lifecycle costing analysis

- help PYM to justify equipment & process selection base on total costs rather than purchase price
-obj is to choose the most cost-effective approach of the product or system

Total cost + concept of the time value of money = LCC analysis

LCC = Ic{initial cost) + (Me {Maintenance cost} + Ec{Energy cost}+ Cc{cleaning cost} + Oc{Overhead & mgt cost}) + (Vc{utilization cost}) - Rv{resale value} Summation of cost estimates
(what is being incurred for the equipment) LCC calculation with inflation

always draw time line, initial cost always start at 0 years

Write: PV (annual operating cost) = $2.5k * AF{annual factor}@8%, 10yr

PV initial cost or hardware cost + installation labour

investment rate is use to calculate PV

Inflation rate is use to calculate (eg. parts and motor replacement) FV

dispose your equipment on the 20th yr, the 20th yr dont need to calculate the cost for it.

why am i not using annual factor of future value?

coz you are not finding it per year
not happening per year

beginning annual serving and annual energy cost use:

Annuity in arrears (present value of ordinary annuity)

Reason for investment rate after calculating investment rate is becoz you are calculating how much
investment (opportunity cost that you are missing if you let it sit in for another "X" years)

LCC is about PV bring it back to zero years

The amount shown is right now eg. motor replacement every 12 yrs $200.

PV (initial costs) = hardware + installation labour

Annuity:
PV (annual servicing) = given amt * AF @investment rate, no. of yrs
Inflation:
FV (motor replacement) = given amt * FV @inflation amt, no. of years
PV (motor replacement) = AMT FOUND * PV @invest rate, no. of years

ANS: Choose option X, because it is more cost effective with a saving of $X (ex option - cheap
option).
Life Cycle Costing
Question 1

The owner of Low Tai Industrial Estate is concerned about the functionality of a 15-year-old
backup power generator. Two possible solutions were proposed for his consideration.

Proposal 1 – Overhaul Existing Generator

A $60,000 overhaul now will extend the life span of the existing generator by 10 years. The
overhaul will come with a 10-year servicing contract costing $4,000 per year. A second major
overhaul costing $70,000 will be required after the first 10 years. With this overhaul, the life
span of the generator will be extended by a further 5 years. A new 5-year servicing contract
with an annual cost of $5,000 will be required after the second major overhaul. There is no
salvage value for the obsolete generator.

Proposal 2 – Install New Generator

To replace the existing backup generator with a new one will cost $120,000. With proper
maintenance the new generator will last for 15 years. The supplier is giving a 5-year warranty
with free service support. Thereafter, a yearly servicing contract costing $6,000 per year is
required. Salvage value is estimated at $15,000 at the end of 15 years.

Assuming that the cost of capital is at 5% compound per annum,

a) Draw a timeline for each proposal and calculate the Net Present Value of each proposal.

b) Highlight the pros and cons of each proposal; and

c) Advise the building owner on the better course of action.

Choose option X, because it is more cost effective with a saving of $X (ex option - cheap option).
Question 2
The solar system in the building requires to be replaced. As a Property Manager, you have
shortlisted TWO options. Option A – a 90% efficient unit and Option B – a 99% efficient unit.
The estimated costs and study factors are as follows:
“A” “B”
$ $
Material Cost 10,000 12,000
Installation Labour 800 800
(using in-house staff)
Annual Servicing 2,000 1,000
Annual Energy Saving Cost 200 300

Parts Replacement 1,000 -

(every 12 years: Option “A” only)
Panel Replacement - 3000
(every 15 years: Option “B” only)

Assuming the investment rate is 8%, inflation rate is 6% (for parts and panel replacements)
and life span of solar system is 30 years.

a) Draw a timeline for each proposal to illustrate your calculations; (21 marks)

b) Tabulate the pros and cons of each option; and (2 marks)

c) Which option would you choose and why? (2 marks

Answers to Past Year Exam Questions:
1) Past Year Exam Question – Feb 2018
Proposal A = $1,425,864
Proposal B = $1,412,895
2) Past Year Exam Question – Aug 2017
Proposal 1 = $468,468
Proposal 2 = $459,406
3) Past Year Exam Question – Aug 2016
Choice 1 = $1,416,603
Choice 2 = $1,406,676
4) Past Year Exam Question – Feb 2016
Option A = $103,353
Option B = $100,349
5) Past Year Exam Question – Aug 2015
Proposal 1 = $104,107
Proposal 2 = $105,911
6) Past Year Exam Question – Feb 2015
Proposal A = $458,723
Proposal B = $461,864
7) Past Year Exam Question – Aug 2014
System A = $848,943
System B = $720,151
8) Past Year Exam Question – Feb 2014
Cladding X = $1,939,920
Cladding Y = $1,933,950
9) Past Year Exam Question – Aug 2013
Proposal A = $939,022
Proposal B = $921,571
10) Past Year Exam Question – Feb 2013
Option 1 = $402,780
Option 2 = $408,480
11) Past Year Exam Question – Aug 2012
Waterproofing membrane A = $1,184,166
Waterproofing membrane B = $1,015,283