LIFE CYCLE COST (LCC) Analysis

Taufik Hamzah, Ir.,MSA.,MBA

CIVIL ENGINEERING DEPARTMENT
BANDUNG STATE POLYTECHNIC
 Life Cycle Cost (LCC)
 Lifecycle costing, LCC, is the process
of economic analysis to asses the
total cost of ownership of a product,
(in this case is BUILSING), including
its cost of construction, operation,
maintenance, conversion, and/or
decommission.
 Life Cycle Cost (LCC)

By using LCC, total cost of the

product can be calculated over
the total span of product life
cycle.
PRODUCT LIFE CYCLE……… ?
 TYPICAL LIFE EXPECTANCY OF BUILDING COMPONENT

Element Component Name Typical Life Expectancy (Years)

Frame Steel frame 83
Concrete frame 81
Timber frame 69
Laminated timber frame 65
Space frame 73
Upper Floors Profiled steel and reinforced concrete floor 71
Precast concrete slab 78
Timber joists 90
Softwood decking to timber joists 71
Chipboard decking to timber joists 51

SOURCES:
Costmodeling.com. Typical life expectancy of building components. [n.d.]
(http://www.costmodelling.com/downloads/BuildingComponentLifeExpectancy.pdf)
 Life Cycle Cost (LCC)
 LCC is a economic tool which
combines both engineering art and
science to make logical business
decision.
 This analysis provides important
inputs in the decision making process
in the product design, development
and use.
 LCC for product supplier
 By using LCC, product suppliers can
optimize their design by evaluation of
alternatives and by performing trade-
off studies.
 By using LCC, product suppliers can
evaluate various operating and
maintenance cost strategies (to assist
product users).
 LCC for customer
 By using LCC, customers can evaluate
and compare alternative products.
 By using LCC, customers can assess
economic viability of projects or
products.
 Why use LCC?
Typical conflict in most of the company:
 Project Engineering wants to minimize capital
costs as the only criteria,
 Maintenance Engineering wants to minimize
repair hours as the only criteria,
 Production wants to maximize operation hours
as the only criteria,
 Reliability Engineering wants to nullify failures
as the only criteria,
 Accounting wants to maximize project net
present value as the only criteria,
 Shareholders want to increase stockholder
wealth as the only criteria.
 Why use LCC?
 LCC can be used as a management
decision tool for synchronizing the
divisional conflicts by focusing on
facts, money, and time.
 WHY USE LCC?
 Why should engineers be concerned about
cost elements?
It is important for engineers to think like
managers and act like engineers for a
profit maximizing organization.

Money Does Matter!!!

 VALUE OF HUMAN CAPITAL
ENGINEERS; SCIENTISTS & BUSINESS EXECUTIVES
 ENGINEERS & SCIENTISTS WILL NEVER MAKE AS MUCH MONEY AS
BUSINESS EXECUTIVES.
 A RIGOROUS MATHEMATICAL PROOF THAT EXPLAINS WHY IS TRUE:
 POSTULATE 1: KNOWLEDGE IS POWER
 POSTULATE 2; TIME IS MONEY
 AS EVERY ENGINEER KNOWS> WORK / TIME = POWER
 SINCE KNOWLEDGE = POWER; TIME = MONEY
 WE HAVE > WORK / MONEY = KNOWLEDGE
 SOLVING FOR MONEY, WE GET:
 WORK / KNOWLEDGE = MONEY
 THUS, AS KNOWLEDGE APPROACHES TO ZERO,,, MONEY
APPROACHES INFINITY, REGARDLESS OF THE WORK DONE
 CONCLUSION: ………… ?
 THE LESS YOU KNOW, THE MORE MONEY YOU MAKE
 Cost element
 For an equipment, there are TWO cost
elements:
1) Initial Cost, and
2) Operation & Maintenance Cost

