LIFE CYCLE COST CALCULATION

Estimating life-cycle costs

• The life-cycle cost of an asset can be expressed by the simple formula:

LCC = capital cost + life-time operating costs + life-time maintenance
costs + disposal cost - residual value.

• However, ascertaining a measure of each variable in the formula can be

difficult. Future costs are usually subject to a level of uncertainty that
arises from a variety of factors, including:

i. the prediction of the pattern of use of the asset over time;

ii. the nature and scale of operating costs;
iii. the need for and cost of maintenance activities;
iv. the impact of inflation on individual and aggregate costs;
v. the prediction of the length of the asset's useful life; and
vi. the significance of future expenditure compared with present day
expenditure.
• The longer the period involved, the more difficult it is to estimate future costs.
• The reality, however, is that it is often unnecessary, at the outset, to estimate
costs beyond 15-20 years.
• In fact, many items of equipment have a useful life of less than 20 years.
• Even for items with very long lives, the process of discounting future costs means
that the costs beyond 20 years generally have only a small impact on the LCC
model.
• Calculation of life-cycle costs can be assisted by the use of cost models that use
sophisticated algorithms to reflect the impact of different assumptions.
• These models are normally implemented, as computer programs, which enable
many different scenarios to be investigated without adding significantly to the
time and effort.
• With these models, a manager can focus on the implications of the analysis for
decision-making rather than just on the process of calculating the costs.
 Cost Elements
•To estimate the total life-cycle costs of an asset, it is necessary to identify the key cost elements.
•The choice of an appropriate set of elements will reflect three specific issues:
•1. The element must be a clearly defined activity that generates costs.
• As far as possible, elements should be independent.
•2. The time line for the element's costs must be known.
• The significance of a cost generally depends on its position in time within the life of the asset.
3. The relationship between the resources used by the element and the resulting cost must be known.
•• Changes in market conditions and price movements are more easily reflected through cost
changes in specific resource types.

•AS/NZS 4536 recommends a three-dimensional matrix approach to identifying the cost elements to provide
a systematic and orderly method of ensuring that all relevant cost elements have been included.
•The matrix recognises the three issues described above.
•The choice of the cost elements for a particular asset should also reflect the complexity of the asset and its
key cost drivers.
•A cost driver is an aspect of the asset that has a direct, significant impact on the scale of costs associated
with the creation, use or disposal of the asset.
•The following examples illustrate some of the cost drivers for a particular asset.
Photocopiers and printers
• method of operation (laser, bubble jet, heat transfer)
affects capital cost;
• the type and frequency of replacement of consumable
items such as toner cartridges; and
• energy consumption.

Plant and vehicles

• function of vehicle;
• engine capacity and type;
• driving mechanisms;
• fuel type and consumption; and
• wheel and tyre types.
 LCC for Building
Buildings
• location/land;
• stormwater and sewerage services;
• main structure, roof and external fabric;
• interior fitout, doors and windows;
• building services, including electrical supply, lighting, heating, ventilation and air
conditioning;
• energy source and consumption rate charges;
• water supply, internal plumbing and sanitary fixtures;
• security, data and communication systems;
• furnishings and furniture;
• surrounding landscaping;
• carpark and driveway;
• local authority services and charges.

•The process of modelling the life-cycle cost of an asset does not make any allowance
for depreciation charges that are part of an organisation’s profit and loss statement
because the full capital cost is already included in the model.
•If depreciation were also included this would effectively be double counting the
capital costs.
 NET PRESENT VALUE (NPV)
• When an organisation has a choice of incurring a cost now or in the future, it
generally considers the benefits of alternative uses for the available funds and
the cost of raising the necessary funds.
• Future costs are regarded as less significant because they have the potential
to be funded by effective use of existing funds over the intervening period.
• For example, if a $100 purchase is to be made today, it is necessary to have
$100 available now.
• However, if the purchase can occur in three years’ time for $100, it would be
possible to generate the required $100 by investing $75.10 at an interest rate
of 10% for the three years.
• If the funds can be used in some other way by the organisation, it may be able
to generate more than 10% per year, which would makes the future cost even
more attractive.
• In a similar way the value of a payment to be received at a future time is
regarded as less than the value of receiving it now.
• In order to quantify the time impact on future receipts and costs, these cash
flows are converted to an equivalent present value.
• This conversion is based on an estimated discount rate (r) and
uses the following formula:

