Page 52 - Materials Chemistry, Second Edition

3.2 Life cycle costing methodology 47
of all costs expended from its conception and production, through its operation, to the end of
its useful life (Woodward, 1997). LCC helps shifting from the best value for money to the best
value across the asset life cycle (Perera et al., 2009), and includes a comparison between
options or an estimation of future costs at portfolio, projects, or components over a defined
period of analysis (ISO, 2011). It allows evaluation of the cost of acquisition, development,
operation, management, repair, disposal, and decommissioning (Langdon, 2006; Reidy
et al., 2015).
Therefore, LCC can be used both by private and public organizations to optimize the cost
of acquiring, owning, and operating physical assets over their useful lives, trying to evaluat-
ing all the significant costs involved in the life cycle (Woodward, 1997). According to Wood-
ward (1997), the costs of an item can be comprised of engineering and development costs,
production and implementation costs, operating costs, and end of life costs. For instance, pro-
duction and implementation costs comprise the initial capital costs, namely purchase costs,
which include assessment of goods like land and buildings; they can be obtained through
quotations from suppliers. There are also acquisition/finance costs, which include the cost
effect of alternative sources of funds and regulations and installation/commissioning/
training costs, which include the installation of machines and the training of the workers.
An important concept is the life of the asset, which defines its life expectancy and decisive
factors considering functional life, physical life, technological life, economic life, and social
and legal life (Woodward, 1997). Associated with the concept of the life of an asset, there
is the concept of the discount rate. The selection of the discount rate is a fundamental phase
in LCC application. A high discount rate will tend to facilitate options with low capital cost,
short life, and high recurring cost; whereas a low discount rate will have the opposite effect.
A way to define the discount rate in LCC studies was proposed by Islam et al. (2015). They
calculated future costs, for instance for operation, maintenance, and demolition, using
Eq. (3.2); then they discounted them using Eq. (3.3). Because of future risk, the discount rate
exceeds the inflation rate.
FC ¼ PC 1+ fð Þn (3.2)
where FC ¼future cost, PC ¼present cost, f ¼inflation rate, and n ¼number of years.

DPV ¼ 1+ dð Þ (3.3)
where DPV ¼discounted present value, FC ¼future cost, d ¼discount rate, and n ¼number
of years.
In the scientific literature, three possible types of LCC emerge, namely conventional LCC,
environmental LCC, and societal LCC (Hunkeler et al., 2008). The conventional LCC is the
assessment of all the costs associated with the life cycle of a product. The focus of the eval-
uation is on real, internal costs and sometimes the costs of the end of life are not included. The
environmental LCC is the evaluation of all the costs associated with the life cycle of a product
covered by the actors in the product life cycle, for instance suppliers, manufacturers, users or
consumers, and end of life actors. However, the environmental problems are simplified, since
it assumes that everything can be expressed as a one-dimensional unit, such as monetary
flows (Gluch and Baumann, 2004). The societal LCC includes all the costs that are associated
with the entire life cycle of a product. These costs are covered by anyone in the society, today,
or in the long-term future (Hunkeler et al., 2008).