Life-cycle cost analysis (LCCA) refers to the technique of determining the cumulative cost involved in the facility owner of an organization or a business. It is essential in an organization as it aids the process of the determination of the most appropriate alternative among competing options when purchasing utilization, maintenance, and finally disposing of either a critical process or product in a company. LCCA is critically essential when making a purchase decision involving projects that require the same performance of the product or process but only differ in the initial acquisition costs and operating costs. It thus helps in cutting costs while maximizing efficiency.
The Factors of a Life-cycle Cost Analysis (LCCA)
The process of determining the LCCA relies on numerous methods and elements. Some of the vital factors of the LCCA includes the initial capital requirements, the operating costs of the component or the process, seasonal replacement of the component or its part, essential additions or modifications, the cost of using the component or the process, and the ultimate salvage value of the element (Babashamsi, Yusoff, Ceylan, Nor, & Jenatabadi, 2016). In a nutshell, the life-cycle cost of a product or process in an organization is a cumulative total of the projected acquisition costs, projected useful time operating expenses, projected costs of maintenance during the valuable time, projected expenses for rehabilitation, estimated disposal costs less the anticipated salvage or residual value of the asset. Therefore, an in-depth understanding of these factors is essential for the application of the LCCA technique.
The Initial Costs
The initial expenses in the LCCA are the expense involved in the prior acquisition of an asset, process, or facilities. The initial costs could be in terms of the actual purchase of a piece of equipment, the transportation costs, taxation involved in the acquisition of the assets, premises, or processes, as well as the installation costs. Initial costs are a vital factor in the LCCA as it helps in the selection of the process or assets that would auger well with the organization's budget.
The Annual Operating Costs
For the LCCA, the operating costs could be in terms of the energy consumption or essential requirements of an asset or machine, the frequency of maintenance of the component or premises as well as the average costs of the maintenance. The annual operating expenses are vital in the LCCA as they provide the best option or selection for the organization through reduced maintenance costs. It is worth noting that the running costs could also be calculated in terms of the downtime of the operations as a result of repair and maintenance.
Periodic Replacement and Associated Costs
Periodic replacement closely relates to the operating costs. They involve the expenses that the business or organization is most likely to encounter as a result of a breakdown, failures, or frequent changes in performance. Such replacements frequently occur, calling for minimal changes in the assets, premises, or machines. A component with minimal periodic replacement is more desirable for in the LCCA as opposed to those with compatible replacement.
Additions and Alterations
They refer to the assembly components as well as changes in the layout or process essential for accommodating the operation of the significant part. Additions and alterations are vital factors in the LCCA as the costs of the individual components and that of the changes in the layout or operations can adversely affect the organization.
The Use Costs
The use costs are the associated expenses relating to the use of a component or apart. It may involve the critical costs in terms of the energy input for a machine. It may also mean the essential human resources requirements. It is vital in LCCA as it helps the organization determine the least cost approach based on the use of a component.
The Salvage Value
The salvage value relates to the possibilities of reuse or resale of a component or part at the end of its useful life. Some components' disposal results in value to the organization while others call for additional costs to dispose them off. Therefore, salvage value is an essential LCCA factor as it helps in the determination of the best investment based on the ultimate disposal. A component that will not result in the extra loss to the company when disposing it off.
The Importance of Life-cycle Cost Analysis
LCCA is critically important in an organization in many ways. LCCA, in a company, helps the company to generate profits at the early stages of the purchase of the component. It also reduces the costs of acquisitions and installation. Additionally, LCCA compares a set of available competing opportunities. The comparison of the alternatives helps in the process of decision making in the organization. It helps the company acquire and implement a more accurate and realistic approach in the organization (Fuller, 2010).
First, LCCA is the focal point for the owners and managers in an organization to know the costs of a property, component, or asset. The analysis process imparts essential information not only on the price but also on other aspects of the asset. Understanding the costs of the assets helps in determining several factors, such as security, that affect the organization. The knowledge on the value of the assets in an organization can help owners when making lending, borrowing, and leasing decisions, as well as selling the premises during the events of takeovers.
Secondly, LCCA is essential to the managers. It helps managers plan accordingly, especially in terms of the maintenance of components, planning the desired workforce, as well as substitutes or complements for the asset or premises. Therefore, LCCA is vital to the management as it helps in assembling the workforce for maintenance, thereby increasing efficiency. Thirdly, LCCA helps in appropriate budgeting in an organization. It helps in the acquisition of assets that best fit with the organization's finances (Zakeri, & Syri, 2015). It also helps in making appropriate budgets regarding human resource requirements and repair and maintenance costs and timing. Therefore, activities such as maintenance and repairs that may affect the normal operations of the organization are identified on time and corrective measures taken at the right time. Instances of halted production as a result of breakdown or planning in maintenance, which affects the organization, are minimal. Additionally, LCCA information helps managers to be ever prepared with the parts assemblies, which streamline activities in the organization.
Fourthly, LCCA helps in the conservation of energy and other resources in the company, including human resources, space, changes in the organization, and raw materials. The primary goal of LCCA is to ensure that the organization takes advantage of the analysis to optimize on the qualities of the purchased resources. As a result, the company is in a better position to acquire components or assets that help in the conservation of the organization's resources (Zakeri, & Syri, 2015).
Conclusively, LCCA is a vital organizational concept. It helps the organization compare a set of available purchase opportunities and determine the best chance that works with the organization's interest. Essential factors of LCCA include initial capital investment, operating costs, seasonal replacement, additions or modifications, and the salvage value of the asset. LCCA is beneficial in the company in many ways, including planning, decision making, investment, and organizational control.
Babashamsi, P., Yusoff, N. I. M., Ceylan, H., Nor, N. G. M., & Jenatabadi, H. S. (2016). Evaluation of pavement life cycle cost analysis: Review and analysis. International Journal of Pavement Research and Technology, 9(4), 241-254.
Fuller, S. (2010). Life-cycle cost analysis (LCCA). Whole building design guide.
Zakeri, B., & Syri, S. (2015). Electrical energy storage systems: A comparative life cycle cost analysis. Renewable and sustainable energy reviews, 42, 569-596.
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