Life Cycle Costing

Group 3: Abhishek(02), Nikesh(23), Rittvik(32), Rohan(33), Rohit(34), Vinayak(56)

Agenda
Introduction Uses of LCC Advantages of LCC Steps in calculating LCC A case study Disadvantages of LCC Conclusion

Life Cycle Cost (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.

Life Cycle Cost (LCC)

By using LCC, total cost of the product can be calculated over the total span of product life cycle.

Life Cycle Cost (LCC)

LCC is a economic tool which combines both engineering art and science to make logical business decision. This analysis provides important inputs in the decision making process in the product design, development and use.

LCC for product supplier

By using LCC, product suppliers can optimize their design by evaluation of alternatives and by performing trade-off studies. By using LCC, product suppliers can evaluate various operating and maintenance cost strategies (to assist product users).

LCC for customer

By using LCC, customers can evaluate and compare alternative products. By using LCC, customers can assess economic viability of projects or products.

Uses of LCC
Why Use LCC? Project Engineering - to minimize capital costs Maintenance Engineering - to minimize repair hours Production - to maximize uptime hours Reliability Engineering - to avoid failures Accounting - to maximize project net present value Shareholders - to increase stockholder value

Uses of LCC contd

Management Related
Project Planning & Development Comparison of Competing Projects Comparison of Logistic concepts Decisions About Replacing Aging Equipment Selection Between Competing Contractors

Design Related
Production and construction cost Operation and support cost Retirement and disposal cost

Advantages of LLC
Useful to control programs Tool for making selection among competing contractors For comparing the cost of competing projects Useful in reducing total cost Take decisions associated with equipment replacement, planning and budgeting Expose areas of uncertainty and quantify the risk Improved rehabilitation strategies Support for overcoming the first cost limitations.

Drawbacks of LLC
Costly and Time consuming Cannot compare design alternatives that have different benefits (e.g., reconstruct road vs. reconstruct road with widening) Cannot, of itself, answer question of whether an improvement is worth pursuing (i.e. the project has a positive net present value) Accuracy of data is doubtful Obtaining data for analysis is difficult

Important factors associated with LLC

The management plays an important role in making the effort worthwhile Both manufacturer and user are required to organize effectively to control cost LLC is gaining importance as technique for strategic decisions, design optimization and detail trade off studies Throughout the life of program, tradeoffs between life cycle cost, performance and design to cost must be performed.

LCC Process
Stage 1: Plan LCC Analysis
define the analysis objectives scope of the analysis Identify any underlying conditions, assumptions, limitations and constraints Provide an estimate of resources required and a reporting schedule for the analysis

Stage 2: Select/Develop LCC Model

create or adopt a cost breakdown structure (CBS) select a method for estimating the cost associated with each cost element determine the data required to develop these estimates integrate the individual cost elements into a unified LCC model

LCC Process
Stage 3: Apply LCC Model
obtain data and develop cost estimates obtain the LCC model results review LCC outputs against the objectives defined in the analysis plan

Stage 4: Document and Review LCC Results Stage 6: Implement and Monitor Life Cost Analysis
continuous monitoring of the actual performance of an asset identify areas in which cost savings may be made and provide feedback

LCC methodology
Total life cycle cost (LCC) = Initial asset acquisition or capital costs (AC) - Tax depreciation entitlements (TD) + Operating and maintenance costs (OC) Plus + Replacement / disposal / upgrade costs (RC) - Residual / salvage value (RV) Typical LCC = (AC - TD) + (OC + RC) - RV

LCC methodology
To compute the life cycle costs of a system, the following straightforward equation is frequently used LCC = Kaq + Ko + Kd Where, LCC Kaq Ko Kd

- Life Cycle Cost - Cost of Acquisition Phase - The cost of operation Phase - The cost of disposal

Case Study
A highly productive foundry shop has one sophisticated robot operated core making machine. Due to increase of demand for its casting, the foundry shop wants to install one new core making machine. For new machine, there are two options: 1. Similar sophisticated robotic machine, or 2. Semi-automated machine.

