Engineering Asset Management and Risk Analysis

The assignment provided is a comprehensive study of engineering asset management and risk analysis, covering topics such as maintainability measurement, cost savings, capital expenditures, depreciation expense, free cash flows, terminal value, discounted cash flows, and enterprise value. It includes a detailed table with specific values for each year from 2002 to 2008, as well as references to relevant studies and frameworks.

Running head: ASSET MANAGEMENT
Management
Name:
Institution:
Date:

ASSET MANAGEMENT
Contents
Introduction................................................................................................................................2
Asset Management and Design for Maintainability and Reliability..........................................2
Need and expectation of stakeholders for maintainance of specific assets................................2
The Scope of Maintainance to Meet Those Expectation...........................................................3
Level of Documented System for the Maintainance Department..............................................3
Risk-Based Maintainace Management.......................................................................................4
What is a discount rate and how important is it in the valuation of companies Assets?........5
Life costs used in Maintainance Decision Making....................................................................7
Conclusion..................................................................................................................................8
References................................................................................................................................10
Introduction

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Asset Management and Design for Maintainability and Reliability
Asset management and design is good for asset usability and depreciation in accounting
matters. Our company is known as ID Engineering Works Limited, a public limited company
that deals with civil engineering and civil works. The best way to give quality services in
construction of buildings and roads is by ensuring there is reliability and maintainability of
construction equipment like fork lifts, graders, construction trucks and rollers. As one of the
biggest civil engineering companies, ID Engineering has strategically placed itself at the
center of civil engineering works in the country and is among the most sort after. The
organization aims at reducing the levels of wastages in the civil engineering industry
therefore giving value for money for every client including the government and private sector
(Asset management, 2008).
Need and expectation of stakeholders for maintainance of specific assets
There are two main aims of stakeholders in a company. The first is shareholders and other
stakeholder’s wealth maximization through ensuring that there is value for money in projects
conducted and value for every equipment. The second is shareholders profit assets through
dividend payout for the reason that they are own the company. In this case, there are different
expectations of various stakeholders of the company. The first expectation is that the
company will be a going-concern. This means that the company can leave to see the
foreseeable future. It is important to note that stakeholders’ confidence grows when the
company maintains a growth trajectory meaning that it cannot go under at any time
(Cautionary tales for the modern investor, n.d.). The second expectation is that the company
will remain profitable and therefore keep on giving back return on investments to
stakeholders. Specific assets in maintenance include the truck lorries, construction folks and
graders. It is their expectations that the company equipment will be used well, serviced
regularly and maintained to avoid losses. Their need is there to be competed with against the

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needs of competitors. The good reason is that the holders always yarn to maximize their
profits (Mathew et al., 2006).
The Scope of Maintainance to Meet Those Expectation
Our Reliability, Availability and Maintainability (RAM) methodology provides an integrated
analysis of the expected performance of the systems based on their design, operation and
maintenance. RAM is essential in life cycle costs and asset management programs. The RAM
models are used to evaluate the reliability and availability of a specific system and / or
equipment, taking into account the specific data of the plant and / or a data source of
reliability and maintainability specific to the sector, in case it is not have data of the plant
(Mathew et al., 2006).
The results of RAM include:
 Criticality of systems and / or equipment
 Reliability and inherent availability of the system
 Forecast of future operational availability
Level of Documented System for the Maintainance Department
The Integral Maintenance Optimization (MIO) proposes a global approach to develop its
functions within the framework of Operational Reliability. Some of the Reliability
Engineering tools are also studied, such as the Criticality Analysis, the FMEA, the RCA and
the RBI, necessary in the implementation of an "Integral System of Operational Reliability
for the industrial services area of the IBD Engineering Limited, which is presented as a
practical case.

