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Harvard University

Life Cycle Cost Calculator

Harvard Life Cycle Calculator Training Joel McKellar Green Building Services 11.06.2012

Harvard University


Overview

Introduction to Life Cycle Costing • What is it?

• When is it required at Harvard?

• Why do we use it?

Calculator Inputs • What information is needed to build

reports?

Calculator Outputs • How to Analyze Reports

• GHG Reduction Reporting Capabilities

Sample Exercises • Bulb Replacement Example

Harvard University


Introduction to Life Cycle Costing

(LCC) What is it?

A method to calculate the full costs and savings of a project including initial costs

(present costs), utility, operations & maintenance, and replacement costs (future

costs) over a set period of time.

Harvard University



(LCC)

When is it required at Harvard? The Harvard University Green Building Standards (Nov. 2009) require LCC in

three situations:

•New buildings and building-wide, full-gut renovations (LEVEL I)

•Partial building interior fit-outs (LEVEL I)

•Limited Scope Projects with Energy and GHG impact (LEVEL II)

LEVEL I – Multiple iterations of LCC at planning/conceptual design stage, schematic

design, and any value engineering exercises. Early investigations are broad and aim

to reduce scope of investigation, while later stages are more detailed.

LEVEL II – Single 20 year LCC for specific measures being considered.

Overview

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Overview


(LCC) Why do we use it?

Initial costs are deceiving. LCC examines the total cost of ownership over 20

years, not just the initial construction cost.

Today’s money ≠ tomorrow’s money. LCC converts all future costs into present

value to allow ‘apples to apples’ comparisons.

Simple paybacks aren’t the full story. Looking only at initial costs and expected

annual savings will not reflect variances in expected equipment lifetimes,

maintenance cost differences, and rebates/incentives that affect total ownership

cost.

The Harvard LCC calculator is specific to Harvard. Our LCC allows for simple

analysis of the use of complex district thermal and energy systems with rate

information updated annually by E&U.

Harvard University


Overview


(LCC) Why do we use it?

GHG Reduction Goal – 30% by 2016 from 2006, including growth

• At the university level, LCC allows for a common set of financial metrics to

compare ECMs for cost and GHG reduction effectiveness

• At the school or department level, LCC enables prioritization of ECMs for GHG

reduction plan implementation.

• At the project level, LCC provides a means to link capital budgets to operating

budgets to ensure sound decision making in terms of long-term cost and

emissions.

Harvard University


Overview

ECM < $100K

ECM Project Identified

Use Simple Payback

Analysis

< 5 Yr Simple

Payback

Implement ECM

Add to GHG

Prioritization List

Use NPV to compare

options

Part of Larger

Capital Project

Use IRR Analysis

> 20% 10-yr IRR

Implement ECM

20 yr NPV of

ECM >

alternative

Implement ECM

Yes

No

Yes

No Yes

Yes Yes

Use NPV $ / MTCDE

to Prioritize

Develop multi-year capital

plan to achieve GHG goals

No

No

Do Not Implement ECM

for Financial ReasonsNo

ECM Financial Analysis Flow Diagram

Harvard University


Overview

Assumptions and Escalation Rates

Assumptions & rates selected in 2009 by the Finance Working Group, one of five

working groups charged with implementing the recommendations of the GHG Task

Force.

• Discount Rate - 8%

• Accounts for the value you could earn if money was invested elsewhere

• Estimate of Harvard’s endowment’s rate of return

• Study period – 20 years

• Cost of Carbon (MTCDE) – $0

• Not currently included in calculations, but cell is functional.

Assumptions

Discount Rate Escalation Rate

Utilities

Escalation Rate

CUSTOM Units

Escalation Rate

Cost of Carbon

Escalation Rate

Materials

Escalation Rate

Labor/Maintenan

ce

Study Period

(Years)

Cost of Carbon

(per MTCDE)

8.00% 4.33% 4.33% 4.33% 1.84% 1.84% 20 $ -

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Overview

Assumptions and Escalation Rates

Non-Utility Escalation Rates Maintenance and Material Costs Escalation Rate – 1.84%

Energy Information Agency’s estimate of inflation

Utility Escalation Rates Non-fixed Costs – 4.33%

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Input Basics – Overview

Required Information • Initial Costs

• Incentives

• Operating Costs

• Utility Consumption

• Location and Supplier

• Annual and One-Time Maintenance Costs

• Equipment Life Span

Most operating and maintenance costs will be based on assumptions that will

need to be developed outside of the LCC.

