During the initial development stages of any project, there are normally multiple design solutions with varying CAPEX (Capital Expenditure) and OPEX (Operating Expenditure) scenarios. Apart from comparing the various options technically, there is a need to also select an optimum cost solution. Generally for this purposes, high level CAPEX of the options are calculated and compared. If technically suitable, the lowest CAPEX option is mostly selected.
However, if somehow the lowest CAPEX solution has a very high OPEX requirement (for e.g. high utility consumption, high maintenance requirement, etc.), then it might not be the cheapest solution if the whole life of the plant operation is considered. In this case the lifecycle cost comparison will need to be made to take a sensible decision on the lowest cost project.
This may not necessarily be a client requirement, but in my view should be analysed to help the decision makers choose the optimum cost solution and the Net Present Cost (NPC) of the various options will need to be calculated and compared.
Also sometimes if the project execution durations are different and the spend profile is considerably different between the options, than the CAPEX-NPC would be a better comparing parameter than only the CAPEX.
Equipment selection (mostly between competing technologies) should also be based on lowest life-cycle cost balancing the trade-off between CAPEX, OPEX and equipment reliability.
Attached is a template to carry out a NPC calculation for both CAPEX and OPEX.
NPC Calculation Template (free estimating resource)
The overall CAPEX in the money-of-today (year of the estimate) will need to be calculated and also the yearly OPEX spend in the same money-of-today will be needed.
In the template there are assumptions made for:
- the project execution period
- life of the plant
- average yearly escalation of CAPEX
- average OPEX escalation per year and
- the nominal discount rate (which can vary considerably between companies).
All the above parameters should be changed as per the project requirement.
The nominal discount rate is the rate of return on investment from other sources that the company would get if the current proposed project investment is not made. The nominal discount rate is used when escalation / inflation is applied to the project spend.
Real discount rate could also be used, but then no escalation should be applied to the costs.