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The result and success of the system was quantified in terms of the reduction in the risks of
the plant, reduction of the failure rates and the control of the mechanisms of deterioration, at
the same time as the operating costs were stabilized and a considerable reduction was
achieved. The total maintenance costs. The MIO includes the most advanced tools in these
aspects, becoming a powerful lever for the transformation of modern asset management (Zuo
et al., 2018).
In the last years, maintenance within modern industry has undergone a series of profound
technological, economic, social, organizational transformations. These changes are a
consequence of the current competitiveness of the businesses and the globalization of the
markets. Given this scenario, the principles of Asset Management based on Operational
Reliability Engineering represent the only effective way that allows companies to efficiently
face the constant challenges to which today's organizations are subject.
Risk-Based Maintainace Management
Operational Reliability is defined as a series of continuous improvement processes that
systematically incorporate advanced diagnostic tools, analysis techniques and new
technologies to optimize the management, planning, execution and control of industrial
production. Operational Reliability implies the capacity of an installation (processes,
technology, people) to fulfill its function or the purpose that is expected of it, within its
design limits and under a specific operational context (Abel, 2001).
The maintenance in each one of the levels of its organizational structure must provide
improvement strategies, from the diagnosis and analysis of the opportunities for the
optimization of costs and the evaluation of the impact of the maintenance, in its four
fundamental areas:

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The Integral Management of Maintenance, includes a series of strategies aligned with the
mission of the business, whose objective is to achieve Organizational Competitiveness. To
achieve it, there are five key factors: safety, Productivity, respect for the environment and
Reliability (Abel, 2001).
Reliability is what enables the four factors to be insured over time and therefore guarantees
profitability. The Reliability of Assets is the key strategy to manage information and make
the best decisions. The development of Assets, is therefore the indispensable element to
increase the Reliability of the Assets. The Reliability of assets is defined as the probability of
efficient and effective performance of people, in all processes, without committing errors or
failures derived from knowledge and acting human, during their work competence, within a
specific organizational environment (Guidelines for risk based process safety, 2007).
1) What is time value of money? Explain how compounding and discounting are used in
capital investment decisions.
This time I will review some ideas related to the theory of the cost of capital and its use in the
valuation of assets.
What is a discount rate and how important is it in the valuation of companies Assets?
To value a company is to use techniques of financial analysis, and good judgment, to achieve
an approximation to the intrinsic value of a company. There is a range of methods to find the
theoretical value of an asset, however, in this blog we will review one in particular: the
discount of cash flows.
[Discounted cash flow is a valuation method based on the theory of project evaluation,
consisting of updating a stream of future cash flows.]

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Precisely the element that brings future flows to the present is the discount rate. This is a
percentage that serves to homogenize over time the different cash flows expected to be
generated by the company in the future. It is also possible to conceive of this rate as the
minimum annual return that will be required from the company to provide in the future.
To calculate this value we must know what is the discount rate to which we must update the
various cash flows. This rate is indicative of the minimum return required for the investment
in the corresponding financial asset and, therefore, is a function of the systemic risk of said
asset.
[The risk of any asset can be subdivided into two parts. The specific risk and the systematic
risk indicative of those variations of its performance that are not attributable to said asset. The
specific risk can be completely eliminated through good diversification, which is not the case
with systematic risk.]
The expected return of any asset is solely a function of its systematic risk as its specific risk is
considered voided. If the investor does not cancel the specific risk of his investment through
an adequate diversification, he will be running a risk for free, since the expected return of the
project only pays the systematic risk (Results-based management and accountability
framework (RMAF) and risk based audit framework (RBAF), 2007). The development of
Assets, is therefore the indispensable element to increase the Reliability of the Assets
To calculate the discount rate it is essential to find out the risk of the target company, since
the process of updating flows, provides us with a means to incorporate it through the discount
rate. The more risky is the business of the company that you want to buy, the higher the

