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BNV7089 Cost Management

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BNV7089 Cost Management

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Course Code: BNV7089
University: University Of Birmingham

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Country: United Kingdom

Question:
Task 1 – Life Cycle Assessment

A Nursing home plans to replace its old Window Air Conditioners. The Gross Floor Area (GIA) of the building is approximately 585 m².
The space arrangement as follows:
Lobby : 30 m2
Waiting Area : 150 m2
Doctor Channeling Rooms : 20m2 x 15 Nrs
Ward : 100 m2
It has the existing Window Air Conditioners provide cooling for the building. Due to their age, there were several instances of major repairs in the last four years and each instance cost around BHD 250.00. In addition, they make noises while working and their appearance is unpleasant. The building maintenance manager suggests upgrading the cooling system. Three options were identified as follow:

Replace the Window Air Conditioners with a similar type of Window Air Conditioners that has a better efficiency
Replace the Window Air Conditioners with Split Air Conditioner
Replace the Window Air Conditioners with Central Air Conditioning System including the necessary cooling tower, ductwork, additional insulation and builder’s work.

You are asked to compare the three options based on a project life of 10 years. Some life cycle data for the three options are collected as follow:
Due to this upgraded AC facility, in addition to that the nursing home is getting BHD 1,000.00 as annual income.
Inflation rate and interest rate shall be decided based on the  their country’s central bank report.

 

New Window Air Conditioners

Split Air Conditioner

Central Air Conditioning System

Supply and
installation cost

Proposed new window air conditioners as per the size available in market are as follows,
Lobby
01 Nr -12,000 Btu/hr capacity (01 x BHD 125)
Waiting Area
04 Nrs – 12,000 Btu/hr capacity (04 x BHD 113)
Doctor Channeling Room
12 Nrs – 10,000 Btu/hr capacity (12 x BHD 100)
Ward
03 Nrs – 12,000 Btu/hr capacity (03 x BHD 100)
Installation cost per unit will be BHD 30

Proposed split air conditioners as per the size available in market are as follows,
Lobby
01 Nr -12,000 Btu/hr capacity (BHD 200)
Waiting Area
02 Nrs – 24,000 Btu/hr capacity (02 x BHD 313)
Doctor Channeling Room
12 Nrs – 12,000 Btu/hr capacity (12 x BHD 200)
Ward
02 Nrs – 18,000 Btu/hr capacity (02 x BHD 250)
Installation cost per unit will be BHD 38

BHD 5,063 for the system including the necessary cooling tower, ductwork, additional insulation and builder’s work.

Expected life

10 years

10 years

10 years

Service cost

Free service during the 1st year.
Thereafter, BHD 4 per unit per year

Free service during the 1st year.
Thereafter, BHD 5.5 per unit per year

Free service during the 1st year.
Thereafter, BHD 188 per year

Replacement of parts

Free replacements for the 1st year.
Thereafter, Every Five years, AC filters have to be replaced. A fixed amount of BHD. 9.00 per unit has been agreed in the maintenance agreement for 9 years.

Free replacements for the first 3 years.
Thereafter, Every Five years, AC filters have to be replaced. A fixed amount of BHD 12.00 per unit has been agreed in the maintenance agreement for 9 years.

Free replacements for the first 5 years.
Thereafter, Every Four years, AC filters have to be replaced. A fixed amount of BHD 125.00 has been agreed in the maintenance agreement for 9 years.

Efficiency / Energy Efficiency Ratio (EER)

3.0

3.0

11.0

Electricity
consumption

419,000 kWh per annum (Electricity) (based on a supplier’s information)

470,000 kWh per annum (Electricity) (based on a supplier’s information)

61,200 kWh per annum (Electricity)
(based on a supplier’s information)

Estimated
output

350,000 kWh per annum

Based on the information above and make necessary assumptions (e.g. the unit rate for electricity per kWh and the discount rate), prepare a life cycle cost comparison for the 3 options. You have to,

Define the scope (or boundary) of the assessment in your comparison (e.g., whether it includes any tax allowance and VAT),
Choosea life cycle cost analysis technique (e.g. payback, net present value or net saving methods) and the corresponding decision making criterion (e.g. fastest payback, lowest net present value, or positive net saving), and

Recommend the best option.

