Using the replacement technology of high pressure waterjet decoating systems as an example, a simple methodology is presented for developing a cost effectiveness model. The model uses a four-step process to formulate an economic justification designed for presentation to decision makers as an assessment of the value of the replacement technology over conventional methods. Three case studies from major U.S. and international airlines are used to illustrate the methodology and resulting model. Tax and depreciation impacts are also presented as potential additions to the model

Shunk, James F.

English

NASA Technical Reports Server

N95- 31762
Evaluating the Cost Effectiveness of
Environmental Projects:
Case Studies in Aerospace and Defense
by
Dr. James F. Shunk
United Technologies Corporation • Waterjet Systems, Inc.
P. O. Box 070019 • Huntsville, AL 35807-7019
Abstract
Using the replacement technology of high pressure waterjet decoating
systems as an example, a simple methodology is presented for developing a cost
effectiveness model. The model uses a four-step process to formulate an
economic justification designed for presentation to decision makers as an
assessment of the value of the replacement technology over conventional
methods. Three case studies from major U. S. and international airlines are used
to illustrate the methodology and resulting model. Tax and depreciation impacts
are also presented as potential additions to the model.
Introduction (Charts I & 2)
The purpose of this paper
is to present a simple
methodology for constructing
a cost effectiveness model
designed to compare, in
economic terms, the value of
a potential replacement
technology with conventional
methods. The replacement
technology of high pressure
waterjet decoating will be
used as an example because it
is rapidly gaining acceptance
as a cost-effective alternative
to chemical stripping,
abrasive grit blasting,
machining, and hand
sanding. Since the current
major user of waterjet
decoating systems is the
aviation industry, the case
1-PURPOSE
DEVISE A SIMPLE METHODOLOGY FOR CONSTRUCTING A
COST-EFFECTIVENESS MODEL TO COMPARE REPLACEMENT
TECHNOLOGIES WITH CONVENTIONAL ONES TO ASSESS
THEIR VALUE FOR DECISION MAKERS.
HIGH PRESSURE WATERJET DECOATINQ SYSTEMS WILL BE
USED AS A SPECIFIC.
2-CONTENTS
• OVERVIEW
• OBJECTIVES
• COST EFFECTIVENESS MODEL
• CASE STUDIES
• ECONOMIC ANALYSIS
• SUMMARY
studies will be drawn from data collected by major airlines.
169
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1Although waterjet decoating systems will be used as the example
replacement technology, the methodology developed is applicable to any
situation where a sound, economic basis is needed for comparing two
technologies capable of performing the same tasks.
Overview (Chart 3)
Waterjet coating
removal system do
provide a good example
for cost effectiveness
modeling because they
offer an alternative to a
number of both labor
intensive and potentially
environmentally
hazardous methods now
in common use in many
industries. The major
attractions of waterjet
decoating are high coating
removal rates, low
3-OVERVIEW
• W•terJet coating removal Is a rapidly emerging niche •re•
of w•terlet machining technolagNf.
• Wet•riot System• Iw • technologw •pin-off company bammd
on bander of waterJet docoatlng exportiN from NASA.
• High prelmure waterJet technologv Is an environmentally
remand alternative to conventional w••to-generoUng
technologloe of:
...Odthla_ins
...Chemical Ira•••don/shipping.
...Machlnlns
...Hand mmdln_
• The only waste product• ere the coating• removed. All
procem; water le recovered, reconditioned and reumed.
potential for damage to the substrate material, and environmental safety since
the only waste products from the process are the coatings removed. All
processing water is normally collected, filtered, reclaimed, and reused in the high
pressure pumps.
Objectives (Chart 4)
Although the focus of
this paper is economic
justification because of
today's priority on
enhancing productivity in
our highly competitive
global environment, a total
assessment that includes
both tangible and
intangible benefits should
be presented to decision
makers as measure of the
total value of a
replacement technology.
