Lec 06 by Lec Ali Salman

Life Cycle Cost (LCC)
LCC is defined as all costs, both non recurring and recurring, that occur over the life cycle. During the acquisition phase, non recurring costs are incurred, and these constitute the first cost of the structure or system. During utilization phase, recurring costs are experienced. Detail of LCC is under these headings:
Cost Generated over the Life Cycle Cost Commitment over the Life Cycle
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design. The costs associated with activities such as research. production or construction. and not viewed on an integrated 2 basis. Although different aspects of cost have been considered in the development of new systems these costs have often been viewed in a fragmented manner. consumer use and support have been isolated and addressed at various stages in the product life cycle. produced and operated with very little concern for their life cycle cost.Cost Generated over the Life Cycle Many systems and products are planned. . testing. designed.

These are illustrated in the figure below.In general the elements of life cycle cost fall into categories that are based on organizational activity over the life cycle. 3 .

Thus in addressing the economic aspects of a system one must look at total cost in the context of the entire life cycle. while the commitment of these costs is based on decisions made in the early stages of the system life cycle. 4 . Further costs associated with the different phases of the life cycle are interrelated.Experience has indicated that a large portion of the total cost for many systems is the direct result of activities associated with their operation and support.

Life cycle cost and economic analysis should originate early in the product life cycle during conceptual and preliminary design. 5 . The majority of the actions. particularly those at the earlier stages. have life cycle implications and definitely affect life cycle cost. The figure illustrate a characteristic cumulative life cycle cost curve related to action occurring during the various phases of the life cycle.Cost Commitment over the Life Cycle Throughout the system/product life cycle there are many actions required.

6 .As illustrated more than half of the projected life cycle cost is committed by the end of the system planning and conceptual design even though actual expenditures are relatively minimal by this point in time.

is the rate of gain received from an investment. an 11% interest rate indicates that for every dollar of money used. an additional $0. Thus.11 % must be returned as payment for the use of money.Interest and Interest Rate Interest is the rental amount charged by financial institutions for the use of money. 7 . The interest rate is determined by mutual agreement between the borrower and the lender and is known as the market rate. Usually this rate of gain is stated on a per year basis. Interest Rate or the rate of capital growth. and it represents the percentage gain realized on the money committed to the undertaking.

labor or facilities. 8 . Interest paid in this connection is a cost. In another aspect. interest is an amount of money received as a result of investing funds either by lending it or by using it in the purchase of materials.In one aspect. Interest received in this connection is gain or profit. interest is an amount of money paid out as a result of borrowing funds.

Why? Because having one thousand now provides the opportunity for investing that for n years more than the one thousand to be received at that time. 9 . one thousand rupees received at some future date is not worth as much as in hand at present. One thousand rupees in hand now is worth more than one thousand rupees received n years from now.The Time Value of Money Because money can earn at a certain interest rate through its investment for a period of time. This relationship between interest and time leads to the concept of the time value of money.

Since money has earning power. so that after n years the original one thousand plus its interest will be greater than the one thousand received at that time. Thus. 10 . This relationship between money and time is illustrated in fig. the fact that money has a time value means that equal amounts at different points in time have different value as long as the interest rate that can be earned exceeds zero. this opportunity will earn a return.

11 . During periods of inflation the amount of goods that can be bought for a particular amount of money decreases as the time of purchase occurs further out in the future. when considering the time value of money it is important to recognize both the earning power of money and the purchasing power of money.It is also true that money has time value because the purchasing power of a thousand changes through time. Therefore.

400 per year.40 per foot and averages 200 feet per day. services. 12 . Thus he has an income of $80 per day worked or $14. ABC who manually digs ditches for underground cable. Weather conditions limit this kind of work to 180 days per year.The Earning Power of Money Funds borrowed for the prospect of gain are commonly exchanged for goods. Consider the example of Mr. or instruments of production. This leads to the consideration of the earning power of money that may make it profitable to borrow. For this he is paid $0.

A summary of the venture follows: 13 .An advertisement brings to his attention a power ditcher that can be purchased for $8000. The machine will dig an average of 800 feet per day. Mr. ABC buys the ditcher after borrowing $8000 at 14% interest. By reducing the price to $0.30 per foot he can get sufficient work to keep the machine busy when the weather will permit. At the end of year the machine is worthless because it is worn out. Estimated operating and maintenance costs for the ditching machine are $40 per working day.

• Receipts • Amount of Loan • Payment for ditches dug $8000 43200 51200 $8000 7200 1120 8000 24320 • Disbursements • • • • Purchase of Ditcher Operating and maintenance Interest on loan Repayment of loan • Receipts less Disbursements $26880 An increase in net earnings for the year over the previous year of $26880-$14400=$12480 is enjoyed by Mr. 14 . ABC.

” It was an instrument of production. ABC to increase his earnings. 15 .This example is an illustration of what is known as the “earning power of money. the power ditcher. that enables Mr. Borrowed money made it possible for the instrument of production to be employed.

When all such effects are taken together . increases in productivity and in the availability of goods tend to reduce prices. while government policies tend to increase prices. 16 . Prices for goods and services are driven upward or downward because of numerous factors at work within the economy. the most common result has been that prices increase. the amount of goods or services that can be purchased for a fixed amount of money decreases or increases accordingly.The Purchasing Power of Money As prices increase or decrease. For example.

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