The Total Economic Impact™ Of ABB’s Turbocharger Upgrade

A Forrester Total Economic

Impact™ Study

Commissioned By

ABB

Project Director:

Shaheen Parks

October 2015

The Total Economic

Impact™ Of ABB’s

Turbocharger Upgrade Business Benefits And Cost Savings Enabled By Utilizing ABB’s Turbocharger Upgrade

Table Of Contents

Executive Summary .................................................................................... 3

Disclosures .................................................................................................. 5

TEI Framework And Methodology ............................................................ 6

Analysis ........................................................................................................ 7

Financial Summary ................................................................................... 15

ABB Turbocharger Upgrade: Overview ................................................. 16

Appendix A: Total Economic Impact™ Overview ................................. 17

Appendix B: Glossary ............................................................................... 18

Appendix C: Endnotes .............................................................................. 19

ABOUT FORRESTER CONSULTING

Forrester Consulting provides independent and objective research-based

consulting to help leaders succeed in their organizations. Ranging in scope from a

short strategy session to custom projects, Forrester’s Consulting services connect

you directly with research analysts who apply expert insight to your specific

business challenges. For more information, visit forrester.com/consulting.

© 2015, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited.

Information is based on best available resources. Opinions reflect judgment at the time and are subject to

change. Forrester®, Technographics

®, Forrester Wave, RoleView, TechRadar, and Total Economic Impact

are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective

companies. For additional information, go to www.forrester.com.

3

Executive Summary

ABB commissioned Forrester Consulting to conduct a Total

Economic Impact™ (TEI) study and examine the potential

return on investment (ROI) enterprises may realize by

implementing an upgrade of its turbochargers. The purpose

of this study is to provide readers with a framework to

evaluate the potential financial impact of the turbocharger

upgrade on their organizations.

To better understand the benefits, costs, and risks

associated with a turbocharger upgrade, Forrester

interviewed an existing power station customer organization

that has upgraded its turbochargers and can provide a view

of the performance of the associated engines both before and after the upgrade. An upgrade is the process of replacing an

older-generation turbocharger or turbocharging component with a new and improved one. A newer-generation turbocharger

or component allows organizations to optimize the engine to achieve a higher operational efficiency, with less fuel

consumption, avoiding eventual derating of the engine, with the added benefit of keeping emissions down.

Prior to the upgrade, the customer experienced challenges with engine performance, leading to high fuel consumption and

lowered power output. After upgrading the turbochargers, the interviewed customer was able to run at higher power output

while lowering temperatures, leading to increased output, better reliability, and reduced fuel consumption. According to the

company CEO, “Our improved performance has greatly increased the goodwill and trust of our customers. We pride

ourselves on being reliable.”

TURBOCHARGER UPGRADES IMPROVE ENGINE PERFORMANCE

Our interview with one existing customer and subsequent financial analysis found that the interviewed organization

experienced the risk-adjusted ROI, benefits, and costs shown in Figure 1.1 The analysis points to benefits of $1 million

initially in cost avoidance and $1 million annually versus initial implementation costs of $1.7 million and annual costs of

approximately $180,000, adding up to a net present value (NPV) of $1.4 million over three years.

The financial analysis is focused on quantifiable benefits over a three-year period, including increased power output and fuel

efficiency. In the interview, Forrester also collected information about additional benefits, including extended component

lifetimes due to lowered thermal stress; longer run hours between maintenance inspections, leading to less planned

maintenance time and an overall reduction in overtime (resulting from more available hours for other needs); and fewer

penalties due to missing contractual output targets. We were not able to isolate and quantify these benefits financially, but

we include a discussion of drivers and metrics as applicable.

FIGURE 1

Financial Summary Showing Three-Year Risk-Adjusted Results

ROI: 64%

NPV: $1.4 million

Payback: 11 months

Output: 2.4%

Source: Forrester Research, Inc.

ABB’s turbocharger upgrade can maximize engine

output, increase fuel efficiency, and lower

operating temperatures, leading to reduced thermal

stress on components.

The costs and benefits for the interviewed

organization, based on customer input, are:

Investment costs: $2.2 million.

Total cost savings and benefits: $3.6

million.

