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What is life-cycle cost analysis?
Life-cycle cost analysis is a method of calculating a building’s expected operating and maintenance costs over its lifespan.
Life-cycle cost analysis is a method that allows you to assess the total cost you’ll incur throughout your period of facility ownership. It factors in the following costs:
- Building acquisition expenses.
- Ownership expenses.
- Building or building system disposal expenses.
Life-cycle cost analysis, or life-cycle costing as it is sometimes called, can be used to determine the value of options when pursuing a new capital investment or asset acquisition. While many options may have similar costs associated with them at the outset, it’s only through a deep analysis via accurate life-cycle costing that you can see which option is the best investment.
The equation for determining life-cycle costs of any one variable is complex. Often, business decision makers line up the various costs associated with expansion options side by side and get to work uncovering the true costs of each acquisition.
In addition, the time value of money also must be discerned to ascertain future value of a building or asset.
The process of systematically analyzing the options is considered the life-cycle cost analysis.
Life-cycle cost analysis example
While life-cycle costing can be applied to acquisition of any type of asset, life-cycle cost analysis is generally only used to compare building costs. This can be useful for a company looking to invest in a new building or set up in a new location.
If you own a company and are considering opening a location in the town next to your flagship store, you obviously will consider multiple options, from renovating an older building to purchasing land and building for a new space. When you consider the costs of purchasing the land and building, the cost of managing each one and the cost of expected repairs associated with each option, you are performing life-cycle costing on the options before you.
As you weigh the calculations and come to a conclusion, you conduct a life-cycle cost analysis. The results of this analysis will indicate which building option you should choose.