15-05-2014, 11:08 AM
LIFE-CYCLE COST ESTIMATE
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INTRODUCTION
Life-cycle costs (LCCs) are all the anticipated costs associated with a project or program
alternative throughout its life. This includes costs from pre-operations through
operations or to the end of the alternative. This chapter contains a discussion of life-
cycle costs and the role they play in planning. Further information about the discount
rates to be used in LCC analysis can be found in OMB Circular A-94, “Economic
Analysis.”
LIFE-CYCLE COST ANALYSIS
LCC analysis has had a long tradition in the Department of Defense. It has been applied
to virtually every new weapon system proposed or under development. Industry has
used LCC to help determine which product will cost less over the life of a product. For
example, an R&D group has two possible configurations for a new product. Both
configurations have the same R&D. One product has a lower manufacturing cost, but
higher maintenance and support costs. LCC analysis can help to make decisions about
which alternative has the lowest LCC.
Definition
LCC analysis is the systematic, analytical process of evaluating alternative courses
of action early on in a project, with the objective of choosing the best alternative to
employ scarce resources. The courses of action are for the entire life of the project
and are not for some arbitrary time span (e.g, the 5-year plan). Figure 23-1 shows
the stages of life-cycle cost over the life of a building.
Typical System Profile
LCC analysis must be performed early in a project’s life, or it loses its impact to
make a cost effective decision on which alternative is best. Figure 23-2 shows that
at the end of R&D, just prior to production or operations, 95% of the cumulative
LCC has been committed.
Figure 23-3 is based on a typical DOD communication system acquisition profile.
It shows that for each $7 to $12 that is put into R&D, $27 to $28 go for production,
and $60 to $66 go for operation and support. Since most of the LCC is the
operational support, it is evident that, for LCC to be effective, it must be
implemented early in the program.
Life-Cycle Cost Analysis Methods
LCC analysis consists of defining the LCC of each element and reducing each
element cost to a common basis. Section 2 has discussed the definition of LCC.
This section discusses the methods of reducing the LCC to a common basis using
present worth calculations.
In LCC analysis, escalation and discount rates must be considered. The most used
method of LCC analysis uses the net present worth method. In this method, costs
are estimated in current dollars, escalated to the time when they would be spent, and
then corrected to a present worth using a discount rate. When the inflation and
discount rates are equal, LCC can be computed as current dollars, totaled for the
project life and compared. When the escalation and discount rate are different, the
escalation and present worth calculations must be performed. The following
example assumes that the discount and escalation rates are different.