Answers to Tutorial – Life Cycle Costing

Question 1:

Proposal 1 – Overhaul Existing Generator:

$4,000 per year $5,000 per year

(1st Annual Servicing) (2nd Annual Servicing)

0 10 years 15 years

$ 60,000 $70,000

(1st Overhaul) (2nd Overhaul)

i = 5%

PV (1st Overhaul initial cost) = $60,000

PV (2nd Overhaul initial cost) = $70,000 x PV @ 5%, 10 years
= $70,000 x 0.61391
= $42,974
PV (1st Annual Servicing) = $4,000 x AF @ 5%, 10 years
= $4,000, 7.72173
= $30,887
PV (2nd Annual Servicing) = $5,000 x AF @ 5%, 5 years x PV @ 5%, 10 years
= $5,000 x 4.32948 x 0.61391
= $13,290

PV (Overhaul) = PV (1st Overhaul initial cost + 2nd Overhaul initial cost + 1st Annual Servicing + 2nd
Annual Servicing)
= $60,000 + $42,974 + $30,887 + $13,290
= $147,151
Proposal 2 – Install New Generator:

$6,000 per year

Free Servicing (Annual Servicing)

0 5 years 15 years

$ 120,000 $ 15,000
(Salvage Value)

i = 5%

PV (initial cost) = $120,000

PV (Salvage Value) = $15,000 x PV @ 5%, 15 years

= $15,000 x 0.48102
= $7,215

PV (Annual Servicing) = $6,000 x AF @ 5%, 10 years x PV @ 5%, 5 years

= $6,000 x 7.72173 x 0.78353
= $36,301
PV (New Generator) = PV (Initial cost + Annual servicing – Salvage value)
= $120,000 + $36,301 - $7,215
= $149,086
b)

Proposal 1 – Overhaul Proposal 2 – New Generator

Pros Most cost effective Free servicing

Lower initial cost Salvage value

Cons 2 rounds of servicing Less cost effective

2 rounds of overhaul Higher initial cost

c) I would advise the building owner to choose Proposal 1 that is overhaul existing generator, as it is more cost effective
with a saving of $1,935 ($149,086 - $147,151).

Question 2: Option A

Investment rate = 8%, Inflation rate = 6%

PV (Initial cost) = $10,000 + $800 = $10,800

PV (Annual Servicing) = $2,000 x AF@8%, 30 years
= $2,000 x 11.25778
= $22,516
PV (Annual Energy Saving) = $200 x AF@8%, 30 years
= $200 x 11.25778
= $2,252
FV (1st Replacement) = $1,000 x FV@6%, 12 years
= $1,000 x 2.0121
= $2,012
PV (1st Replacement) = $2,012 x PV@8%, 12 years
= $2,012 x 0.39711
= $799
FV (2nd Replacement) = $1,000 x FV@6%, 24 years
= $1,000 x 4.0489
= $4,049
PV (2nd Replacement) = $4,049 x PV@8%, 24 years
= $4,049 x 0.15770
= $639
PV (Option A) = PV (Initial cost + Annual servicing + 1st Replacement + 2nd Replacement –
Annual energy saving
= $10,800 + $22,516 + $799 + $639 - $2,252
= $32,502
Investment rate = 8%, Inflation rate = 6%

PV (Initial cost) = $12,000 + $800 = $12,800

PV (Annual Servicing) = $1,000 x AF@8%, 30 years

= $1,000 x 11.25778
= $11,258
PV (Annual Energy Saving) = $300 x AF@8%, 30 years
= $300 x 11.25778
= $3,377
FV (Replacement) = $3,000 x FV@6%, 15 years
= $3,000 x 2.3965
= $7,190
PV (Replacement) = $7,190 x PV@8%, 15 years
= $7,190 x 0.31524
= $2,267

PV (Option B) = PV (Initial cost + Annual servicing + Replacement - Annual energy saving)

= $12,800 + $11,258 + $2,267 - $3,377
= $22,948
b)

Option A Option B

Pros Lower initial cost Most cost effective

1 round of replacement

Cons Less cost effective Higher initial cost

2 rounds of replacement

c)

I would advise the owner to choose Option B, which is a 99% efficient unit, as it is more cost effective with a saving of
$9,554 ($32,502 - $22,948).