Factors of a Life Cycle Cost Analysis
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Factors of a Life Cycle Cost Analysis
Life cycle cost analysis evaluates the overall cost of a facility or system over its lifespan. It is an economic assessment of the alternatives, and enables the making of better decisions after an examination of the costs and benefits (Singh, 2009). It includes costs associated with the life cycle of the system including ownership, acquisition, construction, and disposal of a building. It also includes other factors such as the marketing, production, and other logistic costs. The objectives of the analysis are to examine the economic values of different alternatives and to identify the most cost effective systems. Factors to be considered when performing life cycle cost analysis include the initial cost of the construction, costs for maintaining and operating the system or facility, the replacement costs of the system, the study time, and the residual value. Different factors affect the life cycle cost analysis, and this analysis is especially important when making decisions concerning a facility or system.
Initial costs include the cost for designing and developing a system, the costs of the equipment and other assets, and the costs incurred during installation. Operation and maintenance costs include labor and energy costs, as well as the cost of raw materials and spare part costs. The operational and maintenance costs are included in the analysis total after discounting them to their present values. All the costs included should directly relate to the building. The repair and maintenance costs are different in that the management usually schedules a certain amount for the purposes of the upkeep of the system, while repair costs are usually not planned for since most of them are not intentional. However, these costs are necessary because they help the system to continue operating and they help in prolonging the life of the system.
Another factor is the estimate of the real monetary value of the costs. Calculating the net present value can involve the use of discount or inflation rates. Discount rate is the rate of change of money’s true value over time considering the rate of investment and the interest rates of investments. Subtracting the interest rates from the inflation rates gives an approximate value of the discount rate. Another important factor is the assessment time, which is the period over which the assessment of the system takes place. There is no defined period for different systems, the time assigned depends on the system’s owner. The time assigned signifies the system’s intended life. Some may assign the system a period of forty years while others may assign it twenty years.
The residual value is the value of a building after the time assigned during the analysis. This value can be positive, zero, or negative. A negative residual value indicates that the system still has some value. This could be attributed to the fact that the system is still operational and some of the component parts of a system may still be new. When a system has a positive residual value it shows that the building has some disposable costs, which could be due to several reasons such as the demolition of a building. A zero figure shows that the system has no worth and neither does it have any costs. This situation is rare, but possible. The owner is not able to sell the building or dispose of it without incurring an expense. Replacement costs are often indicated in their present value and are an important factor in the analysis. They are often anticipated, since some of the components of a system may outdo others. They are necessary because the system cannot operate without all the components.
The life cycle cost analysis is essential when there are other alternatives that could have fulfilled the same performance as that of a system, but which differ in terms of the operational and initial costs of the system. Therefore, life cycle cost analysis is important in determining the economic value of a system. The analysis does not just focus on the capital investment used to build the system, but it also focuses on the entire life cycle of the system. This enables the comparison of the systems which used a heavy initial capital investment, and the ones that used a low capital investment when building the system. Through the analysis, it is clear that some of the facilities that used a high initial capital investment ended up incurring fewer costs in operations and maintenance compared to the systems that used a low initial capital investment, but ended up incurring heavy costs before disposing the system. This analysis is especially useful for complex and high cost systems and when making ambiguous decisions, which may be too complex to make using experience and judgment.
This analysis is especially useful to managers and other decision makers, because it helps in identifying hidden costs or other costs which tend to be ignored, but which end up invalidating the results. It helps the decision makers to determine whether they will build, lease, buy, or replace a system (Bronzino, 2000). The analysis helps in making decisions concerning the design and development of a product. By comparing different alternatives, one is able to know which design is most feasible, and which one will make the most economic value. The analysis helps in resolving conflicts that might arise from different decision makers, since each decision maker has his or her own goal in mind. It will provide the best solution for managers in departments such as product engineering, accounts, and maintenance since they all have different objectives. It helps in resolving the conflicts that might arise because of different issues including resources such as time and money.
References:
Bronzino, D. J. (2000). The biomedical engineering handbook. 2. New York, NY: Springer
Singh, A. (2009). Life cycle cost analysis of occupant well-being and productivity impacts in LEED offices. Ann Arbor, MI: ProQuest