4

› Benefits. The interviewed organization experienced the following risk-adjusted benefits:

• Increased power output. Due to the improvements of the turbocharger upgrade, the total output of the engines

rose from 49 megawatts (MW) to 50.2 MW. Based on average revenue associated with incremental output, this led

to a revenue increase of approximately $537,000 annually. In order to achieve this increase in output, additional fuel

was required; this fuel increase is captured in the Costs section.

• Increased fuel efficiency. Turbocharging efficiency leads to higher engine efficiency, which means lower fuel

consumption. Engines with the upgraded turbochargers were able to save a significant amount of fuel for each

kilowatt hour (kWh) generated, ranging from 2.6 g/kWh to 9.67 g/kWh, as reported by the interviewed customer. The

upper end of this range is likely the combination of the upgraded turbocharger as well as an engine overhaul,

resulting in even greater fuel savings; in order to compensate, we have included 50% of the fuel savings for the third

engine, at a total fuel savings of 4.83 g/kWh for that engine. Using the average cost of fuel and total kWh generated

annually by the associated engines, this lead to total fuel cost savings of approximately $470,000 annually.

• Cost avoidance of turbocharger overhaul. If the turbochargers examined in this study had not been upgraded,

they would have required an overhaul. Therefore, we have included the avoided cost of that overhaul as a benefit (in

order to balance the incurred cost of the upgrade). This avoided upfront cost would have been approximately

$960,000.

• Longer component lifetimes. Due to the decrease in temperature enabled by the turbocharger upgrade, the

turbocharger components experience lower levels of thermal stress and therefore have an extended lifetime. This

improvement was recognized by the interviewed organization; however, since the time frame for this benefit is

longer than the three years of the analysis, we have not included it in the financial model.

• Reduced overtime. The interviewed organization has a fixed set of maintenance hours per year, to address either

failures or maintenance. Due to the ability to run longer with a higher degree of confidence, the interviewed

organization was able to use less of the maintenance hours. This left more hours available for dealing with

unscheduled events and therefore, the organization was able to reduce the number of overtime hours required. (Due

to lack of concrete data, this benefit has not been quantified for the financial analysis.)

• Fewer penalties. After the turbocharger upgrade, the organization was able to provide more stable power output at

contracted levels. While this led to increased revenue (as stated earlier), it also allowed the organization to meet

contractual targets and avoid penalties associated with that unit. (As the interviewed organization was not able to

isolate the reduced penalties with the upgraded units, we have not included this benefit in the financial analysis.)

› Costs. The interviewed organization experienced the following risk-adjusted costs:

• Upgrade cost. This is the cost paid by the interviewed organization to upgrade three turbochargers; the total cost

was $1.7M. Forrester notes that the incurred cost was in line with the organization’s annual maintenance budget,

and had the organization not upgraded the turbocharger, it would likely have incurred charges associated with the

approaching exchange interval for the turbocharger components, as captured in the cost avoidance benefit.

• Incremental fuel cost. This is the cost of additional fuel required for the additional power output of 1.2 MW (as

described in the benefits). Using an average cost of fuel and the incremental amount needed, we estimate a cost of

approximately $180,000 annually.

5

Disclosures

The reader should be aware of the following:

› The study is commissioned by ABB and delivered by Forrester Consulting. It is not meant to be used as a competitive

analysis.

› Forrester makes no assumptions as to the potential ROI that other organizations will receive. Forrester strongly advises

that readers use their own estimates within the framework provided in the report to determine the appropriateness of an

investment in a turbocharger upgrade.

› ABB reviewed and provided feedback to Forrester, but Forrester maintains editorial control over the study and its findings

and does not accept changes to the study that contradict Forrester's findings or obscure the meaning of the study.

› ABB provided the customer name for the interviews but did not participate in the interviews.

6

TEI Framework And Methodology

INTRODUCTION

From the information provided in the interviews, Forrester has constructed a Total Economic Impact (TEI) framework for

those organizations considering a turbocharger upgrade. The objective of the framework is to identify the cost, benefit,

flexibility, and risk factors that affect the investment decision.

APPROACH AND METHODOLOGY

Forrester took a multistep approach to evaluate the impact that ABB’s turbocharger upgrade can have on an organization

(see Figure 2). Specifically, we:

› Interviewed ABB marketing, sales, and product specialists to gather data relative to the process and results of a

turbocharger upgrade.

