Calculating Costs – A Crucial Skill!

As operators, we always face the music of cost dictating the way that our processes are governed. Many times figuring costs, figuring payback times, establishing budgets and taking care of normal day-to-day operations is essential in this profession. Many operators cringe at the thought of doing math calculations, math problems or anything associated with number crunching. The best way to deal with this fear is to do math repeatedly or practice math in your spare time. Chemical costs, infrastructure costs, equipment replacement cost, as well as preventive maintenance costs, can all be overwhelming factors to deal with as an operator. News flash––it’s not always a superintendent or city manager that will be responsible for budgets, figuring costs, etc. Thus, the Division of Compliance Assistance introduces math to operators as part of the certification process. Let’s analyze a situation involving cost.

You have a facility that is considering rebuilding a section of the plant. You found out that that you will receive a $2.7 million grant and a $1.5 million loan to complete the project. The total cost of the project is $4.2 million. The plant has set aside an infrastructure fund that generates $1,000 per month. There is currently $320,000 in the fund, and the loan is financed for 20 years. By rebuilding this section of the facility, the energy and operating costs would bring a savings of $13,000 per year. These funds, along with the infrastructure fund and savings, are earmarked for this project only. You have been tasked to see if the city can afford to complete the project and how many years (if applicable) it will take for the city to begin to receive a return on its investment.

Engineering is 15 percent of the project cost.
Infrastructure is 63 percent of the project cost.
Legal is 7 percent of the project cost.
Unforeseeable expenses are 7 percent of the project costs.
Back-up parts are 8 percent of the project cost.
Operating costs for the life of the loan are 6.2 percent of the total cost.
Interest on the loan equals 4.2 percent. 

Total for Entire Project

Interest on Loan                                                      Operating Cost

$4,200,000                                                                              $4,200,000 for project
X   0.042 interest rate                                                                                        X    0.062
$ 176,400 interest                                                                                          $ 260,400 

Total for Project

$ 4,200,000
  +    260,400

What the utility has to cover


Funds available
$320,000 + 1,000 * 12 months *20 years (term of the loan) + $13,000 * 20 years

$320,000 + $240,000 + $260,000 = $820,000 


This is a deficit the utility will face if it does the project. So actually, the yearly cost the utility has to cover is $53,340.

What are options that the city leaders could use or take into account to fund the project if they want to do the project? This is an opportunity for you to consider the options available. We will discuss these options in a future blog post.

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One Response to Calculating Costs – A Crucial Skill!

  1. Pingback: Calculating Costs – Part II | KY OCP

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