Comparative Cost Planning Flashcards
What is life cycle cost (LCC)
The cost of an asset or it’s parts throughout its lifecycle
What is life cycle costing (LCC)
Methodology for systematic evaluation of life cycle costs over a period of analysis, as defined in the agreed scope
What is whole life cost (WLC)
All significant and relevant initial and future costs and benefits of an asset throughout its life cycle
What is whole life costing
Methodology for systematic economic consideration of all whole-life costs and benefits over a period of analysis, as defined in the agreed scope
How do LCC and WLC interact
WLC - relates to the whole of the asset including ownership costs
LCC - relates only to a part of the life cycle meaning some costs are excluded
Two main drivers of WLC/LCC
Sustainability
Focus on reducing through life costs of constructed assets
Uses of WLC/LCC
To predict cash flow in budget preparation
During option appraisal
Key advantage: in comparative cost analysis, accuracy is irrelevant as the same incorrect assumptions apply to all options so variances between options would still carry their weight
Relevant costs to WLC
Non-construction costs
Income
Externalities
Relevant costs to LCC
Construction costs
Maintenance costs
Operation costs
Occupancy costs
End of life costs
What is service life
The period of time after which a building, element or function will no longer fulfil its physical, functional and economic requirements
What is discount rate
Rate reflecting the time value of money
Rate applied represents the opportunity cost of capital
Where d is the interest rate and i is the rate of inflation:
R = d - i
What is the nominal discount rate
The cost of capital (interest rate)
What is the real discount rate
The nominal discount rate adjusted for inflation
Where d is the interest rate and i is the rate of inflation:
R = ( 1+d/1+i -1 ) x 100
What is present value
Where r is discount rate and n is number of years:
Present value of a sum to be paid in the future
PV = 1 / (1+r) to the power of n
Present value of regular annual payments for a number of years
PV = (1 - (1 / (1+r) to the power of n) ) / r
Indicators and techniques for comparative cost planning
NPV
Sum of discounted future cash flows
Annual Equivalent (AE)
Regular annual cost that, when discounted, equals the NPV of the investment
Payback period
The period of time elapsed between the initial investment, it’s subsequent operating costs and the time at which cumulative savings offset the investment
IRR
The coin pound interest rate that, when used to discount cash flows over the period of analysis, makes costs equal to benefits when cash flows are reinvested at a specified interest rate
