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1. Project Engineering wants to minimize capital costs as the only criteria,2. Maintenance Engineering wants to minimize repair hours as the only criteria,3. Production wants to maximize uptime hours as the only criteria,4. Reliability Engineering wants to avoid failures as the only criteria,5. Accounting wants to maximize project net present value as the only criteria, and6. Shareholders want to increase stockholder wealth as the only criteria. LCC can be used as a decision tool for harmonizing the never ending conflicts by focusing on facts, money and time.
A discount rate must represent the cost of capital and a reasonable opportunity cost.
Future Investments: 1. One time investments occurring after the start of the analysis period.2. Non-Annual maintenance or repair.3. Major alterations to initial investment work
Indirect costs can be quantified by using appropriate standards, as in India IRC: SP:30-2009 provides guidelines to estimate the indirect costs.
In deterministic methods, all the input values are given a discrete fixed value and any type ofuncertainty is ignored in determining the Life Cycle Cost.
the probabilistic distribution assigned to each variable provides aclearer and more descriptive picture of associated outcomes.Here, Monte Carlo simulation is used
Life cycle cost analysis
Life Cycle Cost Analysis Ankur Bansal 09010408Footer Text 11/2/2012 1
Life Cycle Cost (LCC) Life-cycle cost analysis is aprocess for evaluating the total economic worth of a usable project segment by analysing initial costs and discounted future costs.Footer Text 11/2/2012 2
Why Use LCC? Project Maintenance Engineering Engineering Shareholders Production Reliability Accounting EngineeringFooter Text 11/2/2012 3
Key Parameters used in calculating Life Cycle Cost• Time Value of Money1. Rate of Return2. Inflation• Opportunity Cost• Discount Rate• AnalysisFooter Text 11/2/2012 4
Steps to determine life cycle costs:• Establish alternative design strategies.• Determine activity timing.• Estimate agency costs.• Estimate user costs.• Determine life-cycle cost.Footer Text 11/2/2012 5
Calculation of Life Cycle CostDeterministic• An Exact Cost is DeterminedProbabilistic• A range of Values is determined with a specific probability distribution.Footer Text 11/2/2012 8
Steps Involved• Step 1-Identify what has to be analysed and the time period for the project life study along with the appropriate financial criteria.• Step 2-Focus on the technical features by way of the economic consequences to look for alternative solutions.• Step 3-Develop the cost details by year• Step 4-Select the appropriate cost model, simple discrete, simple with some variability for repairs and replacements, complex with random variations, etc. required by project complexity.• Step 5-Cost details are acquired.• Step 6-Yearly cost profiles are found. Footer Text 11/2/2012 9
Deterministic Approach• Fixed discrete values are assigned to various parameters and any type of uncertainties are ignored• LCC calculated is fixed valueFooter Text 11/2/2012 10
Probabilistic Approach• Cost parameters are assigned with some appropriate probability distribution.• Random numbers are generated• These random numbers are used to calculate the LCCFooter Text 11/2/2012 11
Sensitivity Analysis• A sensitivity analysis is performed to understand what variables make the largest difference in the final result.• We can identify the model variables that have a significant influence on model results and/or determine break- even points that alter the ranking of considered options.Footer Text 11/2/2012 12
Risk Analysis• Risk analysis helps to estimate the levels of risk and uncertainty within final economic decision measures such as BCR and NPV, from uncertainty in the key input variables feeding into the project evaluation process. By estimating the riskiness aspect of these summary measures, a more realistic comparison of project returns can be obtained Footer Text 11/2/2012 13