HUM 1036: Engineering Economics and Decision Analysis ( F1 )

Semester : Winter 2020-21 Faculty : Dr. Sriram G.

Digital Assignment 1 Submitted by : Aliveli Mansi
Date : 12/5/2021 Registration Number : 18BCM0046

Life Cycle Cost Analysis

• Life cycle cost* (LCC) is the cumulative money spent on an Glossary

asset over the course of its useful life it includes the asset’s
costs (products, structure, system or service) starting from the Present worth- It is an
equivalence method of ana
conceptual stage or time when it is purchased to the time it is
lysis  in which a project's
disposed. cash flows are discounted
• Life cycle costing analysis* (LCCA) also called whole-life to a single present value.

costing is the process associated with estimating the various Annual worth- It  is  the
costs for the entire life cycle of a project using Present worth* equivalent uniform  annual
(PW) and Annual worth* (AW) methods. worth  of all income and
disbursements (costs)
• LCCA can be performed for assets like an aircraft, engine, during the life cycle of a
pump, car etc. The LCCA should be performed early in the project.
design process while there is still a chance to refine the design
Direct costs- Costs that can
to ensure a reduction in life-cycle costs. be reasonably measured
• The direct* and indirect costs* are involved in LCC to the and allocated to a specific
output or work activity.
extent determinable, also the differences between the revenue
and savings projected are included. Indirect costs- Costs that
are difficult to allocate to
a specific output or work
Purpose activity.

Capital investment- It is a
1. The main purpose of LCCA is to present clearly, the
sum of money that goes
interrelated effects of costs over the entire lifespan of the asset. towards furthering the
2. Choose between two or more assets- LCCA provides a objectives of a business or
significantly better assessment of the long-term cost- towards purchasing long-
t e r m  a s s e t s f o r t h e
effectiveness of a project than alternative economic methods
business.
that focus only on first costs or on operating-related costs in
the short run. Inflation- It  is the decline
3. LCCA can be applied to any capital investment* decision in of purchasing power of a
given currency over time. 
which relatively higher initial costs are traded for reduced
future costs incurred.
4. Create accurate budgets
* = refer glossary

Page 1! of 5!
=> LCCA is divided into 2 major time periods or phases: Acquisition phase and Operation
phase
   
1. Acquisition Phase
This phase includes all necessary activities before the delivery of products or services happens. It
generally occurs in 3 stages as follows:
Needs assessment ( or requirements definition) stage - The acquisition stage begins with this
stage which includes determination of user or customer needs for a product, system, structure or
service assessing them relative to the anticipated system, and preparation of the system
requirements and documentation. 

> The rest of the activities in this phase can proceed in a logical order after this explicit
declaration of requirements.
Conceptual (or preliminary) stage - This includes feasibility study by developing alternatives
possible using engineering economic analyses, conceptual and early-stage plans; this means that
the final yes / no decision for the design is taken at this stage. ->
> The activities related to conceptual design help convert the previously determined technical and
operational needs into a preferred preliminary or basic design. Also, advanced development and
prototype-testing activities are conducted to support the preliminary design work completed
during this stage.
Detailed design stage - This stage firstly gives shape to the final detailed design for the
production, manufacturing or construction of the product. It therefore includes detailed plans for
resources—capital, human, facilities, information systems, marketing, etc. and some
economically justifiable assets are acquired. 

> Of course, engineering economy analyses play an important role in finalising the detailed
design of the product or service, by comparing the various aspects of different alternatives.

2. Operation Phase
In this phase all activities are functioning, products or services are available i.e. the production,
delivery, or construction of the end item or service and their operation, or customer use occur. It
covers all activities needed to transition to a new system and ends with the removal or recycling or
disposal of old system.
> This phase is also usually completed in 3 stages as below:
Production (or construction) and implementation stage - The operation phase starts with the
implementation of the detailed product design developed at the end of acquisition phase. It
thereby includes purchases, construction, and implementation of system components; testing,
preparation, etc.
Operation (or usage) stage - This stage claims the largest portion of the life cycle. It uses the
system created to generate products and services, which are then used by customers.