4-OBJECTIVES
• THE OBJECTIVES OF THE COST EFFECTIVENESS MODEL
MLL BE TWOFOLD:
1 -Am•me the value of a replacement technology •e an
nit•re•tire precemL
2-Provide • mound, economic bade for Justllylng to dechdon-
maker• the capital fund• needed to purchaoe the
replacement.
• THE END RESULT WILL BE SIMPLE MODEL WiTH A
FRAMEWORK SUITABLE FOR A WiDE VARIETY OF
PROJECTS THAT CONTRAST ONE TECHNOLOGY TO
ANOTHER.
170
Cost Effectiveness Model (Chart 5)
This is the four-step
methodology used to
develop a cost-effectiveness
model. In step one, not all
the elements listed can
contribute to the economic
analysis; however, some
may be very important in
assessing the total value of .
the alternative. In the
aviation industry, for •
example, the intangible
factor of passenger safety
can override all economic
factors in a decision.
5-COST EFFECTIVENESS MODEL
ESTABLISH CURRENT METHOD BASELINE:
...Cosil.
...Turn.lime.
...Materiel.
...IntangibleL
DEVELOP POTENTIAL BASELINE FOR NEW METHOD
USING SAME CRITERIA.
QUANTIFY DIFFERENCES TO ASSESS VALUE OF NEW
METHOD OVER CURRENT ONE.
CONVERT DATA TO MEANINGFUL ANALYSES FOR
DECISION MAKERS:
...Peyback period.
...Return on Inveulment (ROI).
...Internal Rate of Relurn (IRR).
Step two can be difficult unless data are available on the replacement
technology. There is danger, for example, in comparing actual data from the
workplace with "paper data" generated with only cursory testing. The credibility
of the entire analysis is based on the validity of the data used.
Step four is the most important, because the results of the model must be
presented to decision makers in a form they can easily understand. Customarily,
all such economic analyses use a common measure of economic value - payback
period, for example - so that one capital investment can be compared to another
and prioritized to compete for limited capital funds. The process varies from one
company to another, and may vary for different types of equipment as well.
Benefits Analysis - Tangible vs. Intangible (Chart 6)
The compilation of
tangible and intangible G-BENEFITS ANALYSIS- TANGIBLE VS. INTANGIBLE
benefits is generalized for INTANGIBLE
replacement technologies; • BETTERCOMPANYIMAGE
however, some benefits
listed as intangible could be
quantified and used in the
economic analysis, if
needed. For our waterjet
example, it is possible to
replace girt blasting booths,
chemical treatment tanks, and some machining lathes with a single waterjet
system. The savings in replacing these three systems, therefore, could be
TANGIBLE
• LABOR HOUR (MANPOINER)
SAVINGS
• REDUCED WASTE DISPOSAL
COSTS
• MATERIAL COSTS
• OPPORTUNITY COSTS
• BETTER WORKPLACE &
COMMUNITY ENVIRONMENT
• PROCESS REPLACEMENT
• REDUCED COMPLIANCE
DOCUMENTATION
171
quantified but the mechanics are complex because of complicating factors such as
equipment age, removal costs, salvage value, etc.
On the tangible benefits side, material costs represent the savings in
processing costs. In our waterjet example, these savings would include the cost
of grit, chemical replenishment, machining tools, etc. Our case study analysis,
for simplicity, will focus on labor cost savings.
Case Study #1 - Major U. S. Airline (Chart 7)
These are representative comparison data from an airline that uses high
pressure waterjet equipment to process a large variety of jet engine parts. The
current labor costs are compared with waterjet processing costs to compute the
per part labor savings as well as the annual hourly savings expected for each
specific part.
7-CASE STUDY #1 - MAJOR U. S. AIRLINE
pbiRT IDI_IT.
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172
Case Study #2 - Major International Airline (Chart 8)
This airline processes a smaller variety of parts, but overall, these parts are
more labor intensive than in Case #1.
8-CASE STUDY #2 - MAJOR INTERNATIONAL AIRLINE
PART IDENT.