Note – The cost details are based on assumption data.
Task 2 – Other considerations
Apart from the cost, system’s suitability in terms of the functionality of the building is vital. In addition to that, installation defaults will affect the Energy Efficiency Ratio (EER) while using. Explain what other considerations needed to be considered in choosing the option.
Task 3 – Advice on cost implication of extension works
The Nursing Home is also considering to integrate its operation by accommodating staff quarters, pharmacy, cafeteria and car park. The company plans to build building of 2400m² gross internal area (GIA). Two schemes are proposed. The first scheme contains 2 buildings, a separate three-storey building of 1200m² GIA for staff quarters and a three-storey building of 1200m² GIA connected with the existing nursing home for pharmacy, cafeteria and car park. The second scheme is a six-storey building of 2400m² GIA separate from the existing nursing home. Advise on the relative cost differences between the two schemes (you are suggested to analyse the cost differences according to the cost implications of the building design attributes of the two schemes to individual elements and back up your arguments in an appendix to the report). This discussion need to be based on a realistic cost data.
Notes:

The assessment criteria for this deliverable are shown in the table in this brief. Please read them carefully.
This is an individual assignment and students are not allowed to share any materials for the preparation of the assignment. You are required to retain all working papers and data source (including especially material downloaded from the Internet) prepared or assembled for the purposes of preparing the coursework. Sources of the data used for the preparation of the coursework shall be cited properly. Such working papers must be available for inspection by the Module Leader within 3 working days of any request to provide it.

Students need to attend the lectures, attempt the seminar tasks and read around the various topic areas to be successful on these deliverables.

Answer:

Task -1 Life Cycle Assessment
The task is about a nursing home that wished to replace its existing Air Conditioning system on account of obsolesce and trying to explore more efficient and in trend technologies for its business purpose. In this regard, nursing home is exploring various options to implement the solution. The same has been discussed and analyzed in Test 1 and forms a part of this report and the excel sheet enclosed here in with and marked as Annexure-1& 2.
Define the scope (or boundary) of the assessment in your comparison (e.g., whether it includes any tax allowance and VAT)
The above analysis does not encompass any treatment for tax and is not included in the said assessment. Further, the VAT levied at the time of installation of air conditioners, service cost, maintenance cost and other ancillary cost has been ignored for the analysis. The analysis also does not include treatment for depreciation and other non -cash charges associated with running the operation of Nursing Home.
The assessment is limited to the data provided in the sample and includes some realistic assumption decoded from various sources. The sources of assumptions used forms a part of the report.  Further, the purpose of the test has been limited to test some basis life cycle methodologies. The rate of inflation has been assumed @8% and the discounting factor for the purpose of analysis has been assumed at 10%. The computation also includes an assumption regarding the standard life of the asset i.e. 10 years and the maintenance contract shall get terminated on completion of the project without any additional expenditure. Even, if such expenditure is analysed and computed, the results and conclusion drawn shall not change as proposition 1 shall still remain most lucrative.
Further, repair cost of BHD 250 incurred over the past 4 years has not been considered for analysis as the same does not contribute significantly to decision making.
Choose a life cycle cost analysis technique (e.g. payback, net present value or net saving methods) and the corresponding decision making criterion (e.g. fastest payback, lowest net present value, or positive net saving)
The life cycle cost analysis includes the testing for the following:

Maintenance cost incurred over the period of 10 years and the present value of maintenance cost.
Payback period: The term implies the time period over which the investment horizon can be realized. Further, this is one of the simplest method of ascertaining the project viability. The method suffers from the drawback that it ignores the time value of money which is necessary for understanding the business feasibility;
Discounted Payback Period: This method is similar to payback period but it recognizes the time value of money and thus critically important in evaluating the business feasibility. The discounting rate is generally the project Weighted Average cost of capital of the company.  
Net Present Value: Net present Value is a business proposition analysis tool to understand the feasibility of a project. Under this method project outflow is deducted from inflow to determine the viability. Positive NPV symbolize that the project is worth pursuing and higher the NPV, the more feasible the project. Many analyst also use Internal Rate of return method to analyze the viability;
Profitability Index: This is one of the advance method of analyzing the feasibility of a project. Under this method inflow is divided by inflow. A value greater than 1 symbolize that the project is feasible and higher the number, the greater the feasibility  ;

The assumption includes:

Savings from installation has been analyzed at 1000 BHD.
The expected life of the asset is 10 years and hence the analysis has been restricted to 10 years;
The maintenance contract post 10 years shall be terminated without any charges;
Tax and Vat has no impact;
Rate of Inflation 8%;
Rate of Discounting 10%;
The Electricity purchase rate for 1 KWH = .21 halala;
1 BHD= 1000 halala;
Electricity consumption has been used as provided in the data and the same has not been derived using Energy Efficiency Ratio;
There is 365 days in a year;
Inflation rate has been applied from 2ndyear on the data provided;
The annual saving or income has been considered @1000 BHD subject to inflation @10% per year from 2nd
Saving of electricity has not been considered.