Page 2! of 5!
 Retirement and Disposal stage - The operation phase ends with retirement from active operation
or use and, often with disposal of the physical assets involved. Services may be stopped but has
no physical disposal due to its intangible nature.

=> The below Figure 1 shows relative cost profiles for the 2 phases and the respective stages
involved.

Observations and conclusions drawn from figure 1:

a) Maximum cost savings in the life cycle can be achieved in the early acquisition phase.
b) The savings obtained can vary and depend on many factors; mainly efficient engineering design
and economic analyses are crucial steps to maximise life-cycle cost savings.
c) The cumulative committed life-cycle cost curve increases rapidly during the acquisition phase.
Usually about 80% of life-cycle costs are 'fixed’ by the end of the acquisition phase due to the
decisions taken during requirements analysis, preliminary and detailed design stages.
d) Contradictorily, it can be derived from the cumulative life-cycle cost curve that only
approximately 20% of actual costs take place during the acquisition phase; rather about 80%
costs are incurred during the operation phase.

=> The following Figure 2 gives a fair idea of the major different costs that are a part of the
Acquisition costs and the Sustaining costs (or operation costs):


Page 3! of 5!


=> The cost elements of the life cycle that need to be considered will vary with the situation. The
costs mentioned above are a few possibilities. However, the most commonly used basic life-cycle
cost categories need to be defined as follows:

• Investment cost : It is mostly the capital required to complete most of the activities the
acquisition phase In simple cases, such as acquiring specific equipment, an investment cost may
be incurred as a single expenditure. For example, initial costs like land acquisition and
construction.
• Operation, Maintenance and Repair cost : Non-fuel operating costs, and maintenance and
repair (OM&R) costs are often more difficult to estimate. Operating schedules and standards of
maintenance vary from one operation/system to other. It is therefore especially important to use
engineering judgment when estimating these costs.
=> Includes many of the recurring annual expense items associated with the operation phase of
the life cycle. The direct and indirect costs of operation associated with the five primary resource
areas - people, machines, materials, energy, and information.
• Disposal cost : It includes those nonrecurring costs of shutting down the operation and the
retirement and disposal of assets at the end of the life cycle. Normally, costs associated with
personnel, materials, transportation, and one-time special activities can be expected. Example,
cleaning up a site where a chemical processing plant had been located.
Page 4! of 5!
• Energy & water costs : Operational expenses for energy, water, and other utilities are based on
consumption, current rates, and price projections. Because energy, and to some extent water
consumption, and building configuration and building envelope are interdependent, energy and
water costs are usually assessed for the building as a whole rather than for individual building
systems or components.
=> Energy prices are assumed to increase or decrease at a rate different from general price
inflation. This differential energy price escalation needs to be taken into account when estimating
future energy costs.
• Replacement cost : Replacement cost is a term referring to the amount of money a business
must currently spend to replace an essential asset like a real estate property, an investment
security, a lien, or another item, with one of the same or higher value.
=> A good starting point for estimating future replacement costs is to use their cost as of the base
date. The LCCA method will escalate base-year amounts to their future time of occurrence.
• Residual costs : The residual value of a system (or component) is its remaining value at the end
of the study period, or at the time it is replaced during the study period. Residual values can be
based on value in place, resale value, salvage value, or scrap value, net of any selling,
conversion, or disposal costs.

References:

1. Textbook ‘Engineering Economy’ by William G. Sullivan, Elin M. Wicks and C. Patrick

Koelling
2. Textbook ‘Engineering Economy’ by Leland Blank and Anthony Tarquin
3. https://www.wbdg.org/resources/life-cycle-cost-analysis.
4. https://www.patriotsoftware.com/blog/accounting/life-cycle-costing-process/
5. http://stc.fs.cvut.cz/pdf/VoglJan-319843.pdf

*********

Page 5! of 5!