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Life cycle cost example
This document discusses life cycle cost analysis and presents a case study comparing the total costs of incandescent and compact fluorescent light bulbs over 10,000 hours of use. It finds that while the initial cost of incandescent bulbs is lower, the operational and maintenance costs over the bulbs' lifetimes are much higher. As a result, the total life cycle cost of incandescent bulbs is about $16,350 compared to around $5,500 for compact fluorescent bulbs, making compact fluorescent bulbs the more economical choice over the long run.
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Life cycle cost example
- 1. Life Cycle Cost By:Huzaifa Sajid 5/27/2014 1 College Of Electrical And Mechanical Engineering, NUST, Pakistan A Case Study Of Light Bulbs
- 2. Life 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. 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 2
- 3. Why Use LCC? 5/27/2014 CollegeOf Electrical And Mechanical Engineering, NUST, Pakistan 3
- 4. Why Use LCC? Project Engineering Maintenance Engineering Accounting Reliability Engineering 5/27/2014 CollegeOf Electrical And Mechanical Engineering, NUST, Pakistan 4 Shareholders Production
- 5. Why Use LCC? 5/27/2014 CollegeOf Electrical And Mechanical Engineering, NUST, Pakistan 5 • Project Engineering wants to minimize capital costs as the only criteria • Maintenance Engineering wants to minimize repair hours • Production wants to maximize uptime hours • Reliability Engineering wants to avoid failures • Accounting wants to maximize project net present value • Shareholders want to increase stockholder wealth
- 6. Why Use LCC? 5/27/2014 CollegeOf Electrical And Mechanical Engineering, NUST, Pakistan 6 LCC can be used as a management decision tool for synchronizing the divisional conflicts by focusing on facts, money, and time.
- 7. Life Cycle CostCalculation Approaches 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 7
- 8. Deterministic Approach •An ExactCost is Determined Probabilistic Approach •A range of Values is determined with a specific probability distribution. 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 8
- 9. Deterministic Approach • Fixeddiscrete values are assigned to various parameters and any type of uncertainties are ignored • LCC calculated is fixed value 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 9
- 10. Probabilistic Approach • Costparameters are assigned with some appropriate probability distribution. • Random numbers are generated • These random numbers are used to calculate the LCC 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 10
- 11. Calculating the total LifeCycle Cost 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 11
- 12. Costs Involved 5/27/2014 College OfElectrical And Mechanical Engineering, NUST, Pakistan 12 • Initial Cost (Cic) • Delivery and Installation Costs (Cinst) • Energy Cost (Ce) • Operational cost (Co) • Maintenance Cost (Cm) • Downtime Costs (Cs) • Decommissioning/disposal costs (Cd) Formula LCC = Cic + Cinst + Ce + Co + Cm + Cs + Cd
- 13. Case Study ofa light bulb 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 13
- 14. Case Study ofa light bulb 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 14 •Suppose 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.
- 15. Case Study ofa light bulb 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 15 •The costs of a light bulb can be divided into two main categories 1) Initial cost 2) Operational and maintenance costs
- 16. LCC for incandescentbulb 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 16 Initial cost: Cost of one bulb: Rs 35 Life expectancy of one bulb: 1,000 hours # of bulbs needed to burn for 10,000 hours: 10 Total Payment to light the bulb for 10,000 hours: Rs 350
- 17. LCC for incandescentbulb 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 17 Operational 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 16,000
- 18. LCC for compactfluorescent bulb 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 18 Initial cost: Cost of one bulb: Rs 1500 Life expectancy of one bulb: 10,000 hours # of bulbs needed to burn for 10,000 hours: 1 Total Payment to light the bulb for 10,000 hours: Rs 1,500
- 19. LCC for compactfluorescent bulb 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 19 Operational 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 4,000
- 20. LCC of bothalternatives 5/27/2014 College Of Electrical And Mechanical Engineering, NUST, Pakistan 20 LCC = initial cost + operational and maintenance cost Alternative Initial Cost Operational and maintenance cost LCC Incandescent Bulb Rs 350 Rs 16,000 Rs 16,350 Compact Fluorescent Bulb Rs 1,500 Rs 4,000 Rs 5,500
- 21. Analysis 5/27/2014 College Of ElectricalAnd Mechanical Engineering, NUST, Pakistan 21 It can be seen from the calculations, that the operation and maintenance costs of the bulbs are far more that their initial costs
- 22. Analysis 5/27/2014 College Of ElectricalAnd Mechanical Engineering, NUST, Pakistan 22 The analysis shows: initial cost of incandescent bulb machine is much lower. But, the long term LCC is much lower for compact fluorescent bulb.
- 23. Conclusion 5/27/2014 College Of ElectricalAnd Mechanical Engineering, NUST, Pakistan 23 Hence 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.
- 24. References 5/27/2014 College Of ElectricalAnd Mechanical Engineering, NUST, Pakistan 24 1. http://en.wikipedia.org/wiki/Life_cycle_cost_analysis 2. http://www.coned.com/KIDS/pdf/coned_lightbulbs.pdf 3. http://www.slideshare.net/ankurbansal177/life-cycle-cost- analysis-15005487?qid=86718d3c-0adf-4ca3-b85a- 8b158d429568&v=qf1&b=&from_search=4 4. http://www.slideshare.net/nirjhar_jgec/life-cycle-cost- analysis?qid=86718d3c-0adf-4ca3-b85a- 8b158d429568&v=qf1&b=&from_search=1