A life cycle cost analysis compares the total costs of equipment and systems over their entire useful lives, including initial installation costs as well as operational and maintenance costs. It can help justify investments in more efficient technologies that have a higher upfront cost but lower lifetime expenses. This example analyzes two different chillers over 10 years using metrics like net present value, payback period, and internal rate of return to determine which option provides the best long-term value. It finds that a more efficient chiller with an initial premium of $18,000 has a positive net present value of $23,984 and payback period of 3.8 years, making it the most cost-effective choice.

1. Performing a
Life Cycle Cost Analysis

2. What is a Life Cycle Cost Analysis?
• Compare the cost of different equipment, fuel
types, and etc from inertia installation to end
of service life.
• Comparison includes first installation cost, life
time maintenance cost, life fuel cost,
replacement cost.

3. Why Perform a Life Cycle Cost Analysis
• The owner asks you compare the costs of
different HVAC systems. Packaged RTU’s vs.
central plant fed AHU’s.
• Justify additional cost of Energy Saving
Technology (energy recovery device, heat
pump chiller, solar, and etc.)
• Owner is required by law to perform a LCCA
(government projects)

4. Terminology
• Net Present Value (NPV) – Value of Money at Year “0”
• Adjusted Internal Rate of Return (AIRR) - % return on
investment
• Savings to Investment Ration (SIR) – dollar for dollar
return
• Simple Payback method (SPP) – first cost over savings
• Time Value of Money (TVOM) – Change in the value of
money over time. The US Dollar loses value over time.
• Cash Flow Diagram

5. Simple Payback Method
• Easy method to determine return on
investment for simple projects.
• SPP = Initial Cost / Annual Savings
• Example: $3000 to install an energy recovery
wheel in a restroom exhaust system. Will save
$800 in annual energy costs.
• SPP= $3000/$800 = 3 yrs 9 months

6. Detailed Analysis Consists
• First Cost (Installation cost)
• Maintenance Cost
• Energy Cost
• Inflation
• Discount Rate (Owner’s Cost to Borrow
Money)

7. Cash Flow Diagram

8. Which Chiller Should Be Installed?
• 100 Ton Chiller at 0.9 kw/ton or
• 100 Ton Chiller at 0.6 kw/ton at $18k premium
• Electricity Costs: $0.08 / kwh with 3% Annual Inflation.
• Assume Service Costs are the same with both Chillers.
• The Customer’s Discount Rate is 5%.
• Either chiller will run 2000 hrs per year.
• Which chiller is most cost effective after 10 years?
• What is the Net Present Value (NPV) of the
investment?

9. Annual Energy Costs
0.9 kw/ton Chiller 0.6 kw/ton Chiller
• Annual Energy Consumption • Annual Energy Consumption
is 2000 hrs x 100 tons x 0.9 is 2000 hrs x 100 tons x 0.6
kw/ton = 180,000 kwh kw/ton = 120,000 kwh

10. COST OF ENERGY CONSUMPTION
OVER TIME
ENERGY ANNUAL ENERGY COST
ANNUAL ENERGY
YEAR COST 0.9 KW/TON 0.6 KW/TON
COST DIFFERENCE
($ / KWH) CHILLER CHILLER
1 $0.08 $14,400 $9,600 $4,800
2 $0.08 $14,832 $9,888 $4,944
3 $0.08 $15,277 $10,185 $5,092
4 $0.09 $15,735 $10,490 $5,245
5 $0.09 $16,207 $10,805 $5,402
6 $0.09 $16,694 $11,129 $5,565
7 $0.10 $17,194 $11,463 $5,731
8 $0.10 $17,710 $11,807 $5,903
9 $0.10 $18,241 $12,161 $6,080
10 $0.10 $18,789 $12,526 $6,263

11. SIMPLE PAYBACK ANALYSIS
• SPP = FIRST COST / ANNUAL SAVINGS
• SPP = $18,000 / $4800/YR
• SPP = 3.8 YEARS

12. $6262
$6080
$5245
$4944 $5092
$4800
$18,000

13. Convert Future Savings into Present
Day Values
• Determine the Net Present Value of the
Investment (NPV)
• Use Owner’s discount rate (cost to borrow
money)
• NPV = Present Value (PV) savings or loss minus
PV of First Cost Investment

15. ANNUAL ENERGY COST DISCOUNT
YEAR PRESENT VALUE
DIFFERENCE FACTOR
1 $4,800 0.9524 $4,572
2 $4,944 0.9070 $4,484
3 $5,092 0.8638 $4,399
4 $5,245 0.8227 $4,315
5 $5,402 0.7835 $4,233
6 $5,565 0.7462 $4,152
7 $5,731 0.7107 $4,073
8 $5,903 0.6768 $3,995
9 $6,080 0.6446 $3,919
10 $6,263 0.6139 $3,845
$41,988
NPV = $41988 - $18,000 = $23,984
SIR = $41988 / $18000 = 2.33
Adjusted Internal Rate of Return (AIRR) = [(1+d)x(SIR)^(1/n)]-1 = [(1+.05)x(2.33)^(1/10)]-1 = 0.14 OR 14%