LIFE CYCLE COST

ANALYSIS
 AGENDA
 Introduction to Life-Cycle Cost Analysis (LCCA)
 Time Value of Money / Discounting

 Present Value Calculations

 Supplementary Measures of Economic

Performance

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 WHAT IS LCCA?
 Methodology to determine the most cost-effective
option among different alternatives to purchase,
own, operate, maintain, and dispose of a building
or building system over its entire lifetime
 Useful to compare project alternatives that are
technically acceptable, but differ with respect to
initial costs and operating costs
 Allows an investor to calculate all project costs
and compare cost effectiveness of alternative
investment options
 Required by various mandates for new design,
renovation, or procurement of energy efficient
projects

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 TYPES OF LIFE-CYCLE COSTS
 Initial costs
 Purchase
 Acquisition
 Construction
 Installation
 Replacement costs
 Residual values
 Resale
 Salvage values
 Disposal costs
 Operation, maintenance, and repair costs
 Utility costs
 Costs are only considered if they are relevant and
significant
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 STEPS TO PERFORMING LCCA
 Identify alternatives
 Specify data requirements and establish
assumptions
 Estimate costs and adjust for time value of
money
 Calculate total LCC for each alternative

 Compute supplementary measures if needed

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 DISCOUNTING COSTS TO PRESENT VALUE
 Process of converting costs to a common point
in time to reflect the time value of money
 The discount rate is the interest rate that
reflects an investor’s opportunity cost of money
over time (i.e., the investor’s MARR or Hurdle
Rate)
 Hurdle rate is equal to the company's costs of
capital, which is a combination of the cost of
equity and the cost of debt. Managers typically
raise the hurdle rate for riskier projects or
when the company is comparing multiple
investment opportunities.
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 DISCOUNTING COSTS TO PRESENT VALUE

 Important financial abbreviations:

MARR- Minimum n = Period

acceptable( attractive ) AV = Annual Value
rate of return.
e% = Escalation Rate
PV = Present Value
FV = Future Value
i% = Interest or
Discount Rate

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 PROJECT ABC - CASH FLOW DIAGRAMBase End
Date Date
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Acquisition Cost $10,000

O&M Costs $500 $500 $500 $500 $500 B

FUTURE
Replacement Cost $1,000 A
COSTS
Energy Costs $100 $110 $121 $133 $146 C
Disposal Cost $2,000 A

A – Single non-recurring future

costs

B – Annually recurring uniform

costs

C – Annually recurring non-uniform

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 PV OF SINGLE NON-RECURRING FUTURE COSTS
 In Project ABC, we have single non-recurring future
costs of the following:
 Replacement cost of $1,000 in year 3
 Disposal cost of $2,000 in year 5
 Investor’s MARR is 12%

Replacement Cost Disposal Cost

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 PV OF ANNUALLY RECURRING UNIFORM
COSTS
 In Project ABC, we have annually recurring
uniform costs of the following:
 O&M costs of $500 each year
 Investor’s MARR is 12%

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 PV OF ANNUALLY RECURRING NON-UNIFORM COSTS

 In Project ABC, we have annually recurring non-

uniform costs of the following:
 Energy costs escalating at 10% each year (base year
energy costs were $91)
 Investor’s MARR is 12%

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 LIFE-CYCLE COST FOR PROJECT ABC

 Present value of:

 Acquisition cost $10,000
 O&M costs $1,802
 Replacement cost $712
 Energy costs $431
 Disposal cost $1,135
$14,080

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SUPPLEMENTARY MEASURES OF ECONOMIC
PERFORMANCE
 LCCA is the most suitable and accurate way to estimate
project costs over its lifetime
 Other measures of economic evaluation that supplement
LCCA:
 Net Savings (NS)
 Savings to Investment Ratio (SIR)
 Adjusted Internal Rate of Return (AIRR)
 Simple or Discounted Payback (SPB or DPB)

 All these supplementary measures are based on life-cycle

costs

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 NET SAVINGS

 The amount that an alternative project will save over

the base case
 NS = LCC1 - LCC2

 NS calculations
BC
can Abe used to determine whether to
accept or reject a project (NS > 0)
 A project with the highest NS is equivalent to choosing
a project with the lowest LCC

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 SAVINGS TO INVESTMENT RATIO

Operating Savings
 SIR =
Investment Costs
 SIR > 1 generally means that a project is cost effective

 Can be used to accept or reject a project

 Useful in ranking and prioritizing independent

projects (a higher SIR means higher savings)

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 ADJUSTED INTERNAL RATE OF RETURN
 Measures the economic performance of an investment
as a % yield
 AIRR is a more accurate measure of return because it
adjusts the cash flows using an explicit reinvestment
rate
 AIRR = (1 + i%) SIR -1
 For projects to be attractive,
1/n AIRR > MARR
 Similar to SIR, also useful in ranking and prioritizing
independent projects
 IRR looks only at the rate of return, as opposed to the
size of the return. A $2 investment returning $20
would have a much higher rate of return than a $2
million investment returning $4 million to a company.
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 SIMPLE OR DISCOUNTED PAYBACK
 Time required for the cumulative savings from a
project to recover its initial investment costs
 Calculations ignore all future costs and savings that
occur after the payback period has been reached
 Used as a rough measure on whether to accept or
reject a project
 Payback period < Project life equals a valid project

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 WHOLE LIFE COST AND OWNERSHIP COSTS VS LCC
 The terms Whole Life Cost (WLC) and Life Cycle Cost (LCC) have been
used interchangeably – and their meanings have become confused.
 Components of a whole life cost calculation have varied from client to
client, consultant to consultant and among contractors.
 Whole-life cost is the total expense of owning an asset over its entire
life, from purchase to disposal, as determined by financial analysis. It
includes purchase and installation, design and building costs,
operating costs, maintenance, associated financing costs, depreciation
and disposal costs.
 Whole-life cost generally takes into account certain costs that are
usually overlooked, such as those related to environmental and social
impact factors.
 Broadly, life cycle costs are those associated directly with constructing
and operating the building; while whole life costs include other costs
such as land, income from the building and support costs associated
with the activity within the building.
 The expertise of the construction industry is best placed to deliver life
cycle costs, which its clients can then use to calculate whole life costs.
 https://www.willmottdixon.co.uk/asset/9449