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# Life cycle costing (sqm)

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Life Cycle Costing
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# Life cycle costing (sqm)

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### Life cycle costing (sqm)

1. 1. Life cycle costing Presented to Prof: Devdhar bhat.
2. 2. Group members Name Roll numbers Faizan Bhamla 04 Aabid Kalokhe 13 Zeeshan Khan 22 Mohsin Patel 31 Adil Shaikh 40
3. 3. What is Life cycle costing ?
4. 4. Why use LCC ? • Affordability studies • Source selection studies • Design trade-offs • Repair level analysis • Warranty and repair costs
5. 5. Limitations of LCC • LCC is not an exact science • LCC outputs are only estimates • LCC models require volumes of data • LCC estimates lack accuracy
6. 6. 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 cost Sustaining Acquisition cost cost
7. 7. Life Cycle Costing model LCC model is an accounting structure containing terms and factors which enable estimation of an assets component costs • The LCC model should: 1) Represent characteristics of the assets being analyzed. 2) It should be comprehensive 3) It should be easily understood
8. 8. THE LIFE CYCLE COSTING PROCESS
9. 9. 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.
10. 10. 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……
11. 11. 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……
12. 12. 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.
13. 13. 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.
14. 14. 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……
15. 15. 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……
16. 16. 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……
17. 17. 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
18. 18. 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.
19. 19. 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.
20. 20. EXAMPLE OF LIFE-CYCLE COST ANALYSIS
21. 21. 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.
22. 22. 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.
23. 23. Data collected Particulars 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
24. 24. 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.
25. 25. Solution Particulars 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
26. 26. 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.
27. 27. CONCLUSION.
28. 28. Thank you for your attention.