 The identification of cost elements and their

sub-division are based on the purpose and scope
of the LCC study.
 COST ELEMENT
 INITIAL COST / BIAYA AWAL :
 Soft Costs
 Design & development cost,
 Investment on asset, or cost of
equipment,
 Installation cost or construction &
commission cost.
 COST ELEMENT
 Operation
& Maintenance Cost /
BIAYA OPERASIONAL DAN
PERAWATAN:
– Labour cost,
– Energy cost,
– Spare & maintenance cost,
– Raw material cost.
 Computation
of
Life Cycle Cost Analysis
(Steps for LCCA)
LCC PROCEDURE
How to Perform an LCC Analysis
 Identify alternatives
 Specify data requirements and establish
assumptions
 Estimate costs in dollars or Rupiahs
 Adjust costs for time value of money
 Compute total LCC for each alternative
 Select alternative with lowest LCC
 Compute supplementary measures
 Consider uncertainty in input values
 Steps for computation of LCC
 Step 1: Determine time for each cost
element,
 Step 2: Estimate value of each cost element,
 Step 3: Calculate Net Present Value of each
element, for every year (over its time
period),
 Step 4: Calculate LCC by adding all cost
element, at every year,
 Step 5: Analyze the results.
Step 1: Determination of time
–Determination of life cycle of the
product (i.e. equipment, in this
case).
This Life cycle is not similar to conventional
concept of Product Life Cycle.
Conventional concept of Product Life Cycle
implies to the time span based on demand of
the product in the market, starting from
launch of the product up to the time when
company withdraw the product from the
market. That is purely a marketing concept.
To be continued……
Step 1: Determination of time
– In LCC analysis of an equipment, life cycle
means the life of the product that is installed in
the plant, i.e. productive life time of the
product.
– The product supplier provides the life cycle
depending on design calculation and
experience.
– Based on supplier’s data, customer decides the
Life Cycle, i.e. how long he/ she wants to use
the machine. Customer considers the effect of
available maintenance facility, technological
obsolescence and economic uncertainty factor,
also.
To be continued……
Step 1: Determination of time
– After that, company decides the time
span for each component.
– Example, say, a company decides that
total life cycle of the product will be 10
years from the allocation the fund,
among which first one year will be
initial cost zone and remaining 9
years will be under operation and
maintenance cost zone.
Step 2: Estimation of value
– Estimate monetary value for each cost
element.
– This estimated value will be incurred in
every year. This value is basically
future income at each year, which
is estimated.
– To estimate the value, various source
can be used; e.g. calculation based on
facts and experience, MIS report for
similar existing machines, etc.
Step 3: Net Present Value

–Money has a time value.

–The present value of future
income or future cost can be
calculated by using discounting
factor and inflation factor.

To be continued……
 Step 3: Net Present Value
 Discount factor
– The discount rate is an interest rate, a
central bank charges depository
institutions that borrow reserves from it.
– For example, let's say Mr. Ram expects Rs. 1,000
in one year's time. To determine the present
value of this Rs. 1,000 Ram would need to
discount it by a particular rate of interest (often
the risk-free rate but not always). Assuming a
discount rate of 10%, the Rs. 1,000 in a year's
time would be equivalent of Rs. 909.09 to Ram
today (i.e. 1000/[1+0.10]). To be continued……
 Step 3: Net Present Value
 Inflation factor
– The inflation rate is the percentage by
which prices of goods and services rise
beyond their average levels. It is the rate
by which the purchasing power of the
people in a particular geography has
declined in a specified period.

To be continued……
 Step 3: Net Present Value
 Formula for Net Present Value (NPV)

C (1+i/100) (n-1)
PV= ----------------------
(1+d/100) n
where,
C = any cost element at nth year
i = inflation rate
d = discount rate/ interest rate
 Step 4: Summation of PVs
 PVs of each cost elements is calculated for
an equipment (at every year).
 PVs of each cost element in a year are
added.
 The process is done for every year over the
life cycle, i.e. LCC is calculated for every
year.
 Step 5: Analysis
 The datas collected from LCC are analyzed.
 If one product has to be selected among
multiple equipments, then LCC is calculated
for every product.
 Datas for every product are analyzed, and
the lowest LCC option become preferred.
 But lowest LCC option may not necessarily
be implemented when other considerations
such as risk, available budgets, political
and environmental concerns are taken
into account.
 An important reminder…..

 LCC provides critical

information to the overall
decision-making process, but
not the final answer.
 Estimation
of
Life Cycle Cost
With a typical case study!
CASE STUDY:
1- BLDG MAINTENANCE (PEMELIHARAAN
BANGUNAN) tentukan sbg tugas

2- FOUNDRY SHOP (BENGKEL PENGECORAN

LOGAM)
 CASE STUDY-2
 A highly productive foundry shop has
one sophisticated robot operated core
making machine (made in Italy).
 Due to increase of demand for its
casting, the foundry shop wants to
install one new core making
machine.
 For new machine, there are two options:
1. Similar sophisticated robotic machine, or
2. Semi-automated machine.
 Option 1
 Initial cost
Value
Sl. Cost Element (in IDR, Time Remarks
No. million)/ phase
year

1 Design & development - - Bought out item

(D)

2 Investment on asset 59.4 0-1 year

(A)

3 Installation 0.6 0-1 year 1% of asset cost

(I)
 Option 1
 Initial cost (IC)
Computation of PV of IC
D(1+i/100) (n-1) A(1+i/100) (n-1) I(1+i/100) (n-1)
PV= ------------------------ + ---------------------- + -----------------------
(1+d/100) n (1+d/100) n (1+d/100) n

NOTE:
n is the year on which PV will be calculated, here n=1 year, only
Interest rate, d=8%
Inflation rate, i=5%
0(1+5/100) 0 59.4(1+5/100) 0 0.06(1+5/100) 0
PV= ----------------------- + ------------------------ + ---------------------
(1+8/100) 1 (1+8/100) 1 (1+8/100) 1

