Cost and value

Why this matters

“Buying our own drone is much cheaper than hiring” is often heard, but the purchase price is only part of the cost. There are people, training, insurance, software, maintenance, degrading batteries and rework on jobs that fail acceptance. Money paid in the future is also not worth the same as money today. A proposer who counts every cost and discloses the assumptions earns more trust than one who simply quotes the lowest price.

Total cost of ownership and break-even

Total cost of ownership (TCO) adds every kind of cost over the period analysed. This example comes from the drone knowledge hub’s unit on life-cycle cost and acceptance. A hypothetical agency makes maps for 3 years. In-house has a setup cost of 240,000 baht, a fixed 90,000 baht per year and 2,000 baht per job; hiring a service costs 12,000 baht per job. The figures are for learning only, with no discounting, tax or residual value.

def three_year_cost(setup, annual, per_job, jobs_per_year, years=3):
    return setup + years * (annual + jobs_per_year * per_job)


for jobs in (24, 4):
    inhouse = three_year_cost(240_000, 90_000, 2_000, jobs)
    service = three_year_cost(0, 0, 12_000, jobs)
    better = "in-house" if inhouse < service else "service"
    print(f"{jobs:>2} jobs/year: in-house {inhouse:,}  service {service:,}  -> {better}")

breakeven = (240_000 + 3 * 90_000) / (3 * (12_000 - 2_000))
print(f"break-even: {breakeven:.0f} jobs per year")

24 jobs/year: in-house 654,000  service 864,000  -> in-house
 4 jobs/year: in-house 534,000  service 144,000  -> service
break-even: 17 jobs per year

Above 17 jobs a year, in-house is cheaper; below that, hiring is much cheaper. But cost is only one criterion: first check that every option delivers work that passes the same criteria, such as maps with stated coordinates and checked errors.

The time value of money

100 baht today is worth more than 100 baht in a year, because it can be invested. Present value (PV) converts future money to today’s value using a discount rate $r$, following NIST Handbook 135, the US life-cycle costing manual. It warns that bases must match: constant-price cash flows with a real rate, or inflation-inclusive prices with a nominal rate, never mixed.

r = 0.05
pv = 100_000 + 10_000 / (1 + r) + (10_000 - 20_000) / (1 + r) ** 2
undiscounted = 100_000 + 10_000 + 10_000 - 20_000
print(f"PV {pv:,.2f} baht   undiscounted {undiscounted:,} baht")
for accepted in (100, 80):
    print(f"{accepted} accepted jobs: {undiscounted / accepted:,.2f} baht/job undiscounted, {pv / accepted:,.2f} baht/job from PV")

PV 100,453.51 baht   undiscounted 100,000 baht
100 accepted jobs: 1,000.00 baht/job undiscounted, 1,004.54 baht/job from PV
80 accepted jobs: 1,250.00 baht/job undiscounted, 1,255.67 baht/job from PV

NPV, IRR and payback

A hypothetical service unit invests 900,000 baht in year 0, earns net cash of 350,000 baht a year for 4 years, and sells its equipment for 50,000 baht at the end of year 4.

• NPV (net present value): the sum of the present values of all cash flows. Above zero, the project returns more than the discount rate
• IRR (internal rate of return): the discount rate at which NPV is zero
• Payback period: the time until cumulative cash equals the investment; it ignores the time value of money and any cash after payback

cash_flows = [-900_000, 350_000, 350_000, 350_000, 350_000 + 50_000]


def npv(rate):
    return sum(cf / (1 + rate) ** t for t, cf in enumerate(cash_flows))


low, high = 0.0, 1.0
for _ in range(60):
    mid = (low + high) / 2
    low, high = (mid, high) if npv(mid) > 0 else (low, mid)

print(f"NPV at 6%: {npv(0.06):,.0f} baht")
print(f"IRR: {mid:.2%}")
print(f"simple payback: {900_000 / 350_000:.2f} years")
for rate in (0.03, 0.06, 0.10, 0.15):
    print(f"  NPV at {rate:.0%}: {npv(rate):>10,.0f}")

NPV at 6%: 352,392 baht
IRR: 21.73%
simple payback: 2.57 years
  NPV at 3%:    445,409
  NPV at 6%:    352,392
  NPV at 10%:    243,604
  NPV at 15%:    127,830

IRR is found by bisection: try the middle rate; if NPV is still positive, the true rate is higher, so raise the lower bound; repeat until the range is tiny. NPV stays positive even at a 15% discount rate, so the project is robust to the discount-rate assumption, but the result depends on 350,000 baht of cash a year, whose sensitivity must also be checked.

Public procurement

A municipal service unit must buy under the Public Procurement and Supplies Administration Act B.E. 2560 (2017). Section 55 sets three methods: general invitation, selection and specific method, and section 56 makes general invitation the default. Electronic bidding (e-bidding) is a sub-procedure set by Ministry of Finance regulations. The proposer must write terms of reference (TOR) with measurable deliverables and allow for procurement time in the schedule, as seen in module 1. The steps and value limits for each method must be checked against the regulations in force at the time.

Class activity

Common mistakes

Summary

• TCO counts every cost over the life cycle; the break-even point shows the volume at which one option becomes cheaper
• PV, NPV and IRR account for the time value of money; the price basis and discount rate must match
• Cost per job must be divided by accepted jobs, and sensitivity must always be analysed
• Thai public procurement has three methods under the 2017 Act and needs a TOR with measurable deliverables

Check your understanding

1. In-house setup is 100,000 baht, fixed cost 20,000 baht a year and 1,000 baht per job; hiring is 6,000 baht per job. Over 2 years, what is the break-even number of jobs per year?
2. What is the present value of 110,000 baht in one year at a 10% discount rate?
3. An investment of 500,000 baht earns 200,000 baht of cash a year. What is the payback period?
4. If NPV at an 8% discount rate is zero, what is the IRR?
5. Which method does the 2017 Procurement Act make the default?