› Interviewed one organization that had recently upgraded its turbochargers to obtain data with respect to costs, benefits,

and risks.

› Constructed a financial model representative of the interview using the TEI methodology. The financial model is populated

with the cost and benefit data obtained from the interview.

› Risk-adjusted the financial model based on issues and concerns the interviewed organization highlighted in interviews.

Risk adjustment is a key part of the TEI methodology. While interviewed organizations provided cost and benefit

estimates, some categories included a broad range of responses or had a number of outside forces that might have

affected the results. For that reason, some cost and benefit totals have been risk-adjusted and are detailed in each

relevant section.

Forrester employed four fundamental elements of TEI in modeling the financial impact of the turbocharger upgrade: benefits,

costs, flexibility, and risks.

Given the increasing sophistication that enterprises have regarding ROI analyses related to technology investments,

Forrester’s TEI methodology serves to provide a complete picture of the total economic impact of purchase decisions.

Please see Appendix A for additional information on the TEI methodology.

FIGURE 2

TEI Approach


Perform due diligence

Conduct customer interviews

Construct financial model using TEI

framework

Write case study

7

Analysis

INTERVIEWED ORGANIZATION

For this study, Forrester conducted interviews with the CEO of an independent power provider using ABB turbochargers with

its engines. The power station has been in operation since 1995, growing its total capacity from 74 MW up to 190 MW.

This study focuses on a subset of the reciprocating engine generating sets. The facility discussed in this study, which is

comprised of six turbochargers and three medium-speed diesel engines, has a total capacity of 50.2 MW. Prior to the

upgrade, this set of engines was not providing the 50.2 MW as expected, which hurt the organization’s revenue and

reputation. Additionally, fuel consumption was not as efficient as expected, leading to higher costs. In order to address both

issues, the organization made the decision to upgrade the turbochargers.

INTERVIEW HIGHLIGHTS

Once the upgrade was completed, the organization was able to realize gains in several areas. The newly installed advanced

compressor wheels feature a larger speed margin, allowing for increased operational flexibility, which enabled the engines to

run at higher loads at a higher outside temperature to produce the required power output. Additionally, fuel efficiency

increased, lowering operational cost.

Results

The interview revealed that:

› Meeting output targets was a key benefit of the upgrade. With the installation of newer and more efficient turbocharger

compressor wheels with larger speed margins, the turbochargers allowed the engines to run at higher loads at high

outside temperatures. Increased output led to higher revenue, but reputation and reliability were of equal importance to the

interviewee. The upgraded turbochargers facilitated this benefit by lowering exhaust gas temperatures and allowing the

engines to run at full load. This also has an associated benefit of avoiding penalties charged by the interviewee’s customer

for not meeting targets as contractually agreed.

› Increased fuel efficiency led to significant cost savings. Fuel is the major cost for power generation, and increased

efficiency is achieved at full nominal power output, as enabled by the turbocharger upgrade.

› Lower temperatures extend the lifetime of components. The ability to lower temperatures with the upgraded

turbochargers also puts less thermal stress on components and extends their lifetime. As this extension exceeds the

length of the analysis, it has not been included in the financial calculations. While not quantified, these benefits

nevertheless remain important.

8

BENEFITS

The interviewed organization experienced a number of quantified benefits in this case study:

› Revenue increase due to higher output.

› Lower fuel consumption due to increased efficiency.

› Cost avoidance of turbocharger overhaul.

Another important benefit mentioned by the interviewed organization was an increase in customer satisfaction. While

customer satisfaction depends on a number of factors, the organization nevertheless regarded the opportunity to provide

reliable, predictable service as a strong driver for implementing the solution.

Revenue Increase Due To Higher Output

The interviewed organization told Forrester that prior to the upgrade, it was not able to produce the 50.2 MW as

specified for the three engines in this facility. It was limited to 49 MW, due in large part to high ambient

temperatures, limiting the ability to run the engines at full load. Due to operational flexibility achieved from the

larger speed margins of the new turbocharger compressor wheels, the efficiency of the turbochargers was

increased, leading to lower temperatures. After the turbocharger upgrade, the facility was able to run at 50.2 MW

as desired.

