Life cycle cost (LCC) are all costs associated with the acquisition and ownership of a system over its full life. The usual figure of merit is net present value (NPV). Projects are considered most favorable for large positive NPVs. However for many cost individual cases, decisions are made for the least negative NPVs. In all cases, the default position for accounting is to know the NPV for making no change and this is usually the last alternative for most people associated with change.
Why: The first cost for capital equipment (acquisition) is between ½ and 1/20 of the total life time cost! The first cost, acquisition cost, is usually definable by a firm quotation and sustaining costs must be estimated and put into the appropriate time slots for discounting to obtain the NPV for the project life. Typical values used in industry for LCC are: discount rate = 12%, tax rate = 38%, and project life is usually between 10 and 20 years.
When: Life cycle cost is usually calculated as an up-front decision making effort either for projects or for cost reduction efforts. I does not work well for doing the analysis after the project is underway.
Where: LCC is the business of investing money to make changes occur. The NPV values add the voice of investments to technical decisions to work for the lowest long term cost of ownership.
These definitions are written by H. Paul Barringer and are also posted on his web site at www.barringer1.com
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