BOOSTER SHROUD
HPC DISK
SPOOL
HPC STATOR CASE
i TURBINE MID-FRAME
COMPRESSOR REAR FRAME
SUMP
THERMAL SHIELD
LOW-PRESS. TURBINE CASE
CURRENT WATERJET SAVINGS
(HR) (HR) (HR)
10 0.7 9.3
5
122
0.1 4.g
0.8 121.2
144 0.8 143.2
5.5 0.7 4.8
4 0.8 3.2
3 0.7 2.3
0.8 23.224
4 1.0 3.0
Case Study #3 - Major U. S. Airline (Chart 9)
Our third airline justified the waterjet investment based on processing only
inlet fan cases. The environmental concerns associated with the conventional
method combined with the high labor costs combined to provide the needed
justification. A variety of other parts are also being processed since the backlog
of inlet fan cases no longer exists.
9-CASE STUDY #3 - MAJOR U. $. AIRLINE
PART IDENT. CURRENT WATERJET SAVINGS (HR)
(HR) (I-IR)
INLET FAN CASE 22 2 20
_m m_ v5MISC. PARTS (AVG.)
173
Economic Analysis - Key Data (Chart 10)
If the data from the three
case studies shown are
combined with data from
another airline and two
engine part manufacturing
plants, the key data shown
here are representative of
the replacement technology.
These key data are critical in
the analysis because they
establish the expected part
capacity of the equipment
and the expected labor
savings as a function of the operational use of the equipment.
10-ECONOMIC ANALYSIS • KEY DATA
, AVERAGE PROCESSING TIME FOR ENGINE PART
DECOATED USING HIGH PRESSURE WATERJET:
I 40 MINUTES PER PART I
" AVERAGE LABOR HOUR SAVINGS FOR WATERJET
DECOATING COMPARED TO CONVENTIONAL MEANS:
I 4.8 MANHOURS PER PART J
• DATA BASED ON WATERJET PROCESSING OF OVER 10@
DIFFERENT ENGINE PARTS FROM FOUR MAJOR AIRLINES
AND TV/O PRATT & WHITNEY PLANTS.
Economic Analysis - Manpower Savings (Chart 11)
These calculations are
necessary to establish the
baseline and savings then
possible with the new
waterjet equipment. Note
that although 12 parts per
shift is the potential
maximum throughput,
only 10 parts per shift was
used to allow for "friction,"
such as part change,
fixturing, and unexpected
maintenance. Normal
preventive maintenance is
performed on an idle shift.
11-ECONOMIC ANALYSIS • MANPOWER SAVINGS
• CELL AVAILABILITY
...6 daryulwk ...52 weekm'yr ...260 daym'yr operation
• PART CAPACITY
...S hourafday per wlhift
...40 mln./part for procemdng
...12 partafday top capacity
...(Uae 10 partx#dary to offset handllng_ixturlng time)
• LABOR SAVINGS • SINGLE SHIFT
...2G0 day_'year available X 10 pariLllday - 2400 partafyr
...2600 partldyr X 4.0 him recall/part -
• LABOR SAVINGS • DOUBLE SHIFT
._260 dayafyr available X 20 partm'day - 6200 parl_/yr
_.5200 partlk'yr X 4.8 houim meved_ad - 25_
The key findings are a labor savings of 25,000 labor hours per year per
double-shift operation and 12,500 labor hours for single-shift operation.
174
Economic Analysis - Payback Period (Chart 12)
The chart shows a 5-year analysis of the cost factors involved with the new
waterjet equipment. An original investment of $800,000 is assumed with an
annual maintenance cost of approximately 5% of the purchase price for both
parts and labor. An average hourly wate (fully burdened with benefits, etc.) of
$20 per hour was assumed. This will be varied, since $20 per hour may not be
representative of other companies.