In order to calculate the financial impact of this improvement, we first look at the incremental increase in output,

which was over approximately 6 hours per day (when the ambient temperature was high enough to require the

reduced load). We then multiply by the number of days per year the engine is run (accounting for approximately

two weeks of scheduled maintenance as well) to obtain the total increase in kWh annually. We then project an

average wholesale price of electricity in the local area of $0.25 to arrive at the total value of the increased output

in additional revenue. To account for variability in these estimates, in particular the wholesale price per kWh, we

risk-adjusted the total revenue figure down by 15%, to arrive at a total of approximately $537,000 annually.

TABLE 1

Revenue Increase Due To Higher Output

Ref. Metric Calculation Annually

A1 Output increase (kW) 1.2 MW*1000 1,200

A2 Hours per day 6 6

A3 Days per year 365-14 351

A4 Increased kWh (annual) A1*A2*A3 2,527,200

A5 Wholesale price per kWh $0.25 $0.25

At Increased revenue (output) A4*A5 $631,800

Risk adjustment 15%

Atr Increased revenue (output) (risk-adjusted)

$537,030


9

Lower Fuel Consumption Due To Increased Efficiency

According to the interviewed customer, “The specific fuel consumption improved as follows for the three engines:

2.64 g/kWh, 2.60 g/kWh, and 9.67 g/kWh.” As stated previously, the highest savings, associated with Engine 3, are

likely due to a combination of turbocharger and engine overhaul, yielding a greater efficiency gain; however, as

the customer was not able to separate the drivers for the efficiency gain, we have associated 50% of the

improvement with the turbocharger upgrade and included it in the calculations.

To get to the total fuel saved, we multiply the total grams saved per kWh by the total kWh generated by each

engine annually (accounting for the reduced load as discussed in the previous benefit). We then multiply by an

average cost per metric ton of heavy fuel oil to find the total value of the annual fuel savings. This calculation

represents the savings associated with the fuel use before the increased output, as this corresponds to the

amount of fuel used in the previous state. The details of these calculations are provided in Table 2.

As in the previous benefit calculation, we account for variability in these estimates, in particular the cost of fuel,

by risk-adjusting the total cost savings figure down by 5%. We arrive at a total (across all three engines) of

$469,391 annually, as shown in Table 2.

TABLE 2

Lower Fuel Consumption Due To Increased Efficiency

Metric Calculation Year 1

B1 Total Fuel Efficiency Gains (g/kWh)[across three engines]

2.64+2.60+(9.67*50%) 10.1

B2 Average hours at full load (annually) 18*(365-14) 6,318

B3 Average hours at reduced load (annually) 6*(365-14) 2,106

B4 Average total kWh per engine at full load (annually)

[B2*(50200/3)] 105,721,200

B5 Average total kWh per engine at reduced load (annually)

[B3*(49000/3)] 34,398,000

B6 Average total kWh per engine (annually) B4+B5 140,119,200

B7 Total fuel saved (metric tons) (B1*B6)/1000000 1,412

B8 Cost per metric ton $350 $350

Bt Decreased Fuel Consumption B7*B8 $494,095

Risk adjustment ↓5%

Btr Decreased Fuel Consumption (risk-adjusted) $469,391


10

Cost Avoidance of Turbocharger Overhaul

As stated previously, had the organization not upgraded the turbocharger, they would have instead performed an

overhaul. The cost of this overhaul would have been $160,243 per cartridge, with a total of six cartridges required

(for the six turbochargers). As this cost was not incurred (being replaced by the upgrade charge, included in the

cost calculations), we have included the cost avoidance as a benefit. Table 3 summarizes this calculation.

TABLE 3

Cost Avoidance of Turbocharger Overhaul

Ref. Metric Calculation Initial

C1 Cost per cartridge 160,243

C2 Number of cartridges

6

Ct Cost Avoidance of Turbocharger Overhaul C1*C2 $961,456


Total Benefits

Table 4 shows the total of all benefits calculated in the financial model across the areas listed above, as well as present

values (PVs) discounted at 8%. Forrester typically uses a discount rate of between 8% and 16%, depending on the type of

technology and the customer situation; for this analysis, we have used a lower, more conservative rate in accordance with

industry standards. Over three years, the composite organization expects risk-adjusted total benefits to be a PV of over $3.5

million, or approximately $580,000 per upgraded turbocharger.

