You are on page 1of 37

Life Cycle Cost Analysis

What is Life Cycle Cost?

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

By using LCC, total cost of the product can be calculated over the total span of product life cycle. Compares competing alternatives considering all significant costs
Expresses results in equivalent dollars (present worth)

Importance of Life Cycle Cost

LCC is a economic tool which combines both engineering art and science to make logical business decisions. This analysis provides important inputs in the decision making process in the product design, development and use.

LCC for product supplier

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

LCC for customer


By

using LCC, customers can evaluate and compare alternative products.

By

using LCC, customers can assess economic viability of projects or products.

Why use LCC?


Typical conflict in most of the company:

Project Engineering wants to minimize capital costs as the only criteria, Maintenance Engineering wants to minimize repair hours as the only criteria, Production wants to maximize operation hours as the only criteria, Reliability Engineering wants to nullify failures as the only criteria,

Why use LCC?

Accounting wants to maximize project net present value as the only criteria. Shareholders want to increase stockholder wealth as the only criteria. LCC can be used as a management decision tool for synchronizing the divisional conflicts by focusing on facts, money, and time.

Why use LCC?

Why should engineers be concerned about cost elements? It is important for engineers to think like managers and act like engineers for a profit maximizing organization

Cost Considerations
Present Worth Salvage Costs Initial Cost

Costs

Rehabilitation Cost

Maintenance and Inspection Cost

Years
Salvage Value

Present Worth Analysis

The present worth of asset in the market.

The original value of asset.

Estimates of benefits in future from asset.

First (Initial) Cost

Installation charges Cost of Capital


Capital expenditure Cost Overrun

Maintenance Costs
Labor cost, Energy cost, Spare & maintenance cost, Raw material cost.

Inspection Costs
Occurs

for all alternatives

Cost

varies on the basis of size of the structure and by construction material

Rehabilitation Costs
Expense

incurred in restoring an entity, equipment, machinery, plant, or property to acceptable or normal operational conditions.

Salvage Value/Costs
Occurs once at end of life of structure
Removal cost Cost of remaining effeciency

Computation of Life Cycle Cost Analysis


(Steps for LCCA)

Steps for computation of LCC

Step 1: Determine time for each cost element, Step 2: Estimate value of each cost element, Step 3: Calculate Net Present Value of each element, for every year (over its time period), Step 4: Calculate LCC by adding all cost element, at every year, Step 5: Analyze the results.

Step 1: Determination of time


In LCC analysis of an equipment, life cycle means the life of the product that is installed in the plant, i.e. productive life time of the product. The product supplier provides the life cycle depending on design calculation and experience. Based on suppliers data, customer decides the Life Cycle, i.e. how long he/ she wants to use the machine. Customer considers the effect of available maintenance facility, technological obsolescence and economic uncertainty factor, also.

Step 1: Determination of time (contd.)


After that, company decides the time span for each component. Example, say, a company decides that total life cycle of the product will be 10 years from the allocation the fund, among which first one year will be initial cost zone and remaining 9 years will be under operation and maintenance cost zone.

Step 2: Estimation of value


Estimate monetary value for each cost element. This estimated value will be incurred in every year. This value is basically future income at each year, which is estimated. To estimate the value, various source can be used; e.g. calculation based on facts and experience, MIS report for similar existing machines, etc.

Step 3: Net Present Value


Money has a time value The present value of future income or future cost can be calculated by using discounting factor and inflation factor. Discount factor

Step 3: Net Present Value (contd.)


The discount rate is an interest rate, a central bank charges depository institutions that borrow reserves from it. For example, let's say Mr. Ram expects Rs. 1,000 in one year's time. To determine the present value of this Rs. 1,000 Ram would need to discount it by a particular rate of interest (often the risk-free rate but not always). Assuming a discount rate of 10%, the Rs. 1,000 in a year's time would be equivalent of Rs. 909.09 to Ram today (i.e. 1000/[1+0.10]).