12-ECONOMIC ANALYSIS " PAYBACK PERIOD
YEAR I YEAR 2 YEAR 3 YEAR 4 YEAR 5
MHRS SAVED 25,000 25,000 25,000 25,000 25,000
AVG. HRLY WAGE $20 $20 $20 $20 $20
LABOR SAVINOS $500,000 $500,000 $500,000 $600,000 $500,000
MAINT. COST ($40,000) ($40,000) ($40,000) ($40,000) ($40,000)
WTFtJET EQUIP. ($ EO0,000) 0 0 0 0
YIqLY SAVINGS ($ 340,Q00) $460,000 $460,000 $460,000 $460,000
$1,500,000CUM. SAVINGS
(AFTER PAY]BACK)
($34o,0oo)
ASSUMPTIONS:
$120,000 $580,000 $1,040,000
1 • DOUBLE.SHIFT OPERATION
2 • MAINT. COST = 5% OF PURCHASE PRIDE
3 • TAX IMPAG'I'S NOT INCLUDED:
s- DEPRECIATION (÷)
b • SAVINGS ARE TAXABLE (--)
The yearly labor savings of $500,000 are reduced each year by maintenance
costs and, in the initial 2 years, by the cost of the capital equipment itself. For
this particular labor cost, the equipment is paid for in 18 months of operation
and, by the end of the 5-year period, has earned $1.5 million.
To reduce complexity, several factors such as tax impacts are not included.
Depreciation, for example, would provide a tax benefit for several years. On the
other hand, the labor savings would accrue to the bottom line and be taxed as
additional profits. The value of the out-year dollar savings should also be
reduced by inflation since they will be worth less when finally received.
175
Payback Time vs. Wage Rate (Chart 13)
Thetwo curvesshown allow for calculationsof the paybackperiod (for single
and double-shift operation) as a function of burdened labor wage rates. For the
more typical $35 per hour wage rate in the aerospace/aviation business, a
waterjet investment could be paid back in less then one year in double-shift
operations, as shown.
13-PAYBACK TIME VS WAGE RATE
50
45
40
35
30
WAQE RATE
IJHR 25
(BURDENED) 20
15
10
5
0 I ! I I I I
6 12 18 24 30 38 42
PAY'BACK PERIOD (MONTHS)
Variations for the Purist
There are a number of
complicating factors that can
be added to the analysis, a
few of which are listed. Tax
considerations, for example,
can work in different ways.
For tax purposes, the capital
expenditure can be
depreciated over a number
of years to provide a tax
credit. On the other hand,
the money saved using the
equipment increases profits
which are, in turn, taxed.
The future value of many can
also be a consideration, since
(Chart 14)
14-VARIATIONS FOR THE PURISTS
TAX IMPACTS:
...Depreciation oxpenme.
...Labor savingI are taxable.
FUTURE VALUE OF MONEY
MATERIAL & WASTE DISPOSAL COST
AVOIDANCE
OPPORTUNITY COSTS:
...Additional capacity.
...Turn-time raducUon.
...Procom; replacement.
savings received in the outyears will be worth less than those saved in the
176
current year becauseof inflation. Opportunity costs can also be significant in
some cases. In our waterjet example, we were able to save 4.8 man-hours, on
average, for every part processed. This can translate to additional throughput
capacity for the facility allowing them to accept third-party work and further
increase profits.
Summary (Chart 15)
In summary, we have
described a relatively
simple methodology for
developing a cost
effectiveness analysis that
can be used to compare a
replacement technology
with a conventional one.
The end result of the work
is an economic basis for
justifying the use of a
replacement technology
15-SUMMARY
FRAMEWORK FOR PERFORMING ELEMENTARY COST
EFFECTIVENESS ANALYSES IS APPLICABLE TO MOST
TECHNOLOGY-REPLACEMENT ALTERNATIVES.
FOUR-STEP PROCESS:
1 -Establish current procedure baseline.
2-Develop replacement tochnolog_ baseline.
3-QuanUly dillerencee.
44:onvert to meanlnglul analyses.
METHODOLOGY WILL BE ROBUST ENOUGH TO ALLOW
FOR ADDITION OF MORE COMPLEX FACTORS.
based on tangible benefits.
To assess the value of the replacement technology requires consideration of
intangible benefits as well.
177



Evaluating the cost effectiveness of environmental projects: Case studies in aerospace and defense

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