TABLE 4

Total Benefits (Risk-Adjusted)

Ref. Benefit Category Initial Year 1 Year 2 Year 3 Total

Present Value

Atr Increased Revenue (Output) $0 $537,030 $537,030 $537,030 $1,611,090 $1,383,978

Btr Decreased Fuel Consumption $0 $469,391 $469,391 $469,391 $1,408,172 $1,209,665

Ctr Cost Avoidance of Turbocharger Overhaul

$961,456 $0 $0 $0 $961,456 $961,456

Total benefits (risk-adjusted)

$961,456 $1,006,421 $1,006,421 $1,006,421 $3,980,718 $3,555,099


11

COSTS

The interviewed organization experienced the following cost associated with the turbocharger upgrade:

› Upgrade cost.

› Incremental fuel cost.

These are the only costs included in the analysis, as all time spent by staff on the upgrade was already allocated to the

maintenance of the turbocharger; had the turbochargers not been upgraded, that time would have been spent on an

overhaul or other maintenance activities.

Upgrade Cost

This is the cost paid by the interviewed organization to upgrade six turbochargers (associated with three

engines); the total cost was $1,699,527. Forrester notes that the incurred cost was in line with the organization’s

annual maintenance budget, and had the organization not upgraded the turbochargers, it would likely have

incurred charges associated with the approaching exchange interval for the turbocharger components (as

captured in Table 3).

TABLE 5

Upgrade Cost

Ref. Metric Calculation Initial

D1 Engine 1 $572,854

D2 Engine 2

$547,432

D3 Engine 3 $579,241

Dtr Upgrade cost D1+D2+D3 $1,699,527


Incremental Fuel Cost

In order to achieve the increased output detailed in the Benefits section, additional fuel was required. The amount

of fuel needed is calculated in Table 6. We begin with the increased output: a total of 1.2 MW, spread over three

engines, leading to a total of 400 kW per engine. As in the benefit calculation, this increased output takes place

approximately 6 hours of every day over the number of days annually, excluding maintenance time of

approximately two weeks. We use a total fuel use rate of 196.64 g/kWh, based on an estimate of the total engine

requirement prior to the upgrade (200 g/kWh) and the incremental improvement in efficiency (as described in the

associated benefit, at an average of 3.36 g/kWh across the three engines). We then multiply across the three

engines to get the total fuel required, and then multiply by the cost of fuel per metric ton, to arrive at a total cost of

$173,933. After applying a 5% adjustment to account for variability in the estimates of fuel price, we have a total

annual cost of $182,630.

12

TABLE 6

Incremental Fuel Costs

Ref. Metric Calculation Year 1

E1 Output Increase, kW (per engine) (1.2 MW/3)*1000 400

E2 Total increased running hours 6*(365-14) 2,106

E3 Fuel required for increased output, g/kWh (at increased efficiency)

196.64

E4 Incremental fuel required (per engine) (E1*E2*E3)/1000000 166

E5 Incremental fuel required (across three engines) E4*3 497

E6 Cost of fuel (per metric ton) 350

Et Incremental fuel cost E5*E6 $173,933

Risk adjustment ↑5%

Etr Incremental fuel cost (risk-adjusted) $182,630


Total Costs

Table 7 shows the total of all costs as well as associated present values, discounted at 8%. Over three years, the

organization expects total costs to total a net present value of $2.2 million.

TABLE 7

Total Costs (Risk-Adjusted)

Ref. Cost Category Initial Year 1 Year 2 Year 3 Total Present Value

Dtr Upgrade Cost ($1,699,527) $0 $0 $0 ($1,699,527) ($1,699,527)

Etr Incremental fuel cost $0 ($182,630) ($182,630) ($182,630) ($547,890) ($470,656)

Total costs (risk-adjusted)

($1,699,527) ($182,630) ($182,630) ($182,630) ($2,247,417) ($2,170,182)


13

FLEXIBILITY

Flexibility, as defined by TEI, represents an investment in additional capacity or capability that could be turned into business

benefit for some future additional investment. This provides an organization with the “right” or the ability to engage in future

initiatives but not the obligation to do so. There are multiple scenarios in which a customer might choose to implement a

turbocharger upgrade and later realize additional uses and business opportunities. Flexibility would also be quantified when

evaluated as part of a specific project (described in more detail in Appendix A).

