The life cycle cost of any equipment is the total lifetime costs of purchasing, installing, operating, maintaining and disposing of that piece of equipment.
The life cycle cost of any equipment is the total lifetime costs of purchasing, installing, operating, maintaining and disposing of that piece of equipment. The lifetime of a pumping system is typically 10-20 years.
When used as a comparison tool between possible design or overhaul alternatives, the LCC process will show the most cost-effective solution based on the available data.
Adjusting for price changes over time
Since the time frame is 10 – 20 years, costs must be adjusted for changes in the purchasing power so a meaningful comparison can be made. Energy prices have for example increased radically over recent years and are expected to continue rising more than general inflation in the future.
Given that the calculation extends over such a long period of time, the most correct way of calculating LCC would be based on the capital value method.
Calculating Present Value (PV)
Money spent some time in the future has a different value than the same amount spent today. Some costs occur regularly each year (e.g., energy, routine maintenance). While not occurring every year, other costs occur frequently enough that they can be averaged to an annual expenditure (e.g., mechanical seal replacement). Finally, there are expenses that occur so infrequently that they must be treated as single cost elements and cannot be averaged (e.g., major rebuild, disposal cost at the end of the pump's life). Single cost elements costs are treated differently, as shown below:
The present cost (Cp) of a single cost element, Cn paid after "n" years, can be calculated approximately as follows:
Cp = Cn = 1000 = 554
[ 1+ (i – p) ]n [ 1+ (0,05 - 0,02) ]20
n = number of years
p = expected annual inflation
i = interest rate
i–p = real discount rate
Cn = cost paid after ”n” years
Cp = present cost of a single cost element Cn
To calculate the present value (PV) of several cost elements, their calculated present cost values are added.
”A Guide to LCC Analysis for Pumping Systems” is a reference book about Life Cycle Costs. It is the result of collaboration between:
- Hydraulic Institute
- US Department of Energy’s Office of industrial Technologies