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Life Cycle Cost Analysis

Ankur Bansal 09010408

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Life Cycle Cost (LCC)Life-cycle cost analysis is a

process for evaluating the total economic worth of a usable

project segment by analysing initial costs and discounted

future costs.

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Why Use LCC?Project

Engineering

Maintenance

Engineering

AccountingReliability Engineerin

g

Shareholders

ProductionIndustry

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Key Parameters used in

calculating Life Cycle Cost • Time Value of Money1.Rate of Return2.Inflation• Opportunity Cost• Discount Rate• Analysis

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Steps to determine life cycle costs:

• Establish alternative design strategies.

• Determine activity timing.• Estimate agency costs.• Estimate user costs.• Determine life-cycle cost.

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Costs Involved Direct Costs• Initial Costs: Investment Costs,

Construction Costs, Purchasing Price. (PV = TV)

• Salvage Value: Scrap value of any equipment (or any other property) at the end of its service life. ()

• Future Investments• Residual Cost• Annually Recurring Fixed Cost. )• Annually Recurring Escalating

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Costs Involved Indirect Costs• Motorist delay time• Vehicle operating costs• Accident Costs

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Calculation of Life Cycle Cost

Deterministic• An Exact Cost is Determined

Probabilistic• A range of Values is determined with a specific

probability distribution.

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Steps Involved• Step 1-Identify what has to be analysed and the time

period for the project life study along with the appropriate financial criteria.

• Step 2-Focus on the technical features by way of the economic consequences to look for alternative solutions.

• Step 3-Develop the cost details by year • Step 4-Select the appropriate cost model, simple

discrete, simple with some variability for repairs and replacements, complex with random variations, etc. required by project complexity.

• Step 5-Cost details are acquired.• Step 6-Yearly cost profiles are found.

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Deterministic Approach

• Fixed discrete values are assigned to various parameters and any type of uncertainties are ignored

• LCC calculated is fixed value

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Probabilistic Approach• Cost parameters are assigned

with some appropriate probability distribution.

• Random numbers are generated • These random numbers are used

to calculate the LCC

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Sensitivity Analysis• A sensitivity analysis is performed to

understand what variables make the largest difference in the final result.

• We can identify the model variables that have a significant influence on model results and/or determine break-even points that alter the ranking of considered options.

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Risk Analysis• Risk analysis helps to estimate the levels of risk

and uncertainty within final economic decision measures such as BCR and NPV, from uncertainty in the key input variables feeding into the project evaluation process. By estimating the 'riskiness' aspect of these summary measures, a more realistic comparison of project returns can be obtained