life cycle costing (sqm)

Life cycle costing

Presented to Prof: Devdhar bhat.

Group membersName Roll numbers

Faizan Bhamla 04

Aabid Kalokhe 13

Zeeshan Khan 22

Mohsin Patel 31

Adil Shaikh 40

What is Life cycle costing ?

Why use LCC ?

• Affordability studies• Source selection studies• Design trade-offs• Repair level analysis• Warranty and repair costs

Limitations of LCC

• LCC is not an exact science• LCC outputs are only estimates• LCC models require volumes of data• LCC estimates lack accuracy

Life cycle cost

Acquisition cost

Sustaining cost

Life cycle costing Research and Development Production and Construction Investment Operations Personnel, Training, Facilities etc. Maintenance Preventive maintenance Corrective repairs Repair parts Support Transportation, Tools, Modifications etc. Termination

Life Cycle Costing model

• The LCC model should:

1) Represent characteristics of the assets being analyzed.

2) It should be comprehensive

3) It should be easily understood

LCC model is an accounting structure containing terms and factors which enable estimation of an assets component costs

THE LIFE CYCLE COSTING PROCESS

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.


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.



• 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]).



• 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.



• Formula for Net Present Value (NPV)

C (1+i/100) (n-1)

PV= ----------------------- (1+d/100) n

where,C = any cost element at nth yearI = inflation rated = 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.

EXAMPLE OF LIFE-CYCLE COST ANALYSIS

Definition of Scope

• Buyer wants to purchase an automobile.• Buyer has sufficient funds to purchase an

automobile up to $25,000.• Definitive features are miles per gallon,

estimated salvage value, costs of licenses and inspections, insurance, and estimated maintenance costs.

Assumptions

• All money is spent at the end of a year for a given year.• Buyer will trade the car in after four years.• All models use the same grade of gasoline at $1.25 per

gallon.• The user drives 22,000 miles per year.• Discount rate is 10 percent.• Prices escalate 4 percent per year.• Insurance costs escalate 3 percent per year.• Salvage value is in dollars at the time of salvage.

Data collectedParticulars Car A Car B Car C Car D

Purchase price $17,000 $24,000 $13,000 $11,000

fuel usage(miles per gallon) 24 26 15 18

Average Maintenance cost 250 free 350 125

salvage value 8000 14000 5000 3200

Insurance/Year $950 $1,350 $800 $700

Miles Between Tune ups 5000 5000 10000 75000

Other data

• initial cost of $800 is estimated to remedy some problems for Car C.

• Installation cost of natural gas system is $3,200 for Car D.

SolutionParticulars Car A Car B Car C Car D

Initial cost $17,000 $24,000 $13,000 $14,200

Salvage ($6,010) ($10,518) ($3,757) ($3,381)

Total Annual Costs (4 Yrs) $11,595 $8,805 $12,243 $8,489

TOTAL $22,585 $22,287 $21,486 $19,308

From this LCC analysis, Car D is the most economical for the buyer. From this simplified LCC analysis its benefits and purpose can be recognized.

CONCLUSION.

Thank you for your attention.

life cycle costing (sqm)

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