Life cycle costing is the process of economic analysis to estimate the total cost of ownership and prepare an LCC model to provide input into the decision-making process. The LCC model is a simplified representation of the real world as it extracts all cost elements in each cost category and at all stages through the cost breakdown structure and then translates them into cost estimation ratios. A simple LCC model is an accounting structure that contains mathematical expressions to estimate the costs associated with LCC.
LCC model is the total cost in present value which includes the acquisition cost and DCF such as operation, maintenance and disposal cost. DCF provides net NPV of the future cash flows where NPV is used to determine the best choice because it takes into account the time value of money. In fact, one of the important outputs of LCC model is the identification of cost drivers through sensitivity analysis, which means the costs that contribute the most to the overall LCC.
Thus, the LCC model provides an objective way of selecting or purchasing a new passenger car based on the total cost of ownership and the lowest NPV value. The selection of the new passenger car would also involve other subjective criteria such as status symbols and perception that are not covered in the model.
Background of Study
The discipline of economics plays a key role in life cycle costing, because in order to calculate the life cycle cost of items, various types of economics related information are required. Life cycle costing requires that all potential costs be calculated by considering the time value of money. In life-cycle costing, future costs, such as operation and maintenance costs associated with an item, must be discounted to their present values before they are added to the item's acquisition or acquisition cost.
Over the years, many formulas have been developed in the field of economics for converting money from one point in time to another. Over the years, a large number of publications have appeared on various aspects of transport system life cycle costing.
Objectives and Scope of Study
- Life Cycle Costing
- Life Cycle Cost Model
- Time Value of Money
- Net Present Value
- Inflation Rate
- Discount Rate
- Depreciation Rate
- International Standard IEC 60300-3-3
In general, the life cycle phases can be divided into acquisition costs, operation and maintenance costs (ownership costs) and disposal costs . Because of the difficulties in accurately predicting inflation, it is common for life cycle cost analyzes to be conducted at “constant prices.” However, sometimes it may be possible, for example in the case of a project with a short life cycle, to predict or agree an inflation rate to be included in the analysis.
Depreciation is the car's biggest expense during the first five years of owning a new car. One of the IEC publications is the IEC International Standard entitled Application Guide – Life Cycle Costing (2004). Therefore, life cycle costing (LCC) is defined as the process of economic analysis to estimate the total cost of purchasing, owning and disposing of a product .
The role of high-speed rail in climate change mitigation – The Swedish case of Europabanan from a life cycle perspective. The study from a life cycle perspective is used to analyze Europabanan, a proposed high-speed rail line in Sweden.
Cost Breakdown Structure
- Acquisition Cost
- Basic Price
- Insurance Cost
- Road Tax Cost
- Registration Fee
- Ownership Claim Fee
- Operation Cost
- Fuel Cost
- Insurance Renewal Cost
- Road Tax Renewal Cost
- Maintenance Cost
- Disposal Cost
SVN = residual value at the end of the year Nth N = depreciable life of the asset in years. Insurance costs are calculated based on the value of the sum insured, which depends on the market value of the car, where the market value can be estimated based on the annual depreciation rate. Premium rate and NCD announced , depending on the car's engine power, as shown in Table 3.7.
The annual cost of such repairs is difficult to determine as it is highly dependent on the operating conditions of the vehicle and the nature of the specific part.
Life Cycle Cost Model
Cash Flow Diagram
As observed on the spider graph and comparison for Perodua Myvi EZi Auto 1.3i, maintenance cost is the least sensitive factor in the cash flow, followed by resale value. From this analysis, OTR price and operating cost are critical in the cash flow and the best estimate should be made.
The LCC model was developed using Microsoft Excel software, essentially to assist users in making decisions, especially in selecting or purchasing a new passenger car. This model currently includes 137 passenger car models from various car manufacturers such as Honda, Kia, Nissan, Perodua, Proton and Toyota which are top 10 ranked based on market demand in Malaysia . Based on the data, the LCC model will calculate the life cycle cost during its service life and display the calculation results in tabular form based on an International Standard IEC 60300-3-3.
LCC outputs include OTR price, fuel cost, insurance renewal cost, road tax renewal cost, scheduled maintenance cost, unscheduled maintenance cost, resale value, annual ownership cost (total p.a.), NPV factor, discount rate, sum of the cash flow over the service life and the NPV as shown in Figure 4.1. The LCC model will also generate a cash flow diagram and a spider plot graph based on sensitivity analysis. There are four factors in cash flow, namely purchase cost/OTR price, operating costs, maintenance costs and residual value/resale value.
As observed on the spider plot graph generated by the LCC model for Perodua Myvi EZi Auto 1.3i, maintenance cost is the least sensitive factor in cash flow, followed by resale value. However, choosing a car solely on the basis of fuel consumption does not guarantee having a lower NPV of the future cash flow. The LCC model provides an objective way to choose or buy a new car by comparing the total cost of ownership and the lowest NPV value as shown in Tables 4.5 - 4.11.
Life cycle costing is the process of economic analysis to estimate the total cost of ownership and provides input into the decision-making process. The LCC model is the total cost in present value which includes the purchase cost and DCF as the operation, maintenance and disposal cost calculated based on an International Standard IEC 60300-3-3. Thus, the LCC model provides an objective way of choosing or purchasing a new passenger car by comparing the total cost of ownership.
LCC model can further develop the volume data by adding passenger car models from other car manufacturers that are not included in this current LCC model, such as Hyundai, Mitsubishi, Volkswagen, Isuzu, Suzuki, BMW, Peugeot, Mercedes, Mazda, Ford, Chevrolet, Chery, Lexus, Audi, Volvo, Land Rover, Porsche, Ssangyong, Renault and Subaru. LCC Model can be further developed not only for passenger cars, but for other categories such as people movers, recreational 4WDs, sports and high performance, prestige/luxury, pick-up and light commercial. LCC model can be further developed not only using Microsoft Excel, but with other software as a web-based calculator and applications for Windows, Android and iPhone operating system (iOS) users.
The role of high-speed rail in climate change mitigation - The Swedish case of Europabanan from a life cycle perspective, KTH Royal Institute of Technology. 13] Automotive Data Services http://www.redbookasiapacific.com/my/home.php?lang=en  General Insurance Association of Malaysia http://www.piam.org.my/.