Life Cycle Cost Analysis

Life Cycle Cost Analysis (LCCA) 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 helps organizations choose the project or facility that offers quality results or services at the most lenient overall ownership cost.

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.

Life cycle cost analysis (LCCA) is a method that allows an organization to find out the overall cost of ownership of facilities over a period. It helps companies compare different resources or projects and check which is the most economical option.

There are various alternatives that guarantee the best performances, but these options are not available at the same initial and operating cost. This is where this analysis comes into the picture. It analyses the overall cost of ownership of every option and helps entities compare them to identify the most reasonable alternative without having to compromise on the quality and the output.

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.

Companies have life cycle cost analysis software options available nowadays to help quantify and compare the ownership costs against the quality the facilities or resources have to offer.

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.

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 the net present value calculated for the alternative, the comparison is easy because units are constant. The best option is the alternative with the net present value or lowest life cycle cost.

The basic formula is:

LCC = C+PV Recurring – PV Residual Value

Where:

• LCC is the life cycle cost
• C is the 0-year construction cost
• PV recurring is the present value of all recurring cost
• PV residual value is the present value of residual value at the end of the project.

Let us consider the following examples to understand the life cycle cost analysis definition even better:

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.

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.

Conducting LCCA involves a certain set of guidelines and a series of steps to be followed. When performed efficiently, the organizations can easily make a decision in selecting an appropriate project or facility, guaranteeing maximum productivity and profitability.

The life cycle cost analysis guidelines involve carrying out the following effectively for the best choice. Let us have a look at these steps:

• Firstly, the objectives need to be defined. This means the companies or organizations must know what they desire to get from the facilities they are choosing. The clarity in this respect ensures the choice of a proper resource.
• The next step is to check for the other options available for comparison.
• Then, the assumptions should be jotted down, which would include what they are expected to offer and where they might fall short.
• The next thing is to compare the benefits against the costs involved.
• Then comes the evaluation of all the options or alternatives.
• Based on the observation, one can easily make a decision.

If the process above is serially followed and seriously considered, it is likely for organizations to select the best project or facility to proceed with.

Life Cycle Cost Analysis is a measure that helps organizations identify facilities that can yield the best output with the least required ownership cost. It helps analyze the cost incurred to keep and maintain different resources for life and check if that’s worthy with respect to the returns it offers at the end.

There are multiple other advantages of this analysis. Let us have a look at some of them:

• It will result in earlier actions for the generation of revenue.
• 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.

Undoubtedly, the merits of the analysis technique are many, but then it is not devoid of flaws. Let us check some of them out below:

• 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 Ratio
• Cost Classification
• Cost Allocation
• Cost-Based Pricing