Life Cycle Costing 2

CONSIDERATIONS FOR LCC CALCULATION

There are several factors that must be considered when calculating LCC using AE
method;

•Land cost (Site cost)

•Building cost
•Running cost
•Periodic cost

The above items must be add-up together.

 
1. Land Cost

i) Freehold land, Cs (i)

 
• Freehold land is the land which at the end of the period, the value of the property will not
become zero. It is not a wasting asset (ie., it appreciates in value).
• It is the cost of the site which incurs interest.

Example
If purchase price of a freehold site is RM1,000,00.00 and interest rate is 10%,
 
The AE cost of a freehold site = 1,000,000.00 x 10%
 
= 100,000.00 p.a
(cost of financing/interest)
ii) Leasehold land, Cs (ASF + i)
• Leasehold land has a wasting value so much that at the end of the period, it has no value (it depreciates in value).
• The value can be taken as the building cost, as it has a life span.

Annual cost to the building owner: -

Annual interest
 Which the owner has got to pay/receive annually on his RM1,000,000.00
AE of Cs = Cs (i)
Annual sum
To be invested so that at the end of life of building, initial cost is recovered (ie., the annual replacement cost of initial cost)
AE of Cs (annual sum) = Cs (ASF)
AE cost of site (Cs) = Cs (ASF + i)
2. Building Cost, CB (ASF) + CB (i)
Building is a wasting asset (the value of building at the end of the period will be
zero). It creates no benefit at the end of period.

Example
Cost of the building - RM50,000.00
Life span - 60 years
Annual cost to the building owner: -
 
i) Annual interest
Which the owner has got to pay/receive annually on his RM50,000.00
AE of CB = CB (i)
ii) Annual sum
To be invested so that at the end of life of building, initial cost is recovered (ie., the annual replacement cost of initial cost)
AE of CB (annual sum) = CB (ASF)

In order for a building to have a value of RM50,00.00 at end of its life, ASF is used ie. how much should be invested for at
the end of ‘n’ years every year to recoup the RM50,000.00 initial costs spent on building.
 
 AE cost of building (CB) = CB (ASF + i)
3. Running cost / Annual Cost, Ca
 ie., annual maintenance cost, etc
 AE of annual cost Ca = Ca
 
Add all three factors;
AE = Cs(i) + CB (ASF + i) + Ca
Example
Cs = RM40,000.00
i = 9%
n = 50 years
Ca = 15,000
Cb = 40,000

Cost of site, Cs (i)

40,000 x 0.09 =3,600.00
Cost of building CB (ASF + i)
ASF in 50 years at 9%
= 0.0012269
= 40,000 (0.0012269 + 0.09) = 3,649.08
Annual cost, Ca = 15,000.00
4. Periodic Cost, (Cp)
Periodic cost is the cost incur in a periodic term.
  Example
Repair in every 5 years at RM10,000.00
Interest 6%
Building life 25 years
  i. Work-out all periodic cost factor (PVF) separately;
PVF x Cp = x
5th year = 0.7472582
10th. Year = 0.5583948
15th. Year = 0.4172651
20th. Year = 0.3118047

Total PV (PVF) = 2.0347228

  Total PV of these cost = Cp x ( PVF)
= 2.0347228 x 10,000
= 20,347.23
Note that at the end of life of the building the value is zero.
The cost to the building owner is also;
ASF + I
ie.,
the interest incur to the owner (annual interest) and
the sum which he must keep to recover the cost (annual sum).
 Periodic cost= (Cp x  PVF) (ASF + i)
From previous example;
Interest;
i. Cp x ( PVF) i
20, 347.23 @ 6% = 1,220.83
ii. ( PVF x Cp) ASF
ASF in 25 years at 6% = 0182267
.0182267 x 20,347.23 = 370.86
 
Cp ( PVF) (ASF + i) 1591.69

 
CHECK The ASF:
By using Amount of 1 p.a
Amount of 1 p.a in 25 years @ 6%= 54.8645
= 54.8645 x 370.86
= 20,347.05
RM 370.86 to be invested at 6% for 25 years (to get back 20,347.23 at the end of 25 years)
ie., 370.86…x 54.8645 (Amount of 1 p.a @ 6% in 25 yrs

TOTAL ANNUAL EQUIVALENT COST

Freehold land
= Cs (i) + CB (ASF + i) + Ca + Cp (PVF)
(ASF + i)
  Leasehold land
= Cs (ASF + i) + CB (ASF + i) + Ca + Cp
(PVF) (ASF + i)
  
EXAMPLES
1. Differences in cost between an automatic lift and one requiring an operator is RM200,000.00. If
life of lift is 40 years and interest is 6% p.a, which lift is the more economical?
 
