Sale price as a component of life cycle costing for second hand platforms : decpreciation modelling in the context of the FFG-7 frigate / by Fred Ma.: D68-6/227-2013E-PDF

In Q3 of 2012, as a subtask within a Director Materiel Policy and Procedures Major Equipment Procurement Study (New versus Used), Directorate Materiel Group Operational Research (DMGOR) planned a study into the life cycle costing of second hand platforms (vehicles, ships, aircraft). As an initial input into that study, DMGOR undertook the estimation of the depreciation of two classes of frigates, the U.S. FFG-7 and the Dutch Kortenaer, from second hand sales prices. That work is reported here. A database of both frigate classes was developed from open source, but new and used price data were readily available only for the FFG-7s. Depreciation fit an exponential decay model, with an average loss of 8.4%/year and a 68% (±1 sigma) confidence interval of [5.9%, 11.1%]/year. One variable, vessel age, explained up to 56% of the second used sale price data. The data was not sufficient to extract the portion of depreciation due to aging design/technology rather than physical aging of the platform, but neither did it contradict published cost growth trend of 2%/year for buying new vessels of this type. Because of the projected growth in real cost for new defence platforms, a thorough analysis of procurement options is becoming increasingly important, including the life cycle costing of buying used. This is an essential part of comparing with buying new that ideally includes platform suitability, proficiency, and timeliness of full operational capability.

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