Life Cycle Cost Method

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The life-cycle costing (LCC) method sums, for each investment alternative, the costs of acquisition, maintenance, repair, replacement, energy, and any other monetary costs (less any income amounts, such as salvage value) that are affected by the investment decision. The time value of money must be taken into account for all amounts, and the amounts must be considered over the relevant period. All amounts are usually measured either in present value or annual value dollars. This is discussed later under "Discounting" and "Discount Rate." At a minimum, for comparison, the investment alternatives should include a "base-case" alternative of not making the energy efficiency or renewable investment, and at least one case of an investment in a specific efficiency or renewable system. Numerous alternatives maybe compared. The alternative with the lowest LCC that meets the investor's objective and constraints is the preferred investment.

Following is a formula for finding the LCCs of each alternative:

where LCCA1 is the life-cycle cost of alternative Al, IA1 is the present-value investment costs of alternative A1, EA1 is the present-value energy costs associated with alternative A1, MA1 is the present-value nonfuel operating and maintenance cost of A1, RA1 is the present-value repair and replacement costs of A1, and SA1 is the present-value resale (or salvage) value less disposal cost associated with alternative A1.

The LCC method is particularly useful for decisions that are made primarily on the basis of cost effectiveness, such as whether a given energy efficiency or renewable energy investment will lower total cost, (e.g., the sum of investment and operating costs). It can be used to compare alternative designs or sizes of systems, as long as the systems provide the same service. The method, if used correctly, can be used to find the overall cost-minimizing combination of energy efficiency investments and energy supply investments within a given facility. However, in general, it cannot be used to find the best investment, because totally different investments do not provide the same service.

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