Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. -Ayn Rand
While making a high value purchase either in personal life or during the life cycle of a project in professional life, we always come across a situation where we need to strike a balance between the extra money we spend for buying an equipment versus the anticipated/estimated savings in life cycle cost of the equipment during the operation or utilization of the equipment.
Most of the time the dilemma is whether to spend now and save later or save now and spend later. One of the ways to be able to reconcile with this dilemma is to systematically look at various perspectives.
A. Evaluate Life Cycle cost
We calculate the life cycle cost of the Component comprising of the 3 C’s – CC+OC+RC
- Capital Cost (CC) of buying the equipment
- Operating cost (OC) for running the equipment including consumables/Manpower/utilities
- Replacement cost (RC) for the maintenance of the equipment (End of Life replacements)
B. Full Time Utilization (FTU)
Let’s understand the importance of FTU. Most of the times while calculating the operating cost, we estimate the plant or the component to run at 100% capacity from day one of the operation, whereas the actual scenarios may be quite different. Typically in a Green Field or Brown Field project, the 100% capacity of the plant in usually achieved after atleast couple of years of operation and till such time the plant is operating usually at lower capacity. In such scenarios, typically the payback period or the breakeven point in the project or component life cycle (i.e. where the Capex + Opex starts actual savings for the project) is generally stretched beyond estimated time.
Hence it is important that while comparing the CAPEX & OPEX of 2 choices the following are thought through -
1) Capex Cost:
- Cost of Equipment
- Finance or interest cost on additional spend
- Any additional components required to fulfill the requirements while using alternate option
2. Opex Cost:
- Operating cost of producing the intended end product (i.e. Utilities/cleaning or operating chemicals/Consumables/Manpower/Cost of Treatment of Effluents or Byproducts/Etc.)
- Replacement cost for End of Life components. These costs are most times directly dependent on the life of the components and not the output or the hours of operation of the plant (FTU perspective).
While calculating the Opex of the plant we need to understand the project Life cycle and estimate in what time frame shall the plant start working to full capacity. Till such time is established or estimated the Opex has to be calculated on pro rata basis on actual running hours of the plant which typically is 3-4 hours a day till the production demand arises and typically the time frame for such period will average anything between 18 months to 36 months depending on the end product produced, regulatory reviews, process readiness, etc.
In a rather Ideal situation the payback or the breakeven period for Capex + Opex spend while comparing 2 competitive products or Technologies, if is less than 5-6 years - one can say the money is wisely spent. After all it is YOU as the driver that will have to bring a calculative approach to strike the right balance of CAPEX & OPEX spend!