For the purposes of this financial analysis, we have not quantified the impact of flexibility. However, the improvement in

reliability positions the interviewed organization in a strong negotiating stance with its customers, giving it greater leverage in

future deals. Additionally, the ability to upgrade additional turbochargers across the facility offers the opportunity to increase

revenue and costs savings proportionally.

RISKS

Forrester defines two types of risk associated with this analysis: “implementation risk” and “impact risk.” Implementation risk

is the risk that a proposed investment in a turbocharger upgrade may deviate from the original or expected requirements,

resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the

organization may not be met by the investment in a turbocharger upgrade, resulting in lower overall total benefits. The

greater the uncertainty, the wider the potential range of outcomes for cost and benefit estimates.

TABLE 8

Benefit And Cost Risk Adjustments

Benefits Adjustment

Increased revenue (output) 15%

Decreased fuel consumption 5%

Costs Adjustment

Incremental fuel cost 5%


Quantitatively capturing implementation risk and impact risk by directly adjusting the financial estimates results provides

more meaningful and accurate estimates and a more accurate projection of the ROI. In general, risks affect costs by raising

the original estimates, and they affect benefits by reducing the original estimates. The risk-adjusted numbers should be taken

as “realistic” expectations since they represent the expected values considering risk.

The following impact risks that affect benefits are identified as part of the analysis:

› For the increased revenue due to output improvement, we have estimated the wholesale price of electricity in the region.

The actual value can vary widely; therefore, we have risk-adjusted the total value of the revenue increase down by 15%.

› For the fuel savings, we have estimated the average cost of heavy fuel oil. This value can vary by location and over time;

Forrester has used a risk adjustment of 5% to compensate for this variability.

The following implementation risk that affects costs is identified as part of the analysis:

› As in the fuel savings benefit, we have risk-adjusted the incremental cost of fuel by 5% to account for price fluctuations.

14

Table 8 shows the values used to adjust for risk and uncertainty in the cost and benefit estimates for the interviewed

organization. Readers are urged to apply their own risk ranges based on their own degree of confidence in the cost and

benefit estimates.

15

Financial Summary

The financial results calculated in the Benefits and Costs sections can be used to determine the ROI, NPV, and payback

period for the interviewed organization’s investment in a turbocharger upgrade.

Table 9 below shows the risk-adjusted ROI, NPV, and payback period values. These values are determined by applying the

risk-adjustment values from Table 8 in the Risks section to the unadjusted results in each relevant cost and benefit section.

FIGURE 3

Cash Flow Chart (Risk-Adjusted)


TABLE 9

Cash Flow (Risk-Adjusted)

Summary Initial Year 1 Year 2 Year 3 Total Present Value

Total costs ($1,699,527) ($182,630) ($182,630) ($182,630) ($2,247,417) ($2,170,182)

Total benefits $961,456 $1,006,421 $1,006,421 $1,006,421 $3,980,718 $3,555,099

Total ($738,071) $823,790 $823,790 $823,790 $1,733,300 $1,384,917

ROI

64%

Payback period (months) 10.8


($2,000,000)

($1,500,000)

($1,000,000)

($500,000)

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

Initial Year 1 Year 2 Year 3

Cas

h f

low

s

Total costs Total benefits Cumulative total

16

ABB Turbocharger Upgrade: Overview

The following information is provided by ABB. Forrester has not validated any claims and does not endorse ABB or its

offerings.

A newer-generation turbocharger or component allows organizations to maximize the full potential of their engines to achieve

a higher power output and a higher operational efficiency, resulting in less fuel consumption with the added benefit of

keeping emissions down.

Upgrading a turbocharger not only extends the life of an application, but it also increases its performance. ABB evaluates

customers’ applications and current and future needs and provides a tailor-made upgrade project to fit the exact business

needs. By matching the latest turbocharger technology with an engine in an iterative process, ABB ensures an ideal fit for the

application.

ABB engineers will choose the best approach that offers you the optimum benefit and lowest downtime.

Types of upgrades available include:

› Upgrading thermodynamic components: replacing turbocharger components with newer and improved ones.

› Upgrading the entire turbocharger: replacing the entire turbocharger with a new one.