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discount rate appropriate for cash flows and the lower its current value, that is, its intrinsic
value (Creelman and Smart, n.d.).
Life costs used in Maintainance Decision Making
The cost of capital must be consistent with the valuation procedure of the company and with
the definition of the cash flows that will be discounted, for this it must comply with the
following:
Be a weighted average of the costs, of all sources of financing of the company, in the medium
and long term.
Gaps identified in current practice (appropriateness) when compared with
good practices/ international standard
Nominal annual yield rates will be used for nominal cash flows. If real rates are used, the
flows must be updated according to the variation of a price level index or the variation of the
expected annual inflation rate.
It must be adjusted to the systematic risk of each fund provider, since he expects a return
appropriate to the risk incurred.
The weights should be calculated based on the market values of the different financial
sources. In the absence of these values, the available accounting information should be used.
The discount rate is subject to changes through the forecast period of cash flows, due to
alterations that may occur in inflation, systematic risk and capital structure.
The development of Assets, is therefore the indispensable element to increase the Reliability
of the Assets. The Reliability of assets is defined as the probability of efficient and effective
performance of people, in all processes, without committing errors or failures derived from

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knowledge and acting human, during their work competence, within a specific organizational
environment (Millot, 2014).
What sources of financing are relevant to the calculation of the discount rate
To determine the cost of capital, we are interested in the resources that finance the fixed
assets of the company plus those needed to finance the increase in working capital. All these
financial resources are medium-long term, which is why we will only use them to calculate
the average capital cost.
Conclusion
The cost of asset management.
Preferred assets have priority in the collection of dividends and when liquidating the
company over the rest of the assetsholders. Its cost will be determined by the relationship
between the dividend to be paid to the preferred assets and the market price of said assets
(Millot, 2014). The cost of issuance will have to be subtracted from the market price: kp The
weighted average cost of capital (WACC).
Investment Opportunity
A B C D E
Initial
investment:
100,000 200,000 150,000 100,000 150,000
Annual net
receipts:
120000 240000 300000 140000 180,000

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Salvage
value:
20000 40000 150,000 40,000 30,000
Study period
in years
5 3 4 3 4
2002
2003E
(1)
2004E
(2)
2005E
(3)
2006E
(4)
2007
Steady State
Net sales 1 204,0 1 282,0 1 365,3 1 454,1 1 548,6 1 649,2
Operating Income 85,2 90,7 96,6 102,9 109,5 116,7
- 0,1 56,6 58,9 130,0 140,0 150,0 160,0
90,0 96,0 102,0 108,5
-0,089 44,56 41,15 61,5 65,2
Terminal Value, TV 1051,61
Discounted Cash Flows, DCF 689,99
Enterprise Value, EV 775,61
2002
2003E
(1)
2004E
(2)
2005E
(3)
2006E
(4)
2007
(5)
2008
Steady State
Net sales 1 204,0 1 306,3 1 417,4 1 537,9 1 668,6 1 810,4 1 946,2
99,09 90,37 896,34 105,8 113,8 122,3 131,5
Cost Savings 80,0 80,0 80,0
Capital Expenditures 23,8 175,0 130,0 140,0 150,0 160,0 170,0
Depreciation expense 21,0 84,2 90,0 96,0 102,0 108,5 115,4
Free Cash Flows, FCF -64,2 -6,5 141,8 145,8 150,8 76,9
Terminal Value, TV 1478,83

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Discounted Cash
Flows, DCF - 56,974 - 5,15
Enterprise Value, EV 1023,68
How maintainability is measured.
The Mct requirement for an equipment item is 70 min. and the established risk factor is 10%.
A maintainability test is accomplished and produced results given in the table below for the
50 testing tasks
References
Abel, A. (2001). On the invariance of the rate of return to convex adjustment costs.
Cambridge, MA.: National Bureau of Economic Research.
Asset management. (2008). London: BSI.
Cautionary tales for the modern investor. (n.d.). .
Creelman, J. and Smart, A. (n.d.). Risk-based performance management.
Guidelines for risk based process safety. (2007). Hoboken, N.J.: Wiley-Interscience.

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Mathew, J., Kennedy, J., Ma, L., Tan, A. and Anderson, D. (2006). Engineering Asset
Management. London: Springer London.
Millot, P. (2014). Risk management in life critical systems. Hoboken: Wiley.
Results-based management and accountability framework (RMAF) and risk based audit
framework (RBAF). (2007). Ottawa: Industry Canada, Industrial Technologies Office.
Zuo, M., Ma, L., Mathew, J. and Huang, H. (2018). Engineering asset management 2016.
Cham: Springer.