AE = 200,000 (ASF + i) 
= 200,000 (0.0064615 + 0.06) 
= 13,292.30

Therefore, if the cost of salary of the operator is more than RM13,292.30 per year, then the automatic
lift is more economical.
 Likewise, if the operator’s salary per year is less than RM13,292.30 than manual lift is more
economical.
2. The difference in the construction costs between a normal hotel and another one
incorporating all the high technology equipment making it into an intelligent hotel building
is RM4 million. On the basis of an expected life of 50 years, and interest rates of 6% p.a, is
the additional expense likely to be worthwhile?
AE = 4,000,000 (0.0034443 + 0.06) 
= 4,000,000 (0.0634443) 
= 250,377.20 p.a
If the saving in the running costs of the high tech. hotel is more than RM250,377.20 p.a, than
the additional expense is worthwhile.
AE EXAMPLES
Cs = 100,000.00
i = 12% 10 ½%
n = 50 years
Ca = 20,000.00
CB = 600,000.00
ASF = 2 ½ %

(1) COST OF SITE, AE = Cs (i)

(i) 100,000 (0.12) = 12,000.00 10,500.00
 (ii) leasehold 100,000
(0.0102581 + 0.12) = 13,025.81

(2) COST OF BUILDING

AE = CB (ASF + i)
ASF in 50 yrs @ 2 ½ % = 0.0102581
  600,000 (0.0102581 + 0.12) =78,154.86 69.154 86
(3) ANNUAL COST = Ca = 20,000.00 20,000 00
110,154.86 99,654 86
ASF in 50 yrs @ 2 ½ % = 6154.86
Check amount of 1 p.a in 50 yrs. = 97.4843 x 6154.85 = 600,000.00

CB (i)
CB (ASF in 50 yr @ 2 ½ %)
600,000 (0.0102581) = 6,154.86

Check by using amount of 1 p.a

Amount of 1 p.a in 50 yrs @ 2 ½ % = 97.4843
= 6,154.86 x 97.4843
= 600,000.00
* Every year 6,1654.86 is invested for 50 yrs to recover RM 600,000.00
(4) PERIODIC COST. (Cp)
 EXAMPLE
Repair in every 10 years @ RM 15,000.00
Interest = 12%
Building life= 50 years
 
(i) WORK OUT ALL PERIODIC COST FACTOR
  PV of in 1 10 = 0.32197
@ 12% 20 = 0.103667
30 = 0.033378
40 = 0.0107468
 PVF = 0.4697618
(ii)AE =  PVF x Cp (ASF + i)
= 0.4697618 x 15,000 (0.0102581 + 0.12)
= 917.85
Cp (ASF in 50 yrs. @ 2 ½ %)
= 15,000 (0.0102581)
= 153.87
Check: Amount of 1 p.a in 50 years @ 2 ½ %
= 97.4843 x 153.87
= 15,000.00
* Every year 153.87 is invested for 50 years to recoup RM 15,000.00
Present Value Method
Example 1
•Calculate the present value of the two alternative floor finishes
installations below:

ANSWER

  Installation A Installation B
Life span 20 years 30 years

Initial and RM100,000.00 RM150,000.00

replacement cost

Annual running RM10,000.00 RM7,500.00

cost
% different:
Interest rate 5% 5% = 243,466.50 - 224,622.00 x 100
224,622.00
= 8.39%
Installation B is more expensive than A by 8.39%.
EXAMPLE 2
• A private client is considering to construct an office building in Perak within the site area of 3,000m2 that
was bought two (2) years ago at the cost of RM400.00/m2. The allowable Gross Floor Area in that
location is based on the plot ratio of 1:3. He is interested to know the total present costs of his proposed
project. Based on the information given below, advise the client. Inflation and taxation are to be ignored.

Description Cost information

Building construction cost RM 2,500.00/m2

Infrastructure (% of building cost) 20%
Preliminaries 5%
Contingencies 3%
Pre-development cost and others RM2 million
Annual management cost (of construction cost) 10%
Maintenance and operating cost RM150,000.00/year
Utility bill (first year and increase of 10% every 5 years) RM100,000.00
Replacement of minor services at every 8 years RM200,000.00
Replacement of major services at every 12 years RM400,000.00
Economic life span 50 years
Construction period 2 years
Discount rate 8%
• TQ