From calculation, PV of IC = 55.5 million IDR

 Option 1
 Operation & Maintenance Cost
Value (in
Sl. Cost Element IDR, Time Remarks
million)/
No. year phase
1 Labour (L) 0.3 2-10 4 workers @ 3
year shifts
2 Energy (E) 4 2-10 MIS report of
year existing
equipment, as
3 Spare & maintenance 2.6 2-10
new
(S) year
equipment is
4 Raw material (M) 27.7 2-10 identical
year
 Option 1
 Operation & Maintenance cost (OC)
Computation of PV of OC
Total OC= L+E+S+M=34.6 Million INR
PV of OC at nth year,
OC(1+i/100) (n-1)
PV = ------------------------
(1+d/100) n
Cumulative value of OC after nth year (in terms of PV)
OC(1+i/100) (n-1)
= Ʃ ------------------------
(1+d/100) n
PV of OC and cumulative OC at different year to be
calculated by using this formula.
LEARNING BY DOING
FINISH THE ESTIMATION FOR THE WHOLE
PERIOD (n) first year for Instalment, the
rest (2-9) is for OPM

Discounting Factor (DF) : 1/(1+d/100)n

Inflation Factor (IF) : (1+i/100)n-1
 Option 1
 TABLE 1 COMPUTATION OF LCC
Operation & Maintenance cost (OC)
Future
Time Discounting Inflation OC at nth PV of any Total PV Initial
Period factor factor year year incurred Cost (IC) Total LCC
nth Million Million
year 1/(1+8/100)n (1+5/100)n-1 IDR Million IDR Million IDR IDR Million IDR
F=E+ last
A B C D E=DXBXC year's F G H=G+F
1 - - - - - 55.50 55.50
2 0.86 1.05 34.60 31.15 31.15 55.50 86.65
3 0.79 1.10 34.60 30.28 61.43 55.50 116.93
4 0.74 1.16 34.60 29.44 90.87 55.50 146.37
5 0.68 1.22 34.60 28.62 119.49 55.50 174.99
6 0.63 1.28 34.60 27.83 147.32 55.50 202.82
7 0.58 1.34 34.60 27.05 174.38 55.50 229.88
8 0.54 1.41 34.60 26.30 200.68 55.50 256.18
9 0.50 1.48 34.60 25.57 226.25 55.50 281.75
10 0.46 1.55 34.60 24.86 251.11 55.50 306.61
 Option 1
 Computation of LCC
In the previous calculation, expected future
values of Operation & Maintennce Costs
(OC) at all the years were same, i.e. 34.6
Million IDR.
This expected value can be different for
different years, too.
 Option 2
 Differentcost element for option 2
(i.e. Semi-automated machine)
has been estimated and final
calculation for LCC has been done.
 Option 2
 TABLE 2 COMPUTATION OF LCC
Operation & Maintenance cost (OC)

Future
Time Discounting Inflation OC at PV of any Total PV Initial
Period factor factor nth year year incurred Cost (IC) Total LCC
nth Million Million
year 1/(1+8/100)n (1+5/100)n-1 IDR Million IDR Million IDR IDR Million IDR
F=E+ last
A B C D E=DXBXC year's F G H=G+F
1 - - - - - 42.00 42.00
2 0.86 1.05 50.00 45.01 45.01 42.00 87.01
3 0.79 1.10 50.00 43.76 88.77 42.00 130.77
4 0.74 1.16 50.00 42.54 131.31 42.00 173.31
5 0.68 1.22 50.00 41.36 172.68 42.00 214.68
6 0.63 1.28 50.00 40.21 212.89 42.00 254.89
7 0.58 1.34 50.00 39.10 251.99 42.00 293.99
8 0.54 1.41 50.00 38.01 290.00 42.00 332.00
9 0.50 1.48 50.00 36.95 326.95 42.00 368.95
10 0.46 1.55 50.00 35.93 362.88 42.00 404.88
 Analysis
Life Cycle Cost Analysis

450
400 Option 1:
LCC (INR, in Million)

350 Robotic M/c

300
250
200 Option 2:
Semi-Auto M/c
150
100
50
0
1 2 3 4 5 6 7 8 9 10
Time (Year)
 Analysis
 The analysis shows:
– Initial cost of semi-automated machine is
lower.
– But, the long term LCC is much lower for
Robotic machine.
 Considering LCCA, the robotic machine
is preferred compared to the semi-
automated machine, for this particular
application.
 Capital Budgeting & LCC

 LCC is one of the important tool for capital

budgeting.
 Economist Joel Dean has suggested that,
capital expenditure should be defined in
terms of economic behaviour rather than
in terms of accounting convention.
 LCC is one of the useful tool which
enables investors to analyze investment in
terms of economic behaviour.