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BY: VERSHA GUPTA MONIKA KHATTER KALOL KAZI GAGANDEEP SINGH PRIYANKA
Cost Element
For an equipment, there are TWO cost elements: 1) Initial Cost Design & development cost, Investment on asset, or cost of equipment, Installation cost or erection & commission cost. 2) Operation & Maintenance Cost Labour cost, Energy cost, Spare & maintenance cost, Raw material cost.
Cost Element
The identification of cost elements and their subdivision are based on the purpose and scope of the LCC study
Step 4: Calculate LCC by adding all cost element, at every year, Step 5: Analyze the results.
After that, company decides the time span for each component. Example, say, a company decides that total life cycle of the product will be 10 years from the allocation the fund, among which first one year will be initial cost zone and remaining 9 years will be under operation and maintenance cost zone.
Discount factor
The discount rate is an interest rate, a central bank charges depository institutions that borrow reserves from it.
For example, let's say Mr. Ram expects Rs. 1,000 in one year's time. To determine the present value of this Rs. 1,000 Ram would need to discount it by a particular rate of interest (often the risk-free rate but not always). Assuming a discount rate of 10%, the Rs. 1,000 in a year's time would be equivalent of Rs. 909.09 to Ram today (i.e. 1000/[1+0.10]).
Inflation factor
The inflation rate is the percentage by which prices of goods and services rise beyond their average levels. It is the rate by which the purchasing power of the people in a particular geography has declined in a specified period.
Step 5 : Analysis
The datas collected from LCC are analyzed.
If one product has to be selected among multiple equipments, then LCC is calculated for every product. Datas for every product are analyzed, and the lowest LCC option become preferred . But lowest LCC option may not necessarily be implemented when other considerations such as risk, available budgets, political and environmental concerns are taken into account.
An important reminder..
LCC provides critical information to the overall decision-making process, but not the final answer .