Life Cycle Cost Analysis

Life Cycle CostBy: Huzaifa Sajid27-May-141College Of Electrical And Mechanical Engineering, NUST, PakistanA Case Study Of Light Bulbs1Life Cycle Costing (LCC)Life cycle costing, LCC, is the process of economic analysis to asses the total cost of ownership of a product, including its cost of installation, operation, maintenance, conversion, and/or decommission.27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan22Why Use LCC?27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan33Why Use LCC?27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan4ShareholdersProductionIndustry4Why Use LCC?27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan5Project Engineering wants to minimize capital costs as the only criteriaMaintenance Engineering wants to minimize repair hoursProduction wants to maximize uptime hoursReliability Engineering wants to avoid failuresAccounting wants to maximize project net present valueShareholders want to increase stockholder wealth5Why Use LCC?27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan6LCC can be used as a management decision tool for synchronizing the divisional conflicts by focusing on facts, money, and time.6Life Cycle Cost Calculation Approaches27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan7727-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan88Deterministic ApproachFixed discrete values are assigned to various parameters and any type of uncertainties are ignoredLCC calculated is fixed value27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan99Probabilistic ApproachCost parameters are assigned with some appropriate probability distribution.Random numbers are generated These random numbers are used to calculate the LCC 27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan1010Calculating the totalLife Cycle Cost27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan1111Costs Involved27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan12Initial Cost (Cic)Delivery and Installation Costs (Cinst)Energy Cost (Ce)Operational cost (Co)Maintenance Cost (Cm)Downtime Costs (Cs)Decommissioning/disposal costs (Cd) FormulaLCC = Cic + Cinst + Ce + Co + Cm + Cs + Cd12Case Study of a light bulb27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan1313Case Study of a light bulb27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan

14Suppose there is a company which wants to buy light bulb for one of its offices. And they want the bulb to work for 10,000 hours.

Now there are two possibilities for the company.1) to buy 100 watt incandescent bulb.2) to buy 25 watt compact fluorescent bulb.

Now the task for the economist is to calculate the LCC of both alternatives and decide which one is better for the company.14Case Study of a light bulb27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan15The costs of a light bulb can be divided into two main categories

Initial cost2)Operational and maintenance costs15LCC for incandescent bulb27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan16Initial cost:

Cost of one bulb:Rs 35Life expectancy of one bulb:1,000 hours# of bulbs needed to burn for10,000 hours:10Total Payment to light the bulb for 10,000 hours:Rs 35016LCC for incandescent bulb27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan17Operational and maintenance cost:

Hours required to use one kilowatt of electricity for a 100 watt bulb: (1,000 100) = 10 hours

kWh of electricity in 10,000 hours:(10,000 # of hours) = 1,000 kWh

Total cost of electricity used:(supposing that 1 kWh costs Rs 160):(160 x 1,000) = Rs 16,00017LCC for compact fluorescent bulb27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan18Initial cost:

Cost of one bulb:Rs 1500Life expectancy of one bulb:10,000 hours# of bulbs needed to burn for10,000 hours:1Total Payment to light the bulb for 10,000 hours:Rs 1,50018LCC for compact fluorescent bulb27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan19Operational and maintenance cost:

Hours required to use one kilowatt of electricity for a 25 watt bulb: (1,000 25) = 40 hours

kWh of electricity in 10,000 hours:(10,000 # of hours) = 250 kWh

Total cost of electricity used:(supposing that 1 kWh costs Rs 160):(160 x 250) = Rs 4,00019LCC of both alternatives27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan20LCC = initial cost + operational and maintenance cost

AlternativeInitial CostOperational and maintenance costLCCIncandescent BulbRs 350Rs 16,000Rs 16,350Compact Fluorescent BulbRs 1,500Rs 4,000Rs 5,50020

Analysis27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan21It can be seen from the calculations, that the operation and maintenance costs of the bulbs are far more that their initial costs21

Analysis27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan22The analysis shows:initial cost of incandescent bulb machine is much lower.But, the long term LCC is much lower for compact fluorescent bulb.

22Conclusion27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan23Hence a good economist would prefer compact fluorescent bulb for his company to buy for long term use because it would prove to be more economic in long run.The compact fluorescent bulb is Rs 10,850 less expensive over its life than the Incandescent bulb.23References27-May-14College Of Electrical And Mechanical Engineering, NUST, Pakistan24http://en.wikipedia.org/wiki/Life_cycle_cost_analysis

http://www.coned.com/KIDS/pdf/coned_lightbulbs.pdf

http://www.slideshare.net/ankurbansal177/life-cycle-cost-analysis-15005487?qid=86718d3c-0adf-4ca3-b85a-8b158d429568&v=qf1&b=&from_search=4

http://www.slideshare.net/nirjhar_jgec/life-cycle-cost-analysis?qid=86718d3c-0adf-4ca3-b85a-8b158d429568&v=qf1&b=&from_search=124