Life Cycle Costing

Group 3: Abhishek(02), Nikesh(23), Rittvik(32), Rohan(33), Rohit(34), Vinayak(56)

Agenda
• • • • • • • Introduction Uses of LCC Advantages of LCC Steps in calculating LCC A case study Disadvantages of LCC Conclusion

is the process of economic analysis to asses the total cost of ownership of a product. maintenance. operation. including its cost of installation. conversion. LCC. . and/or decommission.Life Cycle Cost (LCC) • Life cycle costing.

Life Cycle Cost (LCC) • By using LCC. . total cost of the product can be calculated over the total span of product life cycle.

• This analysis provides important inputs in the decision making process in the product design.Life Cycle Cost (LCC) • LCC is a economic tool which combines both engineering art and science to make logical business decision. development and use. .

• By using LCC. . product suppliers can evaluate various operating and maintenance cost strategies (to assist product users).LCC for product supplier • By using LCC. product suppliers can optimize their design by evaluation of alternatives and by performing trade-off studies.

customers can evaluate and compare alternative products.LCC for customer • By using LCC. • By using LCC. customers can assess economic viability of projects or products. .

to avoid failures  Accounting .to maximize uptime hours  Reliability Engineering .to minimize capital costs  Maintenance Engineering .to maximize project net present value  Shareholders .to increase stockholder value .to minimize repair hours  Production .Uses of LCC • Why Use LCC?  Project Engineering .

Uses of LCC contd… • Management Related  Project Planning & Development  Comparison of Competing Projects  Comparison of Logistic concepts  Decisions About Replacing Aging Equipment  Selection Between Competing Contractors • Design Related  Production and construction cost  Operation and support cost  Retirement and disposal cost .

Advantages of LLC • Useful to control programs • Tool for making selection among competing contractors • For comparing the cost of competing projects • Useful in reducing total cost • Take decisions associated with equipment replacement. . planning and budgeting • Expose areas of uncertainty and quantify the risk • Improved rehabilitation strategies • Support for overcoming the “first cost” limitations.

the project has a positive net present value) • Accuracy of data is doubtful • Obtaining data for analysis is difficult . answer question of whether an improvement is worth pursuing (i.Drawbacks of LLC • Costly and Time consuming • Cannot compare design alternatives that have different benefits (e. reconstruct road with widening) • Cannot.g..e. of itself. reconstruct road vs.

performance and design to cost must be performed. design optimization and detail trade off studies • Throughout the life of program. .Important factors associated with LLC • The management plays an important role in making the effort worthwhile • Both manufacturer and user are required to organize effectively to control cost • LLC is gaining importance as technique for strategic decisions. tradeoffs between life cycle cost.

assumptions.LCC Process • Stage 1: Plan LCC Analysis – define the analysis objectives – scope of the analysis – Identify any underlying conditions. limitations and constraints – Provide an estimate of resources required and a reporting schedule for the analysis • Stage 2: Select/Develop LCC Model – create or adopt a cost breakdown structure (CBS) – select a method for estimating the cost associated with each cost element – determine the data required to develop these estimates – integrate the individual cost elements into a unified LCC model .

LCC Process • Stage 3: Apply LCC Model – obtain data and develop cost estimates – obtain the LCC model results – review LCC outputs against the objectives defined in the analysis plan • Stage 4: Document and Review LCC Results • Stage 6: Implement and Monitor Life Cost Analysis – continuous monitoring of the actual performance of an asset – identify areas in which cost savings may be made and provide feedback .

LCC methodology • Total life cycle cost (LCC) = Initial asset acquisition or capital costs (AC) .RV .Residual / salvage value (RV) • Typical LCC = (AC .TD) + (OC + RC) .Tax depreciation entitlements (TD) + Operating and maintenance costs (OC) Plus + Replacement / disposal / upgrade costs (RC) .

Cost of Acquisition Phase .Life Cycle Cost .The cost of disposal .LCC methodology • To compute the life cycle costs of a system. – LCC – Kaq – Ko – Kd . the following straightforward equation is frequently used LCC = Kaq + Ko + Kd • Where.The cost of operation Phase .

• Due to increase of demand for its casting. • For new machine. Semi-automated machine. there are two options: 1. . or 2. the foundry shop wants to install one new core making machine.Case Study • A highly productive foundry shop has one sophisticated robot operated core making machine. Similar sophisticated robotic machine.

Option 1 • Initial cost No Cost Element Value Time (in INR.4 0. phase million)/ year Remarks 1 2 3 Design & development (D) Investment on asset (A) Installation (I) 59.6 0-1 year 0-1 year Bought out item 1% of asset cost .

