Agency Energy

Manager

Life-Cycle Cost
Methodology

Introduction to Life-Cycle Cost

Analysis
Mike Mills, CPA, BEP
Sain Engineering Associates, Inc.
August 12, 2015
Phoenix Convention Center Phoenix,

Agenda
Introduction to Life-Cycle Cost
Analysis (LCCA)
Time Value of Money / Discounting
Present Value Calculations
Supplementary Measures of
Economic Performance

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What is LCCA?
Methodology to determine the most costeffective option among different alternatives to
purchase, own, operate, maintain, and dispose
of a building or building system over its entire
lifetime
Useful to compare project alternatives that are
technically acceptable, but differ with respect to
initial costs and operating costs
Allows an investor to calculate all project costs
and compare cost effectiveness of alternative
investment options
Required by Federal mandates for new design,
renovation, or procurement of energy efficient
projects
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Types of Life-Cycle Costs

Initial costs

Purchase
Acquisition
Construction
Installation

Replacement costs
Residual values
Resale
Salvage values
Disposal costs

Operation, maintenance, and repair costs

Utility costs

Costs are only considered if they are relevant

and significant
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Steps to Performing LCCA

Identify alternatives
Specify data requirements and
establish assumptions
Estimate costs and adjust for time
value of money
Calculate total LCC for each
alternative
Compute supplementary measures if
needed
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Time Value of Money

A dollar today is not equivalent to a
dollar in the future
Important premise of LCCA adjust
all life cycle costs for the time value
of money
Projects can be effectively evaluated
once future costs are adjusted to
their present values

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Discounting Costs to
Present Value

Process of converting costs to a common

point in time to reflect the time value of
money
The discount rate is the interest rate that
reflects an investors opportunity cost of
money over time (i.e., the investors
MARR)
PV = Present Value
n = Period
Important
FV = Future Value
AV = Annual
financial abbreviations:
Value

i% = Interest or
Discount Rate

e% = Escalation
Rate

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Project ABC - Cash Flow

Diagram
Base
Date

End
Date

B
A

FUTURE
COSTS

C
A
A Single non-recurring future
costs
B Annually recurring uniform
costs

C Annually recurring non-

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PV of Single Non-Recurring
Future Costs

In Project ABC, we have single nonrecurring future costs of the

following:
Replacement cost of $1,000 in year 3
Disposal cost of $2,000 in year 5

Investors
MARR
is
12%
Replacement Cost

Disposal Cost

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PV of Annually Recurring
Uniform Costs

In Project ABC, we have annually

recurring uniform costs of the
following:
O&M costs of $500 each year

Investors MARR is 12%

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PV of Annually Recurring NonUniform Costs

In Project ABC, we have annually

recurring non-uniform costs of the
following:
Energy costs escalating at 10% each year (base year
energy costs were $91)

Investors MARR is 12%

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Life-Cycle Cost for Project ABC

Present value of:

Acquisition cost
O&M costs
Replacement cost
Energy costs
Disposal cost

$10,000
$1,802
$712
$431
$1,135

$14,080

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Supplementary Measures of Economic

Performance
LCCA is the most complete and
accurate way to estimate project costs
over its lifetime
Other measures of economic evaluation
that supplement LCCA:
Net Savings (NS)
Savings to Investment Ratio (SIR)
Adjusted Internal Rate of Return (AIRR)
Simple or Discounted Payback (SPB or DPB)

All of these supplementary measures

are based on life-cycle costs
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Net Savings
The amount that an alternative
project will save over the base case
NS = LCC - LCC
NS calculations can be used to
determine whether to accept or
reject a project (NS > 0)
A project with the highest NS is
equivalent to choosing a project with
the lowest LCC
BC

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Savings to Investment
Ratio
SIR =
SIR > 1 generally means that a
project is cost effective
Can be used to accept or reject a
project
Useful in ranking and prioritizing
independent projects (a higher SIR
means higher savings)
Operating
Savings

Investment Costs

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Adjusted Internal Rate of

Return

Measures the economic performance of

an investment as a % yield
AIRR is a more accurate measure of
return because it adjusts the cash flows
using an explicit reinvestment rate
AIRR = (1 + i%) SIR - 1
For projects to be attractive, AIRR >
MARR
Similar to SIR, also useful in ranking
and prioritizing independent projects
1/n

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Simple or Discounted
Payback
Time required for the cumulative
savings from a project to recover its
initial investment costs
Calculations ignore all future costs
and savings that occur after the
payback period has been reached
Used as a rough measure on whether
to accept or reject a project
Payback period < Project life equals a
valid project
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LCCA Resources
FEMPs Building Life-Cycle Costing (BLCC)
software can help calculate LCC, NS, SIR,
AIRR, and PB
NIST Handbook 135, Life-Cycle Costing
Manual, is a guide to understanding LCC
methods and criteria established by FEMP
Annual Supplement to NIST Handbook 135
details discount factors and price indices
as determined by FEMP as well as formulas
and tables for PV calculations

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