above analysis and criteria, I recommend ALTERNATIVE 3.

· This alternative satisfies criteria 1 because it has the lowest total annual cost.

· Using only the annual energy expense (green background)

o Alternative 3 has 22% reduction in cost compared to Alternative 1

o Alternative 3 has 11% cost reduction compared to Alternative 2

· It also satisfies criteria 2 because it is more energy efficient having an efficiency of about 90% hence has the capacity to produce more output.

Performance Monitoring/Post Evaluation

This would be monitored by constantly evaluating:

· Its reliability over the coming months during its life.

· Any reduced or additional costs that might be incurred due to other risks like new technology associated with design in the higher efficient pump.

References

Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2009). Cost Concepts and Design Economics. In M.J. Horton (Ed.), Engineering economy (15^th ed.) (chapter 2) (pp. 20 - 25). New Jersey, NJ: Pearson Education, Inc.

United States Government Accountability Office (2009, March). Cost Risk and Uncertainty. GAO Cost Estimating and Assessment Guide. Best Practices for Developing and Managing Capital Program Costs. (chapter 14) (pp.160).Washington, DC: GAO.

AACE International Education Board. (2006). Risk Management. In J.K.Hollmann (Ed), Total cost management framework – A process for applying the Skills & knowledge of cost engineering (1st ed) (chapter 7.6.1) (pp.159-160). Morgantown, West Virginia: AACE International.