Work with vendors to obtain the information listed above, but reasonable estimates and assumptions can be used when info is not readily available.

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Input Basics – Savings vs. Options Costs

Options Calculator Insert TOTAL COST for each item in the appropriate box.

• If the baseline is an item that is already installed, enter $0 in the initial

cost box.

Savings Calculator Insert DIFFERENCE in costs between baseline and ECM

• If ECM is a completely new system or replacing something in otherwise working

order, then add all costs to “Total Cost” section (e.g. installing new windows in an

existing building)

• If the ECM is an alternative (e.g. upgrading to better windows in a new

construction project) to a lower cost product, only add the cost premium.

The information required for both options and the resulting analysis is almost

exactly the same, it is simply entered in a different format.

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Input Basics – Forms

Savings calculation inputs >

Options calculation inputs ˇ

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Initial Costs

Savings Comparison Shown Above

“Total Cost” should be complete investment cost, including labor and overhead, for the

ECM being considered.

•For the “Savings Comparison”, enter the difference in cost between the baseline

and the ECM being considered.

•For the “Options Comparison”, enter the total cost of each system. If the

Baseline is already installed, enter $0.

If incentives are available, enter them in the incentive box, and the “Net Cost” will be

calculated automatically.

The replacement cost will automatically assume it is the same as the “Total Cost”

without incentives, however this figure can be overwritten as necessary.

Cost Differential between Baseline and Proposed Ongoing Costs

Total Cost ($) Incentives ($) Net Cost ($) Equipment Life (Years) Replacement Cost ($)

$ 30,000 $ 10,000 $ 20,000.00 15 $ 30,000

Harvard University


Input Basics – Incentives

http://www.nstar.com/business/energy_efficiency/application_forms/application_forms.asp

For prescriptive incentives,

application forms list per

unit/fixture/watt reduction/etc.

rebates that can be plugged

directly into calculations.

For custom or performance

incentives, additional

calculations may be required.

All savings rates are listed on

these application forms.




Harvard University


Input Basics – Maintenance/Material Costs

Material Costs Include items that will have value once installed

• Replacement Period In Years

• Replacement Costs (if different from initial)

• Insert everything in present value regardless of year investment will take place

Maintenance/Labor Costs Include items that will not have value once installed.

• e.g. CO2 sensors must be calibrated every five years, so labor expenditures

would be placed here, but once completed there’s no inherent value remaining.

Remaining Equipment Value in Year 20 For investment/capital equipment that has remaining life beyond the 20 year study

period, this is an adjustment made in year 20 that accounts for the value of the

equipment’s remaining life.

Harvard University


Input Basics – Maintenance/Material Costs

Annual Operating/Replacement Cost Savings

Materials Labor/Maintenance Material Labor/Maintenance

Year 1 $ - Year 11 $ -

Year 2 $ - Year 12 $ -

Year 3 $ - Year 13 $ -

Year 4 $ - Year 14 $ -

Year 5 $ - $ 250 Year 15 $ 30,000 $ 250

Year 6 $ - Year 16 $ -

Year 7 $ - Year 17 $ -

Year 8 $ - Year 18 $ -

Year 9 $ - Year 19 $ -

Year 10 $ - $ 250 Year 20 $ - $ 250

Total 20 Year Materials Cost (Unescalated) $ 30,000

Total 20 Year Labor Cost (Unescalated) $ 1,000

Remaining Equipment Value in Year 20 $ 20,000

Savings comparison shown above

Harvard University


Input Basics – Maintenance Costs

If historical cost data is

unavailable, Whitestone

Research’s Facility

Maintenance and Repair Cost

Reference provides some

reasonable assumptions.