Present Value = FV/(1+r)^n

 where FV the amount to be spent or received at a point in the

future;
 n the number of intervals between the present and the future
transaction (eg years);
 r the discount rate applicable to the chosen intervals; and
 ^ raised to the power nominated.
 Sample Calculation NPV
• For example, an expense of $100 in three years’ time with a discount rate of 10% would
have a present value (PV) of:
PV = 100/(1+.1)^3
= 100/1.331
= $75.10
• The net present value (NPV) is simply the difference between the present value of future
revenue and the present value of future costs for an activity over a given period.
• The arithmetic process for calculating present value and net present value is simple and is
often available as a specific function on calculators and in computer programs.
• However, the real difficulty arises in choosing an appropriate discount rate.
• The discount rate is usually chosen to reflect the risk-adjusted rate of return on the asset
employed to justify the long-term retention of the asset by the entity.
• One option is to use a rate equivalent to the prevailing basic low-risk interest rate, with a
small risk premium for low-risk assets.
• However, an organisation that is expected to achieve a better return on its funds than this
base rate would of course choose a higher rate.
 Life Cycle Cost Estimating
• There are FIVE (5) indicator estimating analysis in LCC.
• Basically it applying “ Method of Valuation” which are:
1. Net Present Value (NPV)
2. Amount of RM1 Table (A)
3. Amount of RM1 Per Annum Table (PV)
4. Annual Sinking Fund (SF)
5. Present Value of RM1 Per Annum or Year
Purchase Table Method of Valuation (YP)
5 indicators LCC estimating are based on Method of
Valuation in Estate Management Field.
 Net Present Value (NPV)
• Definition : The present value of RM1 shows how much should be
invested today to get the value of RM1 at the end of n years at an interest
rate i per cent per annum.
• Formula :
PV = Co x (1 + i)

= RM85,000.00 x (1 + 0.1)
= RM85,000.00 X (1.1)
= RM 93,500.00
Co = Cash Flow Today
i = Interest Rate ( Example 10% Per Annum)
 YEILD AND COST DEVELOPMENT
• Suatu Rancangan Kos tidak dapat diperolehi secara
tepat (Hampir Tepat) Tanpa mempertimbangkan
jumlah kos keseluruhan iaitu Kos Awalan (Initial
Cost) dan Kos Hadapan (Future Cost)
 COST ISSUES
• Isu-isu yang terlibat yang dihuraikan dalam angka-
angka ialah pertimbangan dalam perkara seperti
berikut:-
1. Discounting Future Payment
2. Live of Buildings
3. The relationship of design & maintenance and
life cycle costing.
 Competency Parties - Valuer
1. The value of the building is determine by valuer.
2. The function of valuer is to estimate and determine
the building value, once it completed construction
works.
3. The Valuer must know to analyse and determine
future cost value of building through net income,
which is it will increase or decrease in term of
interest rate to owner.
4. Conclusion it depend on the knowledge and
experince of Valuer to determine value.
 Tools Calculation
1. It is important the engineer to know and determine
economic analysis in order to assess the real cost of
using resources when establishment.
2. Real Cost mean the Total Cost which involve :-
a. Initial Cost
b. Future Cost
3. There tools or estimating element for the calculation,
which is identified as “Method of Valuation”.
 Net Present Value (NPV)
• Nilai kini RM 1 menunjukkan jumlah yang
patut dilaburkan hari ini untuk mendapatkan
RM1 di akhir “n” tahun dengan kadar faedah
“i%” setahun.
• Formula :
(1+i)n
RM1,000 (1+ 0.08)10
= RM10,800.00
 Amount of RM1 Table
• Definition : Total capital at the end of the period of n years if invested at
an interest rate i per cent per annum in the initial year.
• Angka daripada sifir ialah Jumlah Modal Terkumpul di akhir jangkamasa n
tahun jika RM 1 dilaburkan dengan kadar faedah i% di awal tahun
pertama.
• Ini bermakna RM 1 dilaburkan di awal tahun 1 telah menjadi RM (1+i) 3 di
akhir tahun pertama.
• Formula : A = (1 + I )
Example:
A = (1 + i)n
= (1 + 0.085)4
= (1.085) 4
PV = 1/ 4.34
= 0.2304
AMOUNT OF RM1 PER ANNUM TABLE (JUMLAH
RM1 SETAHUN)
Jumlah RM1 setahun memberi jumlah yang terkumpul
di akhir jangkamasa n tahun dengan kadar faedah i%
jika RM1 dilaburkan di akhir tiap-tiap tahun.

