Definition of Life cycle cost analysis

Overview 

Life Cycle Costing (LCC) is one of the most important economic analysis that is employed to choose such alternatives that impact both pending and future costs. It helps to compare initial investment options and identifies the least cost alternatives for twenty years. 

Definition Of Life Cycle Cost Analysis 

The term “Life cycle cost analysis” refers to a review process where the total cost of ownership of an asset is assessed over the lifetime. Several costs are involved throughout an asset’s life. For instance:

• design and building cost
• operating cost
• construction and acquisition
• financial costs
• depreciation
• disposal or replacement cost
• the social and environmental cost 

In other words, life cycle cost analysis can be defined as a methodology for the systematic economic consideration of all the calculations of whole life costs and benefits throughout analysis. 

What Is The Purpose Of Life Cycle Cost Analysis? 

LCCA or Life Cycle Cost Analysis is employed to: 

• get a clear idea of the overall costs of project alternatives
• to choose a design that ensures the facility will provide the lowest overall cost of ownership while offering consistent quality and function. 

It is advisable that LCCA is performed early in the design process. That’s because it’s better to make amendments in the design at that point in time. This further indicates one can ensure a reduction in life-cycle costs (LCC). 

How does Life Cycle Cost Analysis Work? 

The factor that has an influential impact on Life cycle cost analysis is, the whole building, sub-elemental, component level and discounted and present day value (NPV). 

The practical application of Life cycle cost analysis allows both companies and consumer to have flare awareness of the factor that can affect the cost and resources required by them for building. 

The techniques of Life cycle cost analysis is not designated to predict the accurate cost of occupying and operating, but it ensures that it comes up with economic judgments between alternative technical solutions. 

The method of Life cycle cost analysis should implement on different stages while the design progresses, the actual manufacturing cost and life expectancy data can be calculated through this method. 

How To Use Life Cycle Costing? 

As you already know, life cycle costing plays a crucial role in any financial decision that a business is supposed to make. It helps a business to make better predictions about how much it will be paying when it acquires a new asset. 

In order to calculate an asset’s life cycle cost, an estimation of the following expenses needs to be made: 

• Purchase
• Installation
• Operating
• Maintenance
• Financing (e.g., interest)
• Depreciation
• Disposal 

Once you’ve made an estimation for all the costs mentioned above, it’s time to add up the expenses for each stage of the life cycle to know your total. 

What Are The Approaches In Which Life-Cycle Cost Can Be Conducted? 

Various approaches can be employed to conduct life-cycle cost. However, the most effective one is to integrate it into the design process. Life- cycle cost, evolves from general concepts to detailed analysis paralleling the focus to the current level of detail study. 

For a project to be successful, it is imperative that commitments are made and retained during the Conceptual Phase. Likewise, the structure frameworks ought to be broken down for appropriateness amid the primary phases of the Design Development Phase. A responsibility on course for the frameworks should be set aside a few minutes, and any further LCC concentrates concentrated on detail inside every framework. 

Differentiate Between Deterministic And Probabilistic Method 

Now that we have covered the basics of LCC, let us talk about two of the most common methods, i.e. “deterministic” and “probabilistic”. 

• Deterministic: 

This kind of approach suggests that all the data be known beforehand such that once you start the system, you have a clear idea of what is about to happen in the future. 

Example: 

One of the best examples of the deterministic method can be the prediction of the amount of money in a bank account. In this case, if you have a clear idea of the initial deposit and the interest rate, then you can easily figure out the amount in the account after two years. 

• Probabilistic: 

In this method, the element of chance is involved such that you have an idea that something is going to happen, but you are not quite sure about the time when it is going to happen. 

Example: 

Roll a die until ‘3’ pops up. Know that each time you roll the die,  there’s a probability (1/6) that ‘3’ will come up. Don’t know exactly when, but we can predict well. 

So, these were the basics of life-cycle cost. For the students pursuing a higher degree in marketing, concepts need to be studied in detail. This is needed in order to score well in exams and also to get top grades on assignments. This calls for a requirement of solid resources for appropriate guidance. Some of these resources are books written by top experts. For instance: 

• Book 1:

Whole life Costing for Water Distribution Network Management By Peter J. Skipworth (published by Thomas Telford, 2002) 

• Book 2:

Whole Life Costing: A New Approach By Peter Caplehorn (published by Routledge, 2012) 

Apart from this, students can refer to online resources or simply connect with a reliable assignment help service like Myassignmenthelp.com. 

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References: 

• (https://www.wbdg.org/resources/life-cycle-cost-analysis-lcca)
• (https://information.mcgsol.com/calculate-life-cycle-cost-of-equipment)
• (https://www.gsa.gov/node/81412)
• (https://www.patriotsoftware.com/accounting/training/blog/life-cycle-costing-process/)