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Life Cycle Costing

Life Cycle Costing (LCC) evaluates the total cost of owning an asset over its lifetime, including initial, operating, and maintenance costs. Rather than just looking at upfront expenses, LCC provides a more comprehensive picture of long-term financial impacts. It is useful for assessing energy efficiency projects, which may have higher initial costs but lower operating costs over time. Calculating LCC can show that an option with a higher initial price may actually be more cost effective in the long run when considering total lifetime expenses.

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32 views1 page

Life Cycle Costing

Life Cycle Costing (LCC) evaluates the total cost of owning an asset over its lifetime, including initial, operating, and maintenance costs. Rather than just looking at upfront expenses, LCC provides a more comprehensive picture of long-term financial impacts. It is useful for assessing energy efficiency projects, which may have higher initial costs but lower operating costs over time. Calculating LCC can show that an option with a higher initial price may actually be more cost effective in the long run when considering total lifetime expenses.

Uploaded by

gosalhs9395
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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LIFE CYCLE COSTING

When evaluating capital investment options, using Life Cycle Costing (LCC) can help you determine the option which is most cost effective. Rather then evaluating projects solely on the basis of initial costs, LCC looks at the total cost of owning, operating and maintaining a project over its useful life (including its fuel, energy, labour and replacement components). Life cycle costing calculates operating and maintenance costs incurred during the lifetime of the project plus the initial capital costs. Life cycle costing often shows that a project with a higher initial cost may be more financially beneficial in the long run. It is especially useful for evaluating energy efficiency projects since they often require a higher initial investment but have lower operating and maintenance costs over the life of the project. By overlooking the purchase of energy-efficient products because their initial costs maybe higher, businesses may save money in the short-term but will end up paying more for the project through higher energy costs and other operating costs over the life of the project. Life cycle cost example Company X is considering whether to pursue Project A or Project B. Project B has an initial cost of $2,000, while Project A has an initial cost of $3,000. Company X is more inclined to take on Project B because of the perceived lower cost. However, applying the life cycle cost formula will help Company X determine if Project B is truly more cost-effective than Project A. Calculating life cycle cost The formula for calculating life cycle cost is:

Initial Cost Annual Costs Electricity Maintenance Project Life (Years) Discount Factor (Based on an interest rate of 3%) Calculations LIFE CYCLE COST

PROJECT A $3,000 $150 $50 15 0.64

PROJECT B $2,000 $250 $150 15 0.64

$3,000 + ($200 x 15 x 0.64) $2,000 + ($400 x 15 x 0.64) $4,920 $5,840 LIFE CYCLE COST = INITIAL COST + (ANNUAL COSTS x PROJECT LIFE x DISCOUNT FACTOR)

As the above comparison demonstrates, the lowest initial cost does not lead to the lowest cost overall. Project A is the more cost effective option to pursue.

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