Lifetime Estimation and Calculation The Cash Flow Diagram

The cash flow diagram is the pictorial presentation of inflow and outflow of money as the result of the operation of the system. By convention, the outflow is represented by downward arrows and the inflow by upward arrows.

The first cost associated with the system is the procurement cost. In a made-to-order system (e.g., military systems), the procurement cost is composed of the cost of phases 1,2, and 3 of the lifetime that occur at different times. The cost of procurement in a ready-made system is the purchase cost and any other administrative cost associated with the purchase and occurs at the time of purchase. After a system is put in service, there are various costs associated with its operation and maintenance. The system will also start producing some benefits. In some systems such as government proj ects, the benefits may not easily be measurable in monetary terms. For comparison purposes, a subj ective monetary value can be attached to these benefits. The system may also have a salvage value when it is taken out of service. Depreciation and tax also affect the inflow and outflow of cash. The time profile of these inflows and outflows (the cash flow diagram) is a useful and essential tool for the financial analysis required in the decision making.

Fig. 11.1 exhibits the various costs and benefits associated with the different phases of the system lifetime for a ready-made system.

* Benefits

MTBF

MTBF

\ Removal

AtquisilUin & Start up

Consequential Costs

\ Removal

AtquisilUin & Start up

Consequential Costs

Costs

It is important to ensure that all tasks or activities involving costs and benefits are considered, accounted for, and included in the cash flow diagram. The following points should be considered when analyzing Fig. 11.1:

(1) The acquisition cost includes the purchase price plus the cost of all other activities that make the system operational. For a made-to-order system, this is the present value of all the costs incurred for the life phases up to this point.

(2) Operation and maintenance includes preventive maintenance (PM) but not maj or overhaul or repair during failure.

(3) Repair costs include all costs of overhaul and major repair including all costs of lost production, e.g., i dl e workforce.

(4) It is assumed that the system is down and nonproductive during the repair period.

(5) Consequential costs are the costs of associated systems taken out of service during the repair time.

(6) Reduction in productivity and increase in operational costs as the system ages are to be obtained from regression models based on statistical data.

(7) The values shown are after-tax values.

The model presented in Fig. 11.1 can be used for calculating the system lifetime worth. It can also be used to compare the merits of different systems. If all the cost and benefits are accounted for, then financial methods discussed in Part 1 can be used for this purpose.

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Project Management Made Easy

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