Copies are available at PIRC.

https://secure.whitestoneresearch.com/products/view/FAC-MAR-2010-2011



Harvard University


Input Basics – Utility Consumption

The LCC does not calculate energy/utility savings for your

ECM, it only weighs those savings against the costs to earn

them.

Work with vendors/consultans for energy savings

calculations.

Consumption is measured in common units (e.g. kWh for

electricity) and converted into dollars based on standard

assumptions in the LCC.

Location is important, because the rate structures are different for

each source (e.g. Blackstone steam vs. Longwood steam)

Harvard University


Input Basics – Utility Consumption

Annual Savings Cambridge Boston (Allston) Boston (Longwood) Boston (Other)

Savings Cost GHG Savings Cost GHG Savings Cost GHG Savings Cost GHG

Electricity (kWh) (3,000) $ (357) -1.18 $ - 0.00 - $ - 0.00 $ - 0.00

Natural Gas (Therms) 3,500 $ 4,375 18.61 $ - 0.00 $ - 0.00 $ - 0.00

Chilled Water (Ton-Days) $ - 0.00 N/A $ - 0.00 N/A

Steam (MMBtu) $ - 0.00 $ - 0.00 $ - 0.00 N/A

Water/Sewer (Ccf) $ - N/A $ - N/A $ - N/A $ - N/A

#2 Fuel Oil (Gallons) $ - 0.00 $ - 0.00 $ - 0.00 $ - 0.00

#4 Fuel Oil (Barrels) $ - 0.00 $ - 0.00 $ - 0.00 $ - 0.00

Transportation Gas (Therms) $ - 0.00 $ - 0.00 $ - 0.00 $ - 0.00

Res. Direct Electricity (kWh) $ - 0.00 N/A N/A N/A

CUSTOM $ - 0.00 $ - 0.00 $ - 0.00 $ - 0.00

CUSTOM Cost/Unit ($)

CUSTOM GHG/Unit

(MTCDE)

Total Annual Cost

Savings $ 4,018 Total Annual GHG

Savings 17.44

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Output Basics – Overview

Financial Costs • 20 year NPV cost of system

Financial Savings • 20 year savings to ratepayer

• 20 year net savings

Investment Performance • 20 year - Savings to Investment Ratio (SIR)

• Return on Investment (ROI)

• Internal Rate of Return

• Simple and Discounted Payback Periods

Greenhouse Gas Metrics • Annual and Cumulative MTCDE Reductions

• GHG Reduction Plan Formatted Info

LCC allows you to examine the effectiveness of an ECM from both a financial and GHG reduction perspective.

Harvard University


Output Basics – Financial Metrics

Analysis Metrics – Savings Comparison

20 Year Savings

(NPV) $29,601 20 Year GHG Savings

(MTCDE) 348.72

Simple Payback Analysis

Savings to University

Variable Cost Only

Annual Savings (FY12 rates) $4,018

Simple Payback Period (Years) 4.98

Return on Investment 20.1%

Life Cycle Cost Metrics


Variable Cost Only

20 Year Net Present Savings $29,601

20 Yr Savings to Investment Ratio 2.11

Discounted Payback Period See 'Net Savings' graph

Internal Rate of Return 22.9%

Greenhouse Gas Metrics


Variable Cost Only

Annual GHG Savings (MTCDE) 17.44

20 Year GHG Savings (MTCDE) 348.72

20 Yr Investment Cost / 20 Yr GHG $77

20 Yr Net Present Savings / 20 Yr GHG $85 Note: Discounted Payback Period occurs on the last year the line crosses the x axis

$-

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

$4,000.00

$4,500.00

0 5 10 15 20

Ne

t S

avin

gs

Year

Net Savings: Discounted Payback Period

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Basic Cost and Savings Metrics

Additional Investment: The difference in initial cost between the ECM and the baseline. Annual Operating Savings: The difference in operating costs between the ECM and the baseline. Simple Payback Period: (Additional Investment/Annual Operating Savings)

• Result is in years • Does not account for future investments and expenditures!

