What is the Life Cycle Cost Analysis?

Life Cycle Cost Analysis examines and assesses the total cost of resource ownership. It considers expenses related to buying, maintaining, operating, and disposing of a project or an object. It is used especially to select the best project when multiple projects satisfy the same performance requirements but differ in terms of operating costs and initial costs, which must compare for selecting the method for maximization of net savings.

Purpose

The purpose of this analysis is to estimate the overall cost of project options and then select the designs that can ensure the facility provides the overall lowest cost of ownership consistent with the function and its quality. The analysis should be performed early so that there will be chances of refining the design to ensure the reduction in life cycle total cost. The most challenging assignment of this analysis or any economic evaluation technique is to ascertain the economic effects of alternate designs of a building system or buildings and quantify these effects in monetary terms. However, the LCCA is useful for the economic impact of the options available in the industry. The process involves assessing costs arising from the company’s assets over time and evaluating alternatives that impact the cost ownership.

Formula

Life Cycle cost analysis appropriately weighs the money spent today as compared to money spent in the future. Each cost should be converted into dollars and then summed up to create a total cost in current dollars for each specified alternative. This quantity is sometimes referred to as the current dollar’s total cost or net present value. With theNet Present Value (NPV) estimates the profitability of a project and is the difference between the present value of cash inflows and the present value of cash outflows over the project’s time period. If the difference is positive, the project is profitable; otherwise, it is not.read more net present valueNet Present ValueNet Present Value (NPV) estimates the profitability of a project and is the difference between the present value of cash inflows and the present value of cash outflows over the project’s time period. If the difference is positive, the project is profitable; otherwise, it is not.read more calculated for the alternative, the comparison is easy because units are constant. The best option is the alternative with the net present value or lowestLife Cycle Costing is a method that aggregates all costs that an organization or individual will incur over the life span of the asset, project, investment etc. It includes initial investment and any further investments such as operating cost, maintenance and repair, upgrades (recurring expenses).read more life cycle costLife Cycle CostLife Cycle Costing is a method that aggregates all costs that an organization or individual will incur over the life span of the asset, project, investment etc. It includes initial investment and any further investments such as operating cost, maintenance and repair, upgrades (recurring expenses).read more.

The basic formula is:

LCC = C+PV Recurring – PV Residual Value

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Where:

  • LCC is the life cycle costC is the 0-year construction costPV recurring is the present value of all recurring costPV residual value is the present value of residual valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed.read more at the end of the project.

Example of Life Cycle Cost Analysis

For example, if Mr. A wants to purchase a printer for business purposes.

  • Purchase: The price is $2000.Installation: Pend an additional $50 for setting up and delivery purposes.Operating: Spend $900 on ink cartridges and paper for it. The total cost of electricity will be expected at $300.Maintenance: Repairs will cost $500.Financing: Credit card interest rate of 4% per month. (2000*4%)Depreciation: Value will be reduced by $100 each year.Disposal: The estimation of hiring a contractor to remove the printer is $ 150.

Hence the price of the printer is $ 2000, but the life cycle cost of the printer will end up costing the business more than $2000.

Life Cycle Cost Analysis Diagram

The life cycle cost analysis diagram represents the working of the whole cycle as it includes all the necessary activities for better results. It shows the stepwise procedure of life cycle cost and how it will impact the business on a large scale. It is the easiest way to accumulate the cost per the specified time.

Benefits

Following are the benefits of the analysis:

  • It will result in earlier actions for the generation of revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more.Lower costs than other methods or techniques.It shows an accurate and realistic assessment of costs and revenue within a specified life cycle stage.It promotes long-term worthwhileness..It allows total incremental costs over the whole period. Following are the benefits of the analysis:It will provide management awareness of the resources required to be purchased and the drive cost. It will result in earlier actions for the generation of revenue.This technique will focus on the cost and other factors like the quality of goods and the services that must be provided.

Disadvantages

  • Time-Consuming: This analysis is way too long because of changes in the new technology with future stability.Costly: The longer project means a long-time duration which makes it more costly than other methods.Technologically Outdated: As technology changes today, it provides the possibility of outdated technology.Less Reliable: It is not a reliable method for facts and figures because the companies assume some data to calculate life cycle costs.

This has been a guide to Life Cycle Cost Analysis. Here we discuss the purpose, formula, and example of life cycle cost analysis and its benefits and disadvantages. You may learn more about financing from the following articles –

  • Benefit Cost RatioCost ClassificationCost AllocationCost-Based Pricing