Formula :-
PV = 1/A
 Annual Sinking Fund ( Dana
Pengganti Tahunan)
Sifir Sinking Fund memberi jumlah yang patut
dilaburkan tiap-tiap tahun dengan kadar faedah i%
setahun untuk mendapatkan RM1 (Modal) di dalam
jangkamasa n tahun.
 Present Value of RM1 Per Annum
or Year Purchaces Table (YP)
Nilai Kini RM1 setahun (Angka Tahun Belian)
menunjukkan nilai masa kini ke atas penerimaan RM1
di akhir tiap-tiap tahun selama n tahun dengan kadar
faedah i % setahun.

YP = 1 - 1/A
1
 SAMPLE CALCULATION
QUESTION 1

You are required to compare the life cycle cost (LCC) of two types of air-conditioner for a
bungalow house. From the option shown in table 3, how would you justify the results of the
comparison you make if rate of interest is 8.5% per annum?

Bil Item Type A Type B

1 Initial Cost RM23,000.00 RM32,000.00
2 Maintenance Every 4 Year RM4,500.00 -
3 Renewal Every 20 Years RM20,000.00 -
4 General Repairs After 20 Year - RM20,500.00
Expected Life of Building 60 Year 60 Year
 SAMPLE
Question 2

In considering the choice for TWO (2) types of cladding to a factory building. The contractor has
provided two proposals as state below. You as Building Surveyor are required to analyze and
recommend the most appropriate cladding.
Bil Item Cladding A Cladding B

1 Construction Period 6 Month 9 Month

2 Initial Cost RM40,000.00 RM90,000.00

3 Annual Maintenance Cost RM1,500.00 -

4 Maintenance Cost - -

5 Renewing after 20 year RM70,000.00

6 General Repair after 20 year - RM15,000.00

USING DISCOUNTED RATE OF 9 % AND LIFE OF A BUILDING 60 YEAR DETERMINE

THE MOST ECONOMIC PROPOSAL
 QUESTION
QUESTION 3

You are required to compare the life cycle cost (LCC) of two types of air-conditioner for a
bungalow house. From the option shown in table 3, how would you justify the results of the
comparison you make if rate of interest is 8.5% per annum?

Bil Item Type A Type B

1 Initial Cost RM25,000.00 RM40,000.00
2 Maintenance Every 4 Year RM7,500.00 -
3 Renewal Every 20 Years RM50,000.00 -
4 General Repairs After 20 Year - RM40,500.00
Expected Life of Building 60 Year 60 Year
 ASSIGNMENT

Bil Item Type A Type B

1 Construction Period 4 month 6 month
2 Initial Cost RM230,000.00 RM230,000.00
3 Annual Maintenance Cost RM5,450.00 -
4 Maintenance Cost - -
5 Renewing After 9 Years RM150,000.00 -
6 General Repair After 10 Years - RM100,000.00
Expected Life of Building 60 Years 60 Years
Discount Rate (Interest Rate) 7% 7%

In considering the choice for two (2) types of air conditioning for office building. The contractor
has provided two proposals as stated below. You are required to analyze and recommend the
most appropriates air conditioning for office building.

i.Calculate and compare lice cycle cost of each types of air conditioning for office building.

ii.Determine and recommend the most appropriates air conditioning for office building.