This document discusses life cycle costing (LCC), which is an accounting method used to estimate total costs of owning an asset over its entire life. It explains that LCC can be used for affordability studies, source selection, design tradeoffs, and more. The key steps of LCC are defined as determining the time period for costs, estimating costs, calculating net present values, summing costs annually, and analyzing results. An example LCC analysis is provided comparing costs of owning four different cars over four years to demonstrate how LCC can identify the most economical option.

1. Life cycle costing
Presented to Prof: Devdhar bhat.

2. Group members
Name Roll numbers
Faizan Bhamla 04
Aabid Kalokhe 13
Zeeshan Khan 22
Mohsin Patel 31
Adil Shaikh 40

3. What is Life cycle costing ?

4. Why use LCC ?
• Affordability studies
• Source selection studies
• Design trade-offs
• Repair level analysis
• Warranty and repair costs

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. 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

9. 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

10. THE LIFE CYCLE COSTING PROCESS

11. 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.

12. 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……

13. 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……

14. 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.

15. 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.

16. 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……

17. 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……

18. 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……

19. 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

20. 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.

21. 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.

22. EXAMPLE OF LIFE-CYCLE COST
ANALYSIS

23. 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.

24. 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.

25. 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

26. 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.

27. 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

28. 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.

29. CONCLUSION.

30. Thank you for your attention.