Result of the analysis for 10 years when saving of electricity has not been considered

Sl No

Particulars

New Window Air Conditioners

Split Air Conditioners

Central Air Conditioning System

1

Capacity

216000

240000

2

Total No of units

20

17

 

3

Supply Cost

2077

3726

5063

4

Installation cost

600

646

0

5

Total Cost initially

2677

4372

5063

6

Expected Life

10

10

10

7

Service  cost (Refer Note 1)

1078.92

1260.99

2535.47

8

Replacement cost (Refer Note 2)

1620.00

1428.00

625.00

9

Energy Consumption (Refer Note 3)

1274.67

1429.82

129.55

10

Total Maintenance Cost (Refer Note 4)

2698.92

2688.99.

3160.47

11

Inflow (Refer Note 5)

14486.56

14486.56

14486.56

12

Net Cash flow (Refer Note 6)

10512.96

10367.75

11196.54

13

NPV ( Refer Note 7)

3427.29

1737.84

1540.09

14

Payback Period (Refer Note 8)

3.29

4.9

5.2

15

Discounted Payback Period (Refer Note 9)

4.11

6.8

7.3

16

Profitability Index (Refer Note 10)

2.28

1.40

1.30

 
Note 1 to 10 : Refer Excel
On the basis of the above analysis, it may be understood that the 1st option i,e, new window air conditioners has the highest ranking in all the metrics except total maintenance cost. Thus, first option should be the best method under the proposed options. The detailed analysis forms part of the excel sheet enclosed herewith and marked as Annexure-1.
The assumption includes:

Savings from installation has been analysed at 1000 BHD.
The expected life of the asset is 10 years and hence the analysis has been restricted to 10 years;
The maintenance contract post 10 years shall be terminated without any charges;
Tax and Vat has no impact;
Rate of Inflation 8%;
Rate of Discounting 10%;
The Electricity purchase rate for 1 KWH = .21 halala;(Electricity tariffs )
1 BHD= 1000 halala;
Electricity consumption has been used as provided in the data and the same has not been derived using Energy Efficiency Ratio;
There is 365 days in a year;
Inflation rate has been applied from 2ndyear on the data provided;
The annual saving or income has been considered @1000 BHD subject to inflation @10% per year from 2nd
Consumption of electricity by the existing window ac is 5,00,000 KWH and thus reduction in consumption has been considered as saving.

Result of the analysis for 10 years when saving of electricity has been considered

Sl No

Particulars

New Window Air Conditioners

Split Air Conditioners

Central Air Conditioning System

1

Capacity

216000

240000

2

Total No of units

20

17

 

3

Supply Cost

2077

3726

5063

4

Installation cost

600

646

0

5

Total Cost initially

2677

4372

5063

6

Expected Life

10

10

10

7

Service  cost (Refer Note 1)

1078.92

1260.99

2535.47

8

Replacement cost (Refer Note 2)

1620.00

1428.00

625.00

9

Energy Consumption saving (Refer Note 3)

246.42

91.27

1334.91

10

Total Maintenance Cost (Refer Note 4)

2698.92

2688.99

3160.47

11

Inflow (Refer Note 5)

14486.56

14486.56

14486.56

12

Net Cash flow (Refer Note 6)

12034.05

11888.83

12661.00

13

NPV ( Refer Note 7)

4307.40

2617.96

2392.30

14

Payback Period (Refer Note 8)

2.92

4.4

4.6

15

Discounted Payback Period (Refer Note 9)

3.55

5.9

6.4

16

Profitability Index (Refer Note 10)

2.61

1.60

1.47

 
Thus on the basis of the above it may be seen that even after considering the saving in electrical consumption from installation of new systems, option 1 i.e. new window air conditioners shall still be the best proposition as all the metrics discussed above are best in option 1 except maintenance cost which is best in option 2. The detailed working has been enclosed herewith and marked as Annexure-2.
Task -2 Other Considerations
Apart from the cost, system’s suitability in terms of the functionality of the building is vital. In addition to that, installation defaults will affect the Energy Efficiency Ratio (EER) while using. Explain what other considerations needed to be considered in choosing the option.
The other factors that needs to be analyzed includes:

Sustainability Risk Management: It is a strategy that encompasses to align the goals of profit of the firm with its economic and other environmental policies The main objective of such method is to align the activities in such a manner to ensure steady and smooth growth of business. The risk of such method can be mitigated through proper planning and execution of strategies.
Environmental Risk: The environment plays a critical factor in the business and change in weather can impact the consumption of electricity by the air conditioner and thus the above research might not hold good under those circumstances. Thus extremities of weather has a direct impact on the above analysis.
Energy Cost: The increase or decrease in energy cost can impact the business model and may render all the propositions ineffective if the energy cost increases significantly to make NPV negative.
Vibration and Sound: If the vibration and sound of the required machinery impact the visitors and patient in the nursing home. The same shall be detrimental to the business and above analysis and the model shall not hold good.
Government Policies and New technologies: A drastic change in technology and government regulation shall have a strong impact on the proposed planning.  

Task -3 Advice on cost implication of extension works
Introduction
Construction cost is the total amount required to finish the work. The estimated amount is computed to finish the work. It is the ascertainment of the value of the project based on the available data. Cost estimate as defined by the Business Dictionary as “approximation of the probable coat of a product, program or project computed on the basis of the available information” and the estimation accuracy depends upon the information available. (Oyedele, 2015)
According to Business Dictionary (2013) four types of costs estimates that need to be considered in Construction work: (Oyedele, 2015)
Planning estimate: A layout or a rough calculation of cost within the range drawn for internal purpose only.
Budget estimate: It is based on information available and established plan layout.
Firm estimate: value based on analysis of cost data that is genuine enough to enter into any contract.
Not to exceed /not less than estimate: Taking into account the firms estimate the maximum and minimum required to achieve the task (Oyedele, 2015)
Big Differences in Costs
Two major costs are involved in construction of a new building. Hard costs  and soft costs, Hard Costs include building material, supplies and equipment in building process and soft costs include engineering fees ,labor costs, architectural costs and other expenses. Increase in hard costs and soft costs will result in overall increase in construction costs. In metro cities, construction costs are usually higher as compared to other non-metro cities. (Nicco, 2017)
Costs Up For All Building Types
Building made with different quality of concrete from 2014 to 2016 costs vary from $3.3 million for 1 to 3 storey buildings and $33.7 million  for 8 to 24 storey buildings. As we can see the construction is at the highest level for 8 to 24 storey buildings. (Nicco, 2017)
*Forecasted subject to change.
We can see from the above table that construction cost is at the highest level for 8 -24-storey building and lowest for 1 – 3 storey buildings. As seen from above construction cost for 8-24 storey buildings starts from $ 28.2 million in year 2013 and rises to $33.7 million in 2017 and the per square feet cost also escalated from $ 194.6 to $ 233.But in case of 1-3 storey building cost raised by $1.0 million from the year 2013 to year 2017 resulting in overall increase of 30 percent but the increase in 4 -7 storey is nominal up by $1.4 million an increment of 14 percent. (Nicco, 2017)
As the Company is planning to build building  and has two option one for 3 storey building which contain two buildings each  with 1200m square Gross Internal Area. In addition, the second for 2400m square Gross Internal Area for staff quarters, pharmacy, cafeteria and car park, the company should go with option one as the cost of construction of three-storey building with 1200m square each is low as can be seen from the above table. The total cost involved including hard and soft costs, in construction of three storey two buildings is approx $17.2 million and the construction of six storey building total cost involved is approx $23.0 million (as seen from the above table).So the nursing home should go with the construction of three storey building as the cost of construction is low compared to construction of six storey building. (Nicco, 2017)
Bibliography
Electricity tariffs . (n.d.). Retrieved july 5, 2018, from saudigazette.com: https://saudigazette.com.sa/article/524039/SAUDI-ARABIA/Electricity-tariffs-to-be-revised-from-Jan-1
Nicco, F. (2017). Multifamily Market Commentary – March 2017. Retrieved July 5, 2018, from https://www.fanniemae.com/resources/file/research/emma/pdf/MF_Market_Commentary_031517.pdf
Oyedele, O. A. (2015). Evaluation of Factors Affecting Construction Cost Estimation Methods in Nigeria. Retrieved July 5, 2018, from https://www.researchgate.net/publication/281620496_Evaluation_of_Factors_Affecting_Construction_Cost_Estimation_Methods_in_Niger

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