4.0 Life Cycle Cost

4.0.
LIFE CYCLE COST
4.1 Meaning of The LCC
Life cycle cost (LCC) is an important technique for evaluating the total cost of
ownership between mutually exclusive alternatives. LCC is an economic method for
evaluating assets that takes into consideration all costs arising from owning, opening,
maintaining, and disposing of the asset. It is the total discounted cost of acquiring, operating
and maintaining, and disposing of an asset over a fixed period of time. LCC is a useful aid for
comparing lifetime cost of mutually exclusive assets to determine which asset provides the
best value and it should be performed early in the design process. Nonetheless, given robust
and realistic assumptions, LCC is an important tool for ranking cost of ownership between
mutually exclusive alternatives. Realistic assumptions can be aobtained from evaluating the
perfomance, over time, of similar assets, conducting literature reviews, obtaining information
from manufacturers, vendors, contractor, and using average support and maintenance costs.
Additionally, the associated discount rates. The former excludes inflation and the latter
includes inflation. Thus, when comparing alternatives in a given period, the same discount
rate must be used. Taxes and depreciation allowances should be accounted for in LCC
calculatios, as well as any local value effect. Generally, the straight-line method of
depreciation is used. It is simple to use and it is based on the principle that each period of the
asset life should depreciate equally. The value effect refers to the market differential response
to one alternate versus another.
4.2 Benefits of Life Cycle Cost
i. It ensures better decision from a more accurate and realistic assessment of

revenues and cost, at least within a particular life cycle stage.
ii. It results in earlier actions to generate revenue or to lower costs than otherwise
might be considered.
iii. It provides an overall framework for considering total incremental costs over
the life span of the product.
iv. It promotes long terms rewarding.
4.3 Stages and Characteristics of Life Cycle Cost
Stages Characteristics
Market introduction stage  Cost are very high
 Slow sales volumes to start
 Little or no competiton
 Demand has to be created
 Customers have to be prompted to
try the product
 Makes no money at this stage
Growth stage  Costs reduced due to economies of

scale
 Sales volume increases significantly
 Profitability begins to rise
 Public awareness increases
 Competition begins to increase with
a few new players in establishing
market
 Increased competition leads to price
decreases
Maturity stage  Costs are lowered as a result of

production volumes increasing and
experience curve effects
 Sales volume peaks and market
saturation is reached
 Increase in competitors entering the
market
 Industrial profits go down
Saturation and Decline stage  Costs become counter optimal

 Safes volume decline
4.4 Process of Life Cycle Cost
The determination of costs is an integral part of the asset management process and is a
common element of many of the asset manager’s tools, particularly Economic Appraisal,
Financial Appraisal, Value Management, Risk Management and Demand Management. Both
the capital and the ongoing operating and maintenance costs must be considered wherever
asset management decisions involving costs are made. This is the Life Cycle Cost approach.
Figure 4.1: Flowchart process of life cycle cost
All stages may be performed iteratively as needed. Assumptions made at each stage
should be rigorously documented to facilitate such iterations and to aid in interpretation of the
results of the analysis. LCC analysis is a multi-disciplinary activity. An analyst should be
familiar with the philosophy, which underlies Life Cycle Costing (including typical cost
elements, sources of cost data and financial principles), and should have a clear understanding
of the methods of assessing the uncertainties associated with cost estimation.
4.5 Life Cycle Cost Calculation
After identifying all costs by year and amount and discounting them to present value,
they are added to arrive at total life cycle costs for each alternative. Life cycle cost (LCC)
calculations are used as a tool to evaluate the different investment options for equipment.
Included in LCC calculations are the product’s combined costs during a specific period –
usually 10 years – which includes capital costs, operating costs, and service and maintenance
costs.
The LCC calculation is often implemented based on a planned installation, but is more
commonly performed on a working installation. The working installation may have several
older air compressors or compressed air equipment that is no longer capable of operating
efficiently. The LCC calculation defines the requirement level for the new installation.
However, it is right to point out that a LCC calculation is often only a qualified guess
with regard to future costs, and is limited because it is based on today’s knowledge of an
installation’s condition and energy prices. Neither does it bear in mind "soft" values that can
be just as important such as production and overall plant safety, nor subsequent costs related
to these values.
Figure 4.2: Formula to calculate life cycle cost

4.6 Example Calculation of Life Cycle Cost
REFERENCES
Ellis, Byron. (2007). Life Cycle Cost. The Jethro Project. (PDF) Life Cycle Cost. (n.d.).
ResearchGate. https://www.researchgate.net/publication/235636259_Life_Cycle_Cost
Life-Cycle Costing: Meaning, Benefits and Effects. (2015, May 13). Your Article Library.
https://www.yourarticlelibrary.com/accounting/costing/life-cycle-costing-meaning-
benefits-and-effects/53110
Andrew Manuel. (2012, October 24). Characterstics of product lifecycle stages.

https://www.slideshare.net/amanuel888/characterstics-of-product-lifecycle-stages
Developing and Using Life Cycle Cost Models. (n.d.). Systecon Group. Retrieved June 12,
2020, from https://www.systecongroup.com/us/course/developing-and-using-life-
cycle-cost-models
(2020). Plantservices.Com. https://www.plantservices.com/articles/2015/calculate-the-life-

cycle-cost-of-your-compressed-air-system/
Mearig, T., Architect, A., Morris, L., Morgan, M., & Coffee, N. (n.d.). Life Cycle Cost
Analysis Handbook State of Alaska -Department of Education & Early Development 2
nd Edition Finance & Support Services / Facilities 2018 State of Alaska -Department
of Education & Early Development 2 nd Edition Finance & Support Services /
Facilities 2018 CONTRIBUTORS. Retrieved June 12, 2020, from
https://education.alaska.gov/facilities/publications/LCCAHandbook.pdf

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4.0.

LIFE CYCLE COST

4.1 Meaning of The LCC

4.2 Benefits of Life Cycle Cost

i. It ensures better decision from a more accurate and realistic assessment of

Growth stage  Costs reduced due to economies of

Maturity stage  Costs are lowered as a result of

Saturation and Decline stage  Costs become counter optimal

Figure 4.1: Flowchart process of life cycle cost

Figure 4.2: Formula to calculate life cycle cost

Andrew Manuel. (2012, October 24). Characterstics of product lifecycle stages.

(2020). Plantservices.Com. https://www.plantservices.com/articles/2015/calculate-the-life-

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