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CLIMATIC Total Cost of Ownership Model

CLIMATIC – Total Cost of Ownership Model

When you’re looking at new equipment, have you ever felt like the initial cost is too high?

Climatic solutions

If you answered yes, you’re not alone. The price tag can cause much confusion because it reflects one small part of the big picture. Sources indicate that the amount of the CAPEX represents less than 10% of the total cost spent on a piece of equipment over its lifetime. In fact, energy costs and OPEX are predicted to have at least five times more relevance than the upfront cost.

The calculation

To fully understand what you are paying for the equipment, you need to evaluate the Total Cost of Ownership (TCO), which is an estimation of all the collective expenses associated with purchasing and operating a piece of equipment. The TCO will provide a way to compare pieces of equipment “apples to apples.” Try using the CLIMATIC formula the next time you are selecting new equipment:

TCO = I + O + M + D + P – R

I = Initial Cost: This is the number that appears on the price tag, CAPEX. In Our case the delivery, installation and testing is part of the CAPEX.

O = Cost of Operation: This is the cost of CLIMATIC annual O&M cost (OPEX) as well as your own cost associated with training of employees to run the installation, and the cost of energy to operate the installation. CLIMATIC is offering monitoring of the operation of the installation, driving the OPEX down in a longer run.

M = Cost of Maintenance: This includes the cost of regular repairs such as cleaning, inspecting, lubricating, and adjusting the installation to make sure it is in optimal condition. This also includes reactive maintenance when the equipment breaks down unexpectedly. These cost are covered in the OPEX offered by CLIMATIC as part of the service contract.

D = Cost of Downtime: While you could include downtime along with the cost of maintenance, it is often so large that it could require its own category. Downtime involves the labor costs of employees whose work is delayed, indirect labor costs from supervisors who address the issue, and lost production, etc.

P = Cost of Production: Two different installations will likely have different levels of output, reduce different quantities of VOCs, and hence have different environmental implications etc.

R = Remaining Value: This has to do with the installation’s longevity and or your accounting principles. E.g. How much will the installation be worth in 5 years? 10 years? 20 years?

CLIMATIC TCO formula can sound a little overwhelming, but let’s start simple.

EXAMPLE

For this example, we will start with three variables to compare two hypothetical Installations for treatment of VOCs: Installation A (Active carbon filters) and Installation B (CLIMATIC – UV and carbon filters). The variables chosen are initial cost (I), OPEX (O+M), and the remaining value after 1st year of depreciation (R).

Installation A has a very affordable upfront cost.

CLIMATIC (Installation B) has a much bigger upfront cost as Installation A.

Based on this information alone, Installation A would be the clear choice. However, the TCO can tell us a lot more about which option is best.

I + (M + O) – R = TCO

  • Installation A
    • I = €50,000
    • M+O = €458,000
    • R = €45,000
    • TCO = €463,000
  • CLIMATIC (Installation B)
    • I = €600,000
    • M+O = €380,000
    • R = €540,000
    • TCO = €440,000

In this example, the TCO of CLIMATIC is less than installation A, hence the choice of investment, even though its initial cost was more than 10 times as much. However, the gap of this investment is only €23,000, which here is only a slight difference.

Furthermore, the above was only an example using year 1 as the comparison and include an accounting principle of 10% depreciation annually over a 10 year period (linear).

Now adding a financial principle, to the above simple comparison, we would look at a period of 5 years (equal to the standard term of O&M, offered by CLIMATIC), using an annual interest rate of 6% and again applying the above mentioned depreciation. We will now calculate the M+O cost annual payments, assuming this investment is a loan, forward to a Future value (FV) but used as a today-value, for investment comparison (a kind of PV), hence making the TCO calculation more reliable. This will give the following calculations:

I + (M + O) – R = TCO

  • Installation A
    • I = €50,000
    • M+O = €2,581,789
    • R = €25,000
    • TCO = €2,606,789
  • CLIMATIC (Installation B)
    • I = €600,000
    • M+O = €2,142,095
    • R = €300,000
    • TCO = €2,442,095

€2,606,789– €2,442,095= €164,693

CLIMATIC TCO is €164,693 less than Installation A, which is a much wider and reliable gap. The price gap become wider with adding a longer period (Using 10 years would give a €973,102 in favour of CLIMATIC) as well as for every variable that you add, giving you a clear choice for cost value. For this calculation, it is assumed that D and P are similar for both installations, hence not used.

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