Abstract
Life cycle costing for energy projects is described as a decision-making tool for energy projects, with several examples and a spreadsheet that can be used as a template for calculations. The focus of the chapter is on the principles of life cycle costing to provide managers and professionals a methodology to compare a variety of complicated projects having different costs and benefits.
INTRODUCTION
Life cycle cost analysis (LCCA) is a useful technique for comparing the relative economic benefits of several energy efficiency opportunities among which one must choose. It can also be used to assess the viability of particular investment opportunities.
The technique is one borrowed and adapted from financial analysis. As applied to energy efficiency project analysis, it has developed a particular set of procedures and approaches, and is often used for compliance enforcement as well as for its original purpose in economic decision-making.
LCCA can be simple, with few variables necessary or used, or it can be so complex that a computer model is required to examine the integrated costs and benefits of several energy efficiency systems.
This chapter is designed as a resource for those who assess energy efficiency (and other) investments. It focuses on the ways in which LCCA can be used to inform and support energy project decision-making, with an emphasis on the general approach and example spreadsheets that can be used for a simple analysis.
Computer models employ the same techniques but use the power of the computer to provide an analysis based on iterative simulations that are value-timed for periods of 20 or 30 years. A brief list of some of the more commonly used computer-modeled LCCA systems is included for those who may be interested; computer models are outside the scope of this chapter, however.
DEFINITIONS
Blended utility rate: The utility rate is the basis on which the utility charges for its products (electricity or natural gas) and its services (for example, transmission costs in the case of natural gas, power factor penalties and demand charges in the case of electricity). For general economic analysis including life cycle costing for energy projects, a “blended” utility rate should be used. A blended rate summarizes all charges for the month and then divides that number by the amount consumed. (For more detailed engineering and economic analyses, time-of-use parameters and differential quantity charges may require that the utility rate components be adjusted individually, but the blended rate gives a reasonable approximation for most purposes.)
Btu/sf: Energy use for a building is often summarized and compared on the basis of Btu/sf, or British thermal units/square foot of facility area. This useful measure converts electrical, natural gas, propane, and other energy sources to Btu and then divides the total by the number of square feet in the facility. Most “benchmark” energy comparisons use this number for total utility usage.
Energy efficiency measure (EEM): Any energy project may be composed of one or more EEMs (such as replacing single-pane windows with double-paned and appropriately glazed windows) that are individual measures designed to reduce utility costs by themselves and in concert with other EEMs.
Internal rate of return (IRR): This popular traditional financial investment comparison method evaluates projects based on all associated projected cash flows. Potential investments are normally compared either to one another or to an organization’s stated target or “hurdle rate.”
Life cycle analysis (LCA): LCA is a concept that is outside the scope of this chapter. It is an emerging technique designed to capture the full economic effect of the environmental costs associated with a product, project, or service, including production, transportation, end of life, and other costs.
Life cycle cost analysis (LCCA): LCCA (also known as life cycle costing) is an economic evaluation tool that is extremely useful in both evaluating and comparing energy projects. It takes into account the timing of those costs and benefits, as well as the associated time value of money, returning a single value for the total life cycle cost of the energy project.
Fig. 1 Thirty-year cost of a building.
Net present value (NPV): The NPV is a traditional financial analysis tool that takes all cash flows expected from a project and discounts them back to the present; positive numbers are generally seen as worthwhile investments.
Payback period: The simple payback period (PB period or simple payback) is a traditional measure used in evaluating energy projects. The calculation divides the total installation cost by the savings projected to determine the number of months it will take to pay back the investment.
Time value of money: This phrase encompasses the idea that a dollar received or spent today is worth more than a dollar received or spent in the future. Inflation is part of the reason for this; the other is that one can use the dollar today in other ways, whereas one must wait to receive and use the dollar tomorrow.
Total owning costs: This term is synonymous with life cycle cost but is used more frequently in the residential context.
THE ANTECEDENTS OF LIFE CYCLE COSTING FOR ENERGY PROJECTS
LCCA is similar to most economic decision-making tools in that it takes a variety of monetary flows and converts them to a single number, making comparisons among alternatives or an organization-designated benchmark relatively simple. As is true of all such tools, it is essentially a way to compare such divergent items as apples, oranges, and kumquats with a shared metric.
The challenge of comparing unlike items on an economic basis is one humans have faced since the beginning of time. Imagine the difficulties of the early traders who had to hold in their heads the comparative values of silks, olives, and pottery throughout their trading regions, in every season.
Money was, of course, the original method used to give similar values to disparate items, and with its introduction traders had a common way to assess the value of very different commodities (as well, of course, as providing a commonly recognized and portable medium of exchange).
As money became one of the foundations on which our civilization and commercial systems were built, other improvements were made as well: the time value of money (sometimes expressed in the phrase “A dollar today is worth more than a dollar tomorrow”) was recognized; with the increasing complexity of the industrial age, project costs and benefits for a variety of complicated projects were analyzed economically; and disparate activities and items were reduced to numbers for comparison. Both of these characteristics are included in LCCA.
In the 1970s, when energy savings investments were first undertaken as stand-alone projects to reduce costs, the economic approach first used was the simple payback period (SPB period). This simple and easily understood measure simply divides the project price by the savings projected, showing that the investment would be recouped in 9 months, or 2.5, or 10 years. Although SPB periods are easy to calculate and explain, they ignore the time value of money, utility rate changes, and any operational or maintenance cost increases or decreases. In fact, they present only part of the story, and it is the author’s contention that LCCA should be the preferred method. In fact for organizations interested in an economic evaluation method that also integrates itself better into their other business decisions, LCCA has come to be the norm.
Note: LCCA should be distinguished from life cycle analysis, LCA, which is the emerging trend toward accounting for each aspect of a product’s life from its inception through to its disposal or recycling, including the embedded cost of the energy used to manufacture and transport the product. Although LCA draws from the legacy of LCCA, it is a different tool that focuses on the global environmental costs and benefits of a particular product.
Table 1 Gas station example, current situation
| Building type | Gas station |
| Date of construction | 1970 |
| Square feet | 7000 |
| Description | Concrete block construction on slab, 1-2 floors, flat roof, single-paned windows, T12 fluorescent lights with magnetic ballasts inside; HID outside; 4 leaded/unleaded vehicle pumps; 6 for truck diesel |
| Electricity use and yearly cost | $23,000 and 102,000 Btu/sf/yr |
| Natural gas use and yearly cost | $21,000 and 223,000 Btu/sf/yr |
| Total Btu/sf/year | 325,000 |
| Energy cost/sf/year | $7.71 |
| Maintenance costs | $5000 |
| Operating schedule | 24 h |
| Major energy using systems | Heating, cooling, lights |
THE FRAMEWORK OF LIFE CYCLE COSTING
The concept of life cycle costing is one that is in fact familiar to us all. When we purchase a car, for example, we do basic research on fundamentals: fuel efficiency, maintenance records, and resale value. We consider our driving patterns and the length of time we plan to have the vehicle. That is essentially an economic assessment. We overlay that information on a strategic and technical assessment. First, what do we really want the car for? Is it for work, for hauling livestock, for soft summer nights on an open highway, for transporting teams of youngsters? Then we examine how the various possibilities fit that need. What is the vehicle’s performance, its reliability, its safety record? Finally (when we are being reasonable), we make our decision based on these strategic, technical, and economic grounds.
When the task is the design of an energy efficient building, the approach is a similar one. To make a reasonable decision, it is important to consider strategic, technical, and economic aspects of the purchase/construction or retrofit question. