cost module

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Safety @ Speed - Cost ModelSafety @ Speed - Cost Model

ParisParis

1515thth 17 17thth May 2002May 2002


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ContentsContents

IntroductionIntroduction Types of CostsTypes of Costs Business CostsBusiness Costs

Risk Based CostsRisk Based Costs Economic FormulaEconomic Formula ExampleExample DemonstrationDemonstration

Evaluation of Risk Control OptionsEvaluation of Risk Control Options ICAF ExampleICAF Example DiscussionDiscussion


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IntroductionIntroduction

The objectives of the cost model are:The objectives of the cost model are:

To develop a general purpose integrationTo develop a general purpose integrationmethodology to apply life cycle costing to highmethodology to apply life cycle costing to highspeed craft, able to incorporate the effect ofspeed craft, able to incorporate the effect ofalternative SEFsalternative SEFs

NB. SEF = Safety Enhancing FeatureNB. SEF = Safety Enhancing Feature


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To assess the benefits of the SEFs, in terms ofTo assess the benefits of the SEFs, in terms ofreduced losses of people, payload and vesselsreduced losses of people, payload and vessels


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To indicate those SEFs having the mostTo indicate those SEFs having the mostfavourable cost-benefit ratios for givenfavourable cost-benefit ratios for given

operational conditions (i.e. capacities, speeds,operational conditions (i.e. capacities, speeds,

routes, and weather).routes, and weather).


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Timings (as far as I can work out fromTimings (as far as I can work out fromstoryboards)storyboards)

WP 1 and 2 formulated by by 1WP 1 and 2 formulated by by 1stst October 2002October 2002 WP 3 Not sureWP 3 Not sure

WP 4 formulated by 1WP 4 formulated by 1stst September 2002September 2002

WP5 starts 1WP5 starts 1stst June 2003 ( I will be startingJune 2003 ( I will be startingbefore)before)


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Types of Cost

Business Capital Costs

Life Cycle Costs Direct Costs Indirect Costs

Risked Based Costs Environmental Capital

Human


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Business CostsBusiness Costs

Capital CostsCapital Costs This is the cost of building the ship.This is the cost of building the ship.

E.G. Steel work, Engines, etcE.G. Steel work, Engines, etc

Life Cycle CostsLife Cycle Costs Direct CostsDirect Costs

E.G. Fuel and Crew costsE.G. Fuel and Crew costs Indirect CostsIndirect Costs

E.G. Administration and InsuranceE.G. Administration and Insurance


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Risk Based CostsRisk Based Costs

EnvironmentalEnvironmentalCostsCosts

Oil leaksOil leaks WashWash

Capital CostsCapital Costs The shipThe ship

Lost IncomeLost Income

SocietySociety

Clean upClean up

OperatorOperator

InsuranceInsurance No IncomeNo Income


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Risked Based CostsRisked Based Costs

HumanHuman-- InjuryInjury

DeathDeath

OperatorOperator InsuranceInsurance

Bad PublicityBad PublicityMore GenerallyMore Generally

SocietySociety

TaxesTaxes

General LossGeneral Loss Earning PotentialEarning Potential


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Economic FormulaEconomic Formula

Net Present ValueNet Present Value Sum of the annual discounted cash flow over theSum of the annual discounted cash flow over the

life of the vessellife of the vessel

Discounted Cash FlowDiscounted Cash Flow= (Income Costs) * Present Worth Factor= (Income Costs) * Present Worth Factor

Present Worth FactorPresent Worth Factor= (1+ i)= (1+ i) NN

Where i is the minimum annual return requiredWhere i is the minimum annual return required


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ExampleExample

Fast ferryFast ferry 460000 passengers a year at 9 euro per460000 passengers a year at 9 euro per

personpersonCrew costs start 700000 euro andCrew costs start 700000 euro andincrease at 10% per annumincrease at 10% per annum

Fixed overheads of 600000 euro a yearFixed overheads of 600000 euro a yearVessel can be resold for 13000000 euro inVessel can be resold for 13000000 euro inyear 6year 6


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ExampleExample

Income:Income:9 * 460000 = 4140000 euro9 * 460000 = 4140000 euro

Present Worth Factor= (1+ 0.1)Present Worth Factor= (1+ 0.1)-N-N


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ExampleExample

Year Ship cost CrewCosts

OtherCosts

Income Cash FlowPW 10%DCF

0

12

3

4

5

6

-18000

+13000

-700-770

-847

-932

-1025

-600-600

-600

-600

-600

+4140+4140

+4140

+4140

+4140

-18000

+2840+2770

+2693

+2608

+2515

+13000

1.0

0.9090.826

0.751

0.683

0.621

0.565

-18000

+2582+2288

+2022

+1781

+1562

+7345

Totals -5000 -4274 -3000 +20700 +8426 -420

Thousands of

Therefore NPV= -420000


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Example - ConclusionsExample - Conclusions

Although the vessel seems profitably (asAlthough the vessel seems profitably (asshown by the positive cash flow) the yieldshown by the positive cash flow) the yield

is insufficient (less than 10%) as shownis insufficient (less than 10%) as shownby the negative NPVby the negative NPV


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Demonstration of SoftwareDemonstration of Software


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Evaluation Risk Control OptionsEvaluation Risk Control Options

A straight forward approachA straight forward approach Simply give a monetary sum for human life etc.Simply give a monetary sum for human life etc.

For the risk level of the ship calculate the expectedFor the risk level of the ship calculate the expected

number of fatalities and injuriesnumber of fatalities and injuries Transform into monetary value and include as aTransform into monetary value and include as a

through life costthrough life cost

Good for whole ship evaluationGood for whole ship evaluation


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Cost per Unit Risk Reduction or ICAFCost per Unit Risk Reduction or ICAF Calculate how much a life would have to beCalculate how much a life would have to be

worth for the option to be worth whileworth for the option to be worth whileAllows better examination of different RCOsAllows better examination of different RCOs

Evaluation Risk Control OptionsEvaluation Risk Control Options


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Example ICAF CalculationExample ICAF Calculation

Reference:Reference:

Cost-Benefit Analysis Of Improved ShipCost-Benefit Analysis Of Improved Ship

SurvivabilitySurvivabilityJohn SpougeJohn Spouge

RINA Watertight Integrity ConferenceRINA Watertight Integrity Conference

Nov. 1996Nov. 1996


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ICAF ExampleICAF Example

Cost Benefit Analysis of fitting 3Cost Benefit Analysis of fitting 3transverse bulkheads retrospectively to atransverse bulkheads retrospectively to a

RORORORO We will look at:We will look at: CostsCosts

BenefitsBenefits

Conventional CBAConventional CBA

ICAFICAF


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CostsCosts 1.5 m to fit1.5 m to fit

Can be installed during annual refitCan be installed during annual refit Minimal effect on cargo loading timeMinimal effect on cargo loading time

Expected remainder of ships life is 15 yearsExpected remainder of ships life is 15 years

Discount rate of 5%Discount rate of 5% Equivalent annual cost is thereforeEquivalent annual cost is therefore 0.15m0.15m


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BenefitsBenefits Restricting flooding preventing capsizeRestricting flooding preventing capsize

Increase subdivision index by 17%Increase subdivision index by 17%

SmallSmall GM and Beam are low while Freeboard is highGM and Beam are low while Freeboard is high This means it capsizes before any extra buoyancy is achievedThis means it capsizes before any extra buoyancy is achieved

form the car deckform the car deck

Helps containment of fireHelps containment of fire In total, benefits are estimated to be 18% riskIn total, benefits are estimated to be 18% riskreduction for the shipreduction for the ship


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BenefitsBenefits This means:This means:

Reduction in total vessel losses:Reduction in total vessel losses:8.0 x 108.0 x 10-5-5 per yearper year

Reduction in fatalities:Reduction in fatalities:

0.04 per year0.04 per year

NB. Calculated from a RiskNB. Calculated from a Risk

Assessment ModelAssessment Model


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If we assume today the non-fatality costsIf we assume today the non-fatality costsof a RORO capsizing isof a RORO capsizing is 150m150m

Then the reduction in cost of total lossesThen the reduction in cost of total lossesdue to the bulkheads is:due to the bulkheads is:

15m x 8.0 x 1015m x 8.0 x 10-5-5 == 12,000 a year12,000 a year

This small compared with the installationThis small compared with the installationcostscosts


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Conventional CBA based on aConventional CBA based on a 2m life2m lifesays:says:

(( 2m x 0.04 + 12,000) x 10 = 0.92m 2m x 0.04 + 12,000) x 10 = 0.92m Where 10 is the annuity factor whichWhere 10 is the annuity factor whichreflects the discount rate and operatingreflects the discount rate and operatinglifelife

As this less than 1.5m Capital Cost it isAs this less than 1.5m Capital Cost it isnot cost effectivenot cost effective


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ICAF =ICAF = 0.15m per year/0.04 fatalities per year0.15m per year/0.04 fatalities per year

== 3.8m3.8m

Because societal risks for ROROs is high itBecause societal risks for ROROs is high itmay be appropriate to introduce themay be appropriate to introduce theoption even though the cost exceedsoption even though the cost exceeds

2m2m

If we applied a disproportion factor of 2 toIf we applied a disproportion factor of 2 toaccount for this. It then becomesaccount for this. It then becomes

Reasonably PracticableReasonably Practicable


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DiscussionDiscussion

Do we agree that in this case Safety refersDo we agree that in this case Safety refersto human risk based costs only?to human risk based costs only?

How can we calculate the capital andHow can we calculate the capital andthrough life costs and account forthrough life costs and account for

changes? (Mass?)changes? (Mass?)


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Capital CostsCapital Costs

Design and EngineeringDesign and Engineering

Steelwork Materials and LabourSteelwork Materials and Labour

Outfitting Materials and LabourOutfitting Materials and Labour Machinery CostsMachinery Costs

Shipyard OverheadsShipyard Overheads


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Through Life CostsThrough Life Costs

Costs of ClassCosts of Class CrewCrew InsuranceInsurance

Repayment of LoanRepayment of Loan FuelFuel Port FeesPort Fees MaintenanceMaintenance

Hotel ServicesHotel Services AdministrationAdministration


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ConclusionsConclusions

Hopefully there is a better understandingHopefully there is a better understandingof how we are going to use the costof how we are going to use the cost

model part of the toolmodel part of the toolAnd from our discussions.And from our discussions.

cost module

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