Option 1
Initial cost
No

Cost Element

Value Time (in INR, phase million)/ year

Remarks

1 2 3

Design & development (D) Investment on asset (A) Installation (I)

59.4 0.6

0-1 year 0-1 year

Bought out item

1% of asset cost

Option 1
Initial cost (IC)

Computation of PV of IC
D(1+i/100) (n-1) A(1+i/100) (n-1) I(1+i/100) (n-1) PV= ------------------------ + ---------------------- + ----------------------(1+d/100) n (1+d/100) n (1+d/100) n n is the year on which PV will be calculated, here n=1 year, only

Interest rate, d=8% Inflation rate, i=5%

0(1+5/100) 0 59.4(1+5/100) 0 0.06(1+5/100) 0 PV= ----------------------- + ------------------------ + --------------------(1+8/100) 1 (1+8/100) 1 (1+8/100) 1

From calculation, PV of IC = 55.5 million INR

Option 1
Operation & Maintenance Cost
Sl. No . 1 2 3 4 Cost Element
(in INR, million)/ year

Value

Time phase 2-10 year 2-10 year 2-10 year 2-10 year

Remarks

Labour (L) Energy (E) Spare & maintenance (S) Raw material (M)

0.3 4 2.6 27.7

4 workers @ 3 shifts MIS report of existing equipment, as new equipment is identical

Option 1
Operation & Maintenance cost (OC)
Computation of PV of OC Total OC= L+E+S+M=34.6 Million INR PV of OC at nth year,
OC(1+i/100) (n-1) PV= -----------------------(1+d/100) n

Cumulative value of OC after nth year (in terms of PV)

=
OC(1+i/100) (n-1) -----------------------(1+d/100) n

PV of OC and cumulative OC at different year to be calculated by using this formula.

Option 1
COMPUTATION OF LCC: TABLE 1
Operation & Maintenance cost (OC) Time Period nth year A 1 2 3 4 5 6 7 8 9 Discounting factor 1/(1+8/100)n B 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50 Inflation factor (1+5/100)n-1 C 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 Future OC at nth year Million INR D 34.60 34.60 34.60 34.60 34.60 34.60 34.60 34.60 PV of any year Million INR E=DxBxC 31.15 30.28 29.44 28.62 27.83 27.05 26.30 25.57 Total PV incurred Million INR F=E+ last year's F 31.15 61.43 90.87 119.49 147.32 174.38 200.68 226.25 Initial Cost (IC) Million INR G 55.50 55.50 55.50 55.50 55.50 55.50 55.50 55.50 55.50

Total LCC Million INR H=G+F 55.50 86.65 116.93 146.37 174.99 202.82 229.88 256.18 281.75

10

0.46

1.55

34.60

24.86

251.11

55.50

306.61

Option 2
Different cost element for option 2 (i.e. Semi-automated machine) has been estimated and final calculation for LCC has been done.

Option 2
COMPUTATION OF LCC: TABLE 2
Operation & Maintenance cost (OC) Time Period nth year A 1 2 3 4 5 6 7 8 9 Discounting factor 1/(1+8/100)n B 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50 Inflation factor (1+5/100)n-1 C 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 Future OC at nth year Million INR D 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 PV of any year Million INR E=DXBXC 45.01 43.76 42.54 41.36 40.21 39.10 38.01 36.95 Total PV incurred Million INR F=E+ last year's F 45.01 88.77 131.31 172.68 212.89 251.99 290.00 326.95 Initial Cost (IC) Million INR G 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00

Total LCC Million INR H=G+F 42.00 87.01 130.77 173.31 214.68 254.89 293.99 332.00 368.95

10

0.46

1.55

50.00

35.93

362.88

42.00

404.88

Analysis
Life Cycle Cost Analysis 450 400
LCC (INR, in Million)

350 300 250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Time (Year)

Option 1: Robotic M/c

Option 2: Semi-Auto M/c

Analysis
The analysis shows:
initial cost of semi-automated machine is lower. But, the long term LCC is much lower for Robotic machine.

Considering LCCA, the robotic machine is preferred compared to the semiautomated machine, for this particular application.

Limitations of LLC
There are two major limitations: If the estimated project life is too long, which often happens because of new technology replacing obsolete technology, then more is probably invested in the original project than is justified. Developing a model to describe the operating costs over a period life time.

Conclusion
LCC can be used in many applications in an organization: - purchasing
- developing new products - optimal time for withdrawal - when making trade-offs and evaluate various alternatives

LCC should be a dynamic tool used by engineering or logistics management to assess the progress of each phase. The sooner an LCC modeling tool is used, the faster it will have an impact on the logistic lifecycle.

An important reminder..

LCC provides critical information to the overall decision- making process, but not the final answer.