Step 3: Net Present Value (contd.)


Inflation factor

The inflation rate is the percentage by which prices of goods and services rise beyond their average levels. It is the rate by which the purchasing power of the people in a particular geography has declined in a specified period.

Step 3: Net Present Value


Formula for Net Present Value (NPV) C (1+i/100) (n-1) PV= ----------------------(1+d/100) n where, C = any cost element at nth year I = inflation rate d = discount rate/ interest rate

Step 4: Summation of PVs

PVs of each cost elements is calculated for an equipment (at every year). PVs of each cost element in a year are added. The process is done for every year over the life cycle, i.e. LCC is calculated for every year.

Step 5: Analysis

The datas collected from LCC are analyzed. If one product has to be selected among multiple equipments, then LCC is calculated for every product.

Data for every product are analyzed, and the lowest LCC option become preferred.
But lowest LCC option may not necessarily be implemented when other considerations such as risk, available budgets, political and environmental concerns are taken into account.

Analysis tools

The use of computer programs can considerably reduce the time and effort spent on formulating the LCCA, performing the computations, and documenting the study. Listed below are several LCCA-related software programs: Building Life-Cycle Cost (BLCC) Program Economic analysis tool developed by the National Institute of Standards and Technology for the U.S. Department of Energy Federal Energy Management Program (FEMP).

ECONPACK for WindowsAn economic analysis tool developed by the Army Corps of Engineers in support of DOD funding requests. Energy-10Cost estimating program available from the Sustainable Buildings Industry Council (SBIC). Success Estimator Estimating and Cost Management SystemCost estimating tool available from U.S. Cost.

Conclusion
The following are the key ideas for this topic:

The term "life cycle" has several meanings in various communities, but they include a cost model for total cost of ownership (and/or total profit); dealing with the logistics of supplying, transporting, and maintaining equipment; and end-of life disposal/retirement issues.

A sufficiently rich economic model can help designers and users make informed decisions to minimize total cost of ownership. However, the real economic constraints and potentially suboptimal behavior of customers may lead to making choices for purchases and operation that are less than what would be optimal without these constraints.
A true life cycle perspective includes designing not only for manufacturing cost, but also includes the costs (monetary and otherwise) for all the phases of the lifecycle, including manufacturing, deployment, maintenance, operation, and eventual retirement/disposal.

Plant and equipment acquisition: a life cycle costing case study

INTRODUCTION
The

aim of this study is to undertake an economic assessment of the materials available for floor covering in commercial buildings and spaces. study is basically based on alternative use of vinyl on the place of carpet.

The

Assumptions

Life of carpet is less whereas vinyl is more. Costs- no economies of scale.

Discounting and Inflation.


Taxation- 36% and Sales Tax. Benefits

NPV ANALYSIS

NPV of carpet=171.71 NPV of vinyl =256.43 In general terms, the vinyl tile flooring option is 17 per cent more expensive than the wool/nylon option. If the $10 per m2 per annum loss of rental is included, then vinyl tiles are 49 per cent more expensive than the carpet.

Conclusion
Sensitivity

Analysis-

The initial capital cost of carpet is greater than that for vinyl flooring. In theoretical terms, in choosing the less expensive alternative in initial cost, an opportunity arises for investing the difference in the capital costs, that is: wool/nylon mix costs $54.00 per m2; vinyl tile flooring costs $37.00 per m2 ; sum available for investment $17.00 per m2.

Break-even analysisBreak-even period is that period at which the cost of the new carpet replacement (including subsequent running costs) are equal to the costs of retaining the vinyl flooring. The cost of the new carpet replacement, assuming it to be wool, includes initial cost of$54.00 per m2 plus the consequent net of tax cash flows. The cost of retaining the vinyl flooring (i.e. cleaning costs) is $32 per m2 per annum ($20.40 per m2 net of tax) and it is assumed that it has been fully depreciated for tax purposes. The above figures are tabulated to show the break-even period which is just over three years.

THANK YOU