EVALUATION OF TRANSPORTATION

PROJECTS & LIFE CYCLE COST / NPV

ANALYSIS

By: Dr. HA Quainoo

DATE: August 2022
 CONTENTS (1)
1. INTRODUCTION
• Life Cycle of Physical Infrastructure
• Design Period & Analysis Period / Economic Life
• Cost Components of physical assets

2. DIFFERENCE BETWEEN WHOLE LIFE CYCLE COST & LIFE

CYCLE COST
• What is whole Life Cost (WLC)?
• What is Life Cycle Cost (LCC)?
• Life Cycle Cost Analysis & Objective
• Why WLC or LCC? Applications of LCCA
 CONTENTS (2)
2. PROCEDURAL STEPS FOR LCCA

3. MATHEMATICAL MODELS FOR LCCA

• Net Present Value /Worth;
• Simple & Discounted Payback Method;
• Internal Rate of Return;
• Cost Benefit Analysis, etc.

Worked Examples of LCCA using NPV method

 CONTENTS (3)

4. GENERAL ISSUES IN LCCA

5. REFERENCES
 INTRODUCTION (1)
Life Cycle of Physical Infrastructure
- conceptual stage
- development stage
- implementation stage
- operation and maintenance
- replacements
- “disposal/salvage” (e.g. pumps, )
• Ability to add value and cost of change
relationship
 INTRODUCTION (2)
Design Life /Period & Analysis Period / Economic
Life of an asset:
 PAVEMENT DESIGN TERMINOLOGIES
• Structural Design & Analysis Periods
• Structural Design Period:
- The chosen minimum period during which the pavement
is designed to carry the traffic in the prevailing
environment with a reasonable degree of confidence that
structural maintenance will not be required

Analysis Period:
- The useful life over which the total present cost of the
pavement (comprising construction costs,
maintenance costs (including user costs), & salvage
value) is determined so that the whole-life-cycle cost
comparisons can be made between alternative
design options)
Illustration of DSP & AP of flexible pavements
and design strategies (TRH 4)
Cost Components of physical assets (e.g. Pump)
• Direct costs of ownership:
- Initial purchase cost
- Fuel costs
- Maintenance / Repair
- Replacement costs
• Other costs (environmental costs, social costs –
cost paid by society – e.g. cost of noise pollution
due to airplanes)
• Indirect costs:
- Interest / Insurance
- Administrative costs
- Staffing, - Opportunity costs of down time, etc.
• Cost elements of Road networks
There are two types of road costs over its
economic life: (Road agency costs and Road
user costs)
(i) Road Agency costs (those affecting the road
agency):
• Construction costs:
- Initial costs (planning & design)
- Capital costs (land acquisition /procurement/
construction of the road/ installation of signals
and other control equipment)
- Supervision & Management
• Maintenance costs:
-(routine maintenance of the road and control
devices/ drainage features, structures, signs
and signalling) vegetation control)

● Road user costs:

- Vehicle operating costs (including running
and standing costs). This increases over time.
- Delay costs (congestion and roadworks)
- Road accident costs
- Other costs (e.g. environmental costs)
DIFFERENCE BETWEEN WHOLE LIFE
CYCLE COST & LIFE CYCLE COST
What is whole Life Costing (WLC)?
‘Methodology for systematic economic evaluation
of the life cycle costs over a period of analysis,
as defined in the agreed scoping’ (ISO 15686
definition) OR

“An economic assessment considering all agreed

projected significant and relevant cost flows over a
period of analysis expressed in monetary value.
The projected costs are those needed to
• achieve defined levels of performance, including
reliability, safety and availability” (Willmott
Dixon, UK, undated)
What is Life Cycle Costs (LCC)?
”cost of an asset or its parts throughout its life
cycle, while fulfilling the performance
requirements” (ISO 15686 definition)
• LCC 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 (Willmont Dixon, UK, undated)
 Life Cycle Cost Analysis & Objective

Life Cycle Cost Analysis: Mathematical techniques

for evaluating all relevant costs of acquiring and
operating an asset (or a project/product) over its
useful time in order to form or support decisions on
options
• LCC process includes: estimation of costs arising
from an infrastructure / asset over its useful life
(economic life) (from the stages of planning, design,
operation, maintenance, rehabilitation and disposal)
• evaluating alternatives that impact on the total cost
of ownership and operation
(NSW Treasury, Australia, 2004)
Objective of LCC analysis:

To optimise the total cost of ownership and

operation during the economic life of the physical
asset
 Why WLC or LCC? Applications of LCCA (NSW
Treasury, 2004; NAVFAC, 1993)
Life cycle costs are used to:
- set operational budgets and targets for management control
- monitor asset and programme performance
- evaluate capital projects / compare investment alternatives
(Allow alternative systems to be evaluated)
- set a basis to establish prices and financing of additional
infrastructure
- establish / predict full costs of owning and operating an
asset over its useful life
-determine cost drivers (sensitivity analysis can reveal cost
drivers – parameters that have great influence on life cycle
cost)
• In setting design and construction standards to
minimise total costs over the project lifetime
 PROCEDURAL STEPS FOR LCCA
• Specify the goal, objectives and constraints of the
analysis
• Identify feasible alternatives to achieve the
objectives
• State various assumptions regarding discount rate,
inflation rate, economic life, etc)
• Develop Cost Breakdown Structure (CBS)
(identify all cost generating activities/ cost estimation
per activity)
• Identify and estimate relevant costs
• Evaluation of alternatives: compare the
total life-cycle costs for each option and
select the one with the least total costs
• Analyse the results for sensitivity to the
initial assumptions

(Boussabaine & Kirkham, 2004; NSW Treasury,

2004; NAVFAC, 1993)
 MATHEMATICAL MODELS FOR LCCA

In general,
LCC (of an asset) = Capital cost +
life-time operating costs
+ life-time maintenance costs
+ life-time rehabilitation costs
+
disposal cost/ salvage value
• Net Present Value / Worth (NPV/NPW)
The sum of money that needs to be invested today
to meet all future financial requirements as they
arise throughout the economic life of the asset
Simple Payback
• The time taken for the return on an investment to
repay the investment
P = I / R, Where P = payback period in years
I = capital sum invested; R = money returned or
saved as a result of the Investment
 
• Internal Rate of Return
• The percentage earned on the amount of
capital invested in each year of the life of
the project / asset after allowing for the
repayment of the sum originally invested.
 NPV analysis
• Carry out a Life Cycle Cost analysis (using NPV
method of calculation) for a typical upper class
Gauteng house over a 25 year period.
• In using NPV for life cycle cost analysis, always
draw the cashflow diagram
• LCCA /NPV can also be used to select project
investment options
• Project comparisons must be made over common
economic life spans
• For unequal economic life spans, use Equivalent
Uniform Annual Cash Flow (EUACF) method
 Comparing projects / components with
equal life spans
Choose between two water pumps which have the same expected life
(at discount rate of 7%)

Machine A Machine B

Purchase cost, R 200, 000 300, 000

Annual maintenance costs, R 50, 000 25, 000

Annual fuel costs, R 25, 000 15, 000

Economic life, (years) 20 20

The cash flows usually are graphically presented in a diagram.

S
W
O
L
F
H
S TIME, years
A
C

Cash flow
 NPV analysis of Projects with Unequal life
spans (Example 2)
• Two machines have the cost data shown in Table
2. In addition: for machine A, the annual operating
cost is R 1 200 000 throughout its life; for
machine B, the annual operating cost is R 1 000
000 for the first 5 years and R 1 600 000 for the
remaining 4 years. The interest rate is 18 percent.
• Determine which machine is more economical by
using
• (i) Equivalent Uniform annual cash flow
method.
• (ii) Net Present Value method.
Substantiate your conclusion with logic and calculation.

Table 2
Machine A Machine B
Cost (R) 3 000 000 4 000 000
Salvage value (R) 500 000 300 000
Life (years) 6 9
 NPV Example 3
The installation of a small hydroelectric plant is being considered. Make a
selection based on Net Present Value (NPV) between two makes of
turbines with the following associated costs.

TURBINE A TURBINE B

• Capital cost 1 000 000 1 150 000

• Annual operation & maintenance 10 000 10 000 plus major

overhaul after 20 years
costing 300 000

• Economic life 20 years 30 years

• Interest rate 12% 12%

Please state clearly any assumptions required to solve this problem

 REFERENCES
• Australian National Audit Office (2001). Life Cycle
Costing: Better Practice Guide
• BCIS (n.d). Standardised Method of Life Cycle Costing
for Construction, The UK supplement to ISO 15686 Part
5 – Life Cycle Costing for Buildings and Constructed
Assets
• Boussabaine, HA and Kirkham, RJ (2004). Whole Life
Cycle Costing: Risk AND Risk Responses, Blackwell
Publishing, Oxford
• Fuller, SK and Petersen, SR (1995). Life Cycle Costing
Manual for Federal Energy Management Program,
National Institute of Standards and Technology
Handbook 135, US
• NAVFAC (1993). Economic Analysis Handbook,
NAVFAC P-442, Virginia
• NSW Treasury (2004). Total Asset
Management: Life Cycle Costing Guideline, TAM
04-10
• Office of Government Commerce, UK (2007).
Whole Life Costing and Cost Management
• Willmont Dixon, UK (n.d). What is Whole Life
Costing, Life Cycle Analysis and Life Cycle
Costing? Briefing Note 12