Loss-Cost Evaulation of electrical Equipment

[redtrumpet]

I want to include cost of losses in a transformer specification I am preparing, and have determined my annual load and no-load loss costs. I am having trouble determining the worth of these losses, however.

I have the 1986 version of the Red Book, which uses the present worth of an annuity to determine the worth of losses. However, it does not explain what a discount rate is or how to determine the value of the discount rate. I am used to thinking in terms of interest rates and the opportunity cost of money. Can I use a time-value of money formula instead, using the prime interest rate and determining what the cost of losses would be worth in say 10 years if they were invested instead of being tied up in the transformer? Alternatively, can someone explain the discount rate in the annuity formula in the Red Book to me?

 

[electricpete]

I'd say it's a more complicated subject than meets the eye. If your corporation has shareholders ow owners, then surely they have a stake in every transaction. If that money was not invested in your project now then it could conceivably be used on other projects. (what is the opportunity cost of forgoing those projects). If that money was not invested in your project now then conceivably it could be paid to the shareholders in dividends. How much is it worth for that shareholder for you to take his potential dividend and reinvest it in your project... What are his other investment options and how do they compare from a standpoint of average return over life of project, front-end return (sometimes short-term cash flow outweighs long-term return) and risk. Even if the major funding for the project can be identified with a specific loan, odds are that activity is not proceeding in a vacuum and will touch many parts of the organization.

So as a first guess, the prime rate or the rate at which you can get a loan to finance the project is a good guess. But in the end it's a management determination in my humble opinion. Also IMHO Electrical Engineers are probably not the best folks to field this question.

 

[BJC]

The discount rate they use in the Redbook is the present value of some future sum. For example if you are going to buy a new corvette in 5 years for $60,000 how much do you have to have now to do it if you can get 12% for your money. ( $34,045) Or what is the present worth of $60,000 in five years.
Your company has a cost of capitol,some of the bean counters can tell you what is is. or you can use prime + some precentage.
The formula on page 455 of the Redbook is for the present worth of a stream of money in the future. So if your transformer load losses are $450 a month you can find the present value of the cash stream using that formula.
Instead of using all the formulas for present worth of various flows ( present value, capitol recovery sinking fund etc. etc ) I suggest setting it up on a spread sheet using a line for each month of the projected life. You can set it up to give you the present value of future costs. You can set it up to compair the efficency of different transformers at 1/2 and full load, You can set it up to allow for increasing energy cost ( it's harder to do with a the formula for the present cost of a stream) , changing load cycles or what ever.
Sorry if I made this sound to simple. My main point is use the spreadsheet, the simple intrest formula ( FV= (1+i)^n) and lots of lines on the spreadsheet. Someone said Excel has made playing "what if" the second most popular indoor sport. It can help you most in deciding which of several transformers to buy.
There is also some good info on this site.

http://energy.copper.org/

 

[redtrumpet]

I am the author of the question and after reading the first response I better clarify my position. I am a consulting engineer and the project in question is a dust collection system required to meet environmental regulations. It does not benefit productivity, rather it is a 100% loss in terms of return on investment. The alternative is paying a big fine to the government.

So, I have an obligation to ensure operating costs are as low as possible within economic justification. If on balance one transformer has lower load and no-load losses than another, but is more expensive, the more expensive transformer may be justified if the operating cost is sufficiently lowered.

I also do not like the tone of the first response, wherein the shareholder's interest comes first (indeed, is the only factor that matters). As a professional engineer, I owe a duty to the public to ensure wise use of limited energy resources and to reduce harmful greenhouse gas emissions through energy-efficient use of resources. Or has everyone forgotten about the public good, which supersedes an individual's private interest?

 

[electricpete]

Red - You wrote:
I also do not like the tone of the first response, wherein the shareholder's interest comes first (indeed, is the only factor that matters). As a professional engineer, I owe a duty to the public to ensure wise use of limited energy resources and to reduce harmful greenhouse gas emissions through energy-efficient use of resources. Or has everyone forgotten about the public good, which supersedes an individual's private interest?


I'm sorry that you don't like my tone. I don't particularly like the tone of your most recent message.

Your question as I understood it was: "How do I establish the interest rate/discount rate/cost-of-capital to be used in an economic evaluation"

The main point I tried to make was that it can be a complex question. Also built into my frame of reference is that "time value of money" depends on whose money is being spent and returned at different points in time. If I am a one-person company barely making ends meet, and financing my expenses with high-rate running credit card balances, then I would probably use an interest rate of 15% (yes, this would steer me away from long-term investments and toward quick-payback projects). If I am a municipality financing my project with low-cost municipal bonds, then I might evaluate the project using 8%. Does this surprise you?

I never said that economic factors are the only ones that need to be considered in a decision. Your question was confined to economic factors and I limited my response to economic factors.... what's wrong with that? Why do you think I have forgotten about public good, limited natural resources, etc etc? Why do you attack me when I'm only trying to help you?

 

[BJC]

" Or has everyone forgotten about the public good, which supersedes an individual's private interest? "
Well Redtrumpet at least you don't sound like a Shrub fan.
I know of a company that purposly put off a project to clean up a spill problem for some time. They hired engineers to study one fix and them another. They would propose the fix to the govermental agency and it would take 6 or 9 months to get a response. They purposly had engineers and lawyers in a delay tactic. They had evaluated the cost ( present value) of hiring the engineers and lawyers against just fixing the damm problem. It went on for 4 or 5 years untill the company was sold and then it all started again.
I had a chance to work on it but declined. For all we knew you could have been just another study to wave in front a the state agency. I don't think any body made that assumption. But the tatic is more common than you may think. The most common soulution to polution is dilution followed by leagle challenges.
You fortunate to be working with a client that takes problems head on.

 

[redtrumpet]

Sorry, electricpete. I misinterpreted your answer and realize you were only trying to answer the question.

BJC, ironic you should mention Shrub as I finished reading Molly Ivins' book, "Shrub: The Short But Happy Political Career of George W. Bush" two weeks ago.

 

[electricpete]

No hard feelings, Redtrumpet. Keep up the interesting discussions.

 

[stevenal]

IEEE C57.120 also addresses the subject. My eyes glaze over every time I attempt to look at it, however. I found a much better (easier to follow) guide at the Rural Utilities Service:

http://www.usda.gov/rus/regs/bulls/1724e301.pdf

 

[redtrumpet]

Excellent document, Stevenal. Thanks for the post.

 

[jbartos]

Suggestions:
1. Beside all those traditional factors, references and standards, newly deregulated Utilities may have a great influence on those traditional or standard approaches to the transformer (or perhaps other electrical equipment) efficiencies, losses, cost savings and profits.
2. Also, the Red Book (IEEE Std 141-1993) includes several important transformer parameters/variables that are considered, e.g. Transformer Temp Rise, Full Load, No Load, 10-year evaluation period (who knows what the Utility will prepare within 10-years), new materials for core steel, etc.

 

[electricpete]

IEEE739 = Recommended Practice for Energy Management in Industrial and Commercial Facilities - This document has a large chapter on Economic Analysis (probably the same as you'd find in any textbook), but also has pretty detailed models for efficiency calculations on transformers, as well as motors, cables etc.

 

[BJC]

Sometimes you can arrive at the best soultion in terms of present cost, annual operating cost or what ever and find the present budget ( dollars to spend now ) rules the most optimum choices one of consideration. I'm pretty sure it's cheaper to drive a Mercedes SL 500 for three years than a Chevy or Ford. Realities at home and the job sometime dictate less that optium choices.