› Retrofits: replacing a non-ABB turbocharger with an ABB turbocharger for better efficiency and savings.

17

Appendix A: Total Economic Impact™ Overview

Total Economic Impact is a methodology developed by Forrester Research that enhances a company’s technology decision-

making processes and assists vendors in communicating the value proposition of their products and services to clients. The

TEI methodology helps companies demonstrate, justify, and realize the tangible value of technology initiatives to both senior

management and other key business stakeholders. The TEI methodology consists of four components to evaluate

investment value: benefits, costs, flexibility, and risks.

BENEFITS

Benefits represent the value delivered to the user organization — technology and/or business units — by the proposed

product or project. Often, product or project justification exercises focus just on technology cost and cost reduction, leaving

little room to analyze the effect of the technology on the entire organization. The TEI methodology and the resulting financial

model place equal weight on the measure of benefits and the measure of costs, allowing for a full examination of the effect of

the technology on the entire organization. Calculation of benefit estimates involves a clear dialogue with the user

organization to understand the specific value that is created. In addition, Forrester also requires that there be a clear line of

accountability established between the measurement and justification of benefit estimates after the project has been

completed. This ensures that benefit estimates tie back directly to the bottom line.

COSTS

Costs represent the investment necessary to capture the value, or benefits, of the proposed project. Technology or the

business units may incur costs in the form of fully burdened labor, subcontractors, or materials. Costs consider all the

investments and expenses necessary to deliver the proposed value. In addition, the cost category within TEI captures any

incremental costs over the existing environment for ongoing costs associated with the solution. All costs must be tied to the

benefits that are created.

FLEXIBILITY

Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can typically be

the primary way to justify a project, Forrester believes that organizations should be able to measure the strategic value of an

investment. Flexibility represents the value that can be obtained for some future additional investment building on top of the

initial investment already made. For instance, an investment in an enterprisewide upgrade of an office productivity suite can

potentially increase standardization (to increase efficiency) and reduce licensing costs. However, an embedded collaboration

feature may translate to greater worker productivity if activated. The collaboration can only be used with additional

investment in training at some future point. However, having the ability to capture that benefit has a PV that can be

estimated. The flexibility component of TEI captures that value.

RISKS

Risks measure the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured in two

ways: 1) the likelihood that the cost and benefit estimates will meet the original projections and 2) the likelihood that the

estimates will be measured and tracked over time. TEI risk factors are based on a probability density function known as

“triangular distribution” to the values entered. At a minimum, three values are calculated to estimate the risk factor around

each cost and benefit.

18

Appendix B: Glossary

Discount rate: The interest rate used in cash flow analysis to take into account the time value of money. Companies set

their own discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of

8% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment.

Readers are urged to consult their respective organizations to determine the most appropriate discount rate to use in their

own environment.

Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the

discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have

higher NPVs.

Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the

discount rate). The PV of costs and benefits feed into the total NPV of cash flows.

Payback period: The breakeven point for an investment. This is the point in time at which net benefits (benefits minus costs)

equal initial investment or cost.

Return on investment (ROI): A measure of a project’s expected return in percentage terms. ROI is calculated by dividing

net benefits (benefits minus costs) by costs.

A NOTE ON CASH FLOW TABLES

The following is a note on the cash flow tables used in this study (see the example table below). The initial investment

column contains costs incurred at “time 0” or at the beginning of Year 1. Those costs are not discounted. All other cash flows

in years 1 through 3 are discounted using the discount rate at the end of the year. PV calculations are calculated for each

total cost and benefit estimate. NPV calculations are not calculated until the summary tables are the sum of the initial

investment and the discounted cash flows in each year.

Sums and present value calculations of the Total Benefits, Total Costs, and Cash Flow tables may not exactly add up, as

some rounding may occur.

TABLE [EXAMPLE]

Example Table

Ref. Metric Calculation Year 1 Year 2 Year 3


19

Appendix C: Endnotes

1 Forrester risk-adjusts the summary financial metrics to take into account the potential uncertainty of the cost and benefit

estimates. For more information, see the section on Risks.

The Total Economic Impact™ Of ABB’s Turbocharger Upgrade

Documents

Transcript of The Total Economic Impact™ Of ABB’s Turbocharger Upgrade