Phase 4

Analysis Judicial Phase: Analysis/Development

Key Question

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Select top-ranked ideas (normally 8 and above).

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What is cost impact of ideas?

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Consider cost of ownership.

Technique

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A Life Cycle Cost

Life Cycle Costing

Form WS-13, the LCC summary, summarizes all the life cycle cost. The present worth costs should

be entered in the appropriates space for each design alternative.

The following general instructions for performing the LCC apply:

1.

For initial costs, the present-worth factor always equals 1. Therefore, the estimated cost and

the present worth are the same and should be so entered.

2.

To obtain the present worth of each salvage & replacement cost, refer to Table 4, using

the column with the corresponding discount rate. By knowing the building and item life, select

the correct factor. Multiply this factor by the estimated replacement cost and enter the value in

the present-worth column. For example, a replacement cost of $10,000 equivalent to today's

buying power is estimated to occur at the 16th year. The PW factor is 0.2176 at a 10%

interest rate; therefore, the PW of this cost is $2,180.

3.

Before the estimated annual cost is converted to present worth, determine if a differential

escalation rate is appropriate. Differential escalation rate is the difference one estimates the

item will escalate in relation to the devaluation of the currency. For example, if the

forecast is that energy will, over a 20-year period, escalate an average of 5%/year, and

devaluation of the dollar ($) is estimated at 3%/year, the differential rate would be 2%.

Refer to Table 1, "Present Worth of an Escalation Annual Amount", using a 10% interest factor

as recommended by the U.S. Office of Management and Budget. The value PWA escalated

for 2% differential over 20 years is 9.934 vs 8.51 for the nonescalated value. If a

differential escalation rate is not necessary, refer to Table 2, "Present Worth of Annuity", for

conversion of an annual cost to present worth. By knowing the building life, select the correct

factor. Multiply this factor by the estimated annual expenditure. Enter the computed amount

in the present-worth column.

For example, the table indicates that, assuming an annual cost of $1 per year at 10 percent

interest, nonescalating (0%), the present worth of a 20-year cycle is $8.51.

4.

Calculate the difference between the original design and the design alternative's life cycle costs.

Enter this figure at the bottom of the form.

5.

Attached is Example WS 13 illustrating a typical LCC.