20 Year Net Present Cost: The TOTAL cost of owning the system over 20 years. • Only available for Options Comparison where total costs are entered • The higher the number, the more expensive the ECM is to own and operate.

20 Year Net Present Value: The total DIFFERENCE in cost between the ECM and the baseline over 20 years.

• Available for both Options and Savings Comparisons Formulas • Figure includes fixed costs in rates • The higher the number, the more savings the ECM will provide compared to the baseline. • Negative NPV means that it is more expensive to own the ECM than the baseline.

Harvard University



Basic Cost and Savings Metrics

Baseline 20 Year Net Present Cost $ 31,199

ALTERNATE 1 – VFD/ Occupancy Control of Ventilation Additional Investment $ 4,000

20 Year GHG Savings (MTCDE) 52 Simple Payback Analysis


Variable Cost Only

Annual Savings (FY12 rates) $597

Simple Payback Period (Years) 6.70

Return on Investment 14.9%

Harvard University


Output Basics – Financial Metrics

Analysis Metrics Savings to Investment Ratio (SIR) : 20 Year Investment Savings / 20 Year Costs

• If greater that 1.0, then project saves more than it costs over 20 years. • If less than 1.0, the project costs more than it saves over 20 years. • A rating of 2.0 would mean you save twice as much as you invest, 3.0 would mean you save three times as much as you invest, etc.

Return on Investment (ROI): (Annual Savings – Initial Investment) / Investment * 100 • Provides a value showing the percentage of savings earned beyond the initial investment. • A negative ROI shows that you’re losing money • A positive ROI shows that you’re savings exceed your initial investment • Does not account for future investments and expenditures!

Internal Rate of Return (IRR): Discount Rate at which 20 Year NPV would equal $0 • Assumed Discount Rate is 8.0%, so if value is equal to or lower than 8% than the project does not offer savings in present dollars. • Allows you to examine project viability if assumptions about the discount rate are adjusted.

Harvard University


Advanced Cost and Savings Metrics

ALTERNATE 1 – VFD/ Occupancy Control of Ventilation Life Cycle Cost Metrics


Variable Cost Only

20 Year Net Present Savings $2,956

20 Yr Savings to Investment Ratio 0.59

Discounted Payback Period See 'Net Savings' graph

Internal Rate of Return 15.7%

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

0 5 10 15 20

Net

Sa

vin

gs

Year

Net Savings: Discounted Payback Period

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Output Basics – Greenhouse Gases

Analysis Metrics

20 year Cost / 20 year MTCDE: Result indicates a cost per ton reduction

•Lower costs mean better cost efficiency at reducing GHG emissions

NPV / Total GHG Reduction: Result indicates how much savings (or losses) a project incurs per ton of GHG

•Generally most useful for NPV negative projects, when it describes how much additional cost you’re paying per ton compared to the baseline.

Greenhouse Gas Metrics

Savings to

University

Variable Cost Only

Annual GHG Savings (MTCDE) 17.44

20 Year GHG Savings (MTCDE) 348.72

20 Yr Investment Cost / 20 Yr GHG $77

20 Yr Net Present Savings / 20 Yr GHG $85

Harvard University


Output Basics – Cost Isn’t Everything!

Analysis Metrics

Sometimes the most favorable project from an economic perspective is not the most favorable from a GHG reduction standpoint. As the campus gets more and more efficient, we will likely need to pursue GHG reduction projects with increasingly less favorable economic outcomes, though currently there are still many ECMs that result in both GHG and long

term cost savings.

Harvard University


Example – Savings Comparison

Upgrade Motor to Premium Efficiency? Existing 5HP fan is powered by a motor that runs year round and is only 85% efficient, and the building manager is considering upgrading to a motor that is 91% efficient. Baseline Cost - $0 New Motor Installed Cost - $2,500 Incentives available - $500 Equipment life for both existing and new motor is 15 years, but the existing motor costs 300 less than the new motor installed. Savings Anticipated: kWh =(.746*5*8760)/(.91-.85)= 2,354 kWh/year

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