+ ---------------------.Option 1 • Initial cost (IC) Computation of PV of IC D(1+i/100) (n-1) A(1+i/100) (n-1) I(1+i/100) (n-1) PV= -----------------------.+ ----------------------(1+d/100) n (1+d/100) n (1+d/100) n n is the year on which PV will be calculated.5 million INR . here n=1 year. i=5% 0(1+5/100) 0 59.+ --------------------(1+8/100) 1 (1+8/100) 1 (1+8/100) 1 From calculation. d=8% Inflation rate.+ -----------------------.4(1+5/100) 0 0. only Interest rate. PV of IC = 55.06(1+5/100) 0 PV= ----------------------.

7 4 workers @ 3 shifts MIS report of existing equipment. million)/ year Value Time phase 2-10 year 2-10 year 2-10 year 2-10 year Remarks Labour (L) Energy (E) Spare & maintenance (S) Raw material (M) 0.6 27. No .Option 1 • Operation & Maintenance Cost Sl. 1 2 3 4 Cost Element (in INR.3 4 2. as new equipment is identical .

Option 1 • Operation & Maintenance cost (OC) Computation of PV of OC Total OC= L+E+S+M=34. OC(1+i/100) (n-1) PV= -----------------------(1+d/100) n Cumulative value of OC after nth year (in terms of PV) = OC(1+i/100) (n-1) Ʃ -----------------------(1+d/100) n PV of OC and cumulative OC at different year to be calculated by using this formula.6 Million INR PV of OC at nth year. .

50 55.60 34.15 61.54 0.05 1.62 27.50 55.11 55.57 Total PV incurred Million INR F=E+ last year's F 31.68 226.32 174.60 PV of any year Million INR E=DxBxC 31.16 1.58 0.25 Initial Cost (IC) Million INR G 55.18 281.88 256.60 34.15 30.34 1.Option 1 • COMPUTATION OF LCC: TABLE 1 Operation & Maintenance cost (OC) Time Period nth year A 1 2 3 4 5 6 7 8 9 Discounting factor 1/(1+8/100)n B 0.28 1.60 34.50 55.50 Total LCC Million INR H=G+F 55.60 24.50 55.82 229.44 28.38 200.46 1.60 34.05 26.49 147.86 0.22 1.93 146.99 202.50 55.60 34.41 1.61 .50 55.28 29.50 Inflation factor (1+5/100)n-1 C 1.37 174.48 Future OC at nth year Million INR D 34.55 34.79 0.83 27.74 0.60 34.50 86.10 1.86 251.68 0.50 306.43 90.30 25.65 116.50 55.87 119.60 34.63 0.75 10 0.50 55.

Option 2 • Different cost element for option 2 (i. Semi-automated machine) has been estimated and final calculation for LCC has been done. .e.

00 42.68 254.58 0.46 1.95 10 0.00 50.01 88.54 41.00 50.31 172.95 Total PV incurred Million INR F=E+ last year's F 45.00 87.36 40.01 36.00 42.63 0.89 251.00 404.50 Inflation factor (1+5/100)n-1 C 1.00 368.00 42.74 0.93 362.41 1.54 0.16 1.00 50.55 50.00 42.28 1.00 50.22 1.00 50.21 39.95 Initial Cost (IC) Million INR G 42.86 0.77 173.00 Total LCC Million INR H=G+F 42.00 50.68 212.31 214.88 42.99 290.05 1.10 38.00 42.00 PV of any year Million INR E=DXBXC 45.99 332.89 293.88 .01 43.00 35.00 50.10 1.34 1.00 42.77 131.Option 2 • COMPUTATION OF LCC: TABLE 2 Operation & Maintenance cost (OC) Time Period nth year A 1 2 3 4 5 6 7 8 9 Discounting factor 1/(1+8/100)n B 0.79 0.00 42.76 42.01 130.48 Future OC at nth year Million INR D 50.68 0.00 326.00 42.

Analysis Life Cycle Cost Analysis 450 400 LCC (INR. in Million) 350 300 250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Time (Year) Option 1: Robotic M/c Option 2: Semi-Auto M/c .

Analysis • The analysis shows: – initial cost of semi-automated machine is lower. . the robotic machine is preferred compared to the semiautomated machine. the long term LCC is much lower for Robotic machine. for this particular application. – But. • Considering LCCA.

Developing a model to describe the operating costs over a period life time.Limitations of LLC There are two major limitations: • If the estimated project life is too long. which often happens because of new technology replacing obsolete technology. • . then more is probably invested in the original project than is justified.

when making trade-offs and evaluate various alternatives • LCC should be a dynamic tool used by engineering or logistics management to assess the progress of each phase.developing new products .optimal time for withdrawal . the faster it will have an impact on the logistic lifecycle.purchasing . . • The sooner an LCC modeling tool is used.Conclusion • LCC can be used in many applications in an organization: .

but not the final answer.making process. LCC provides critical information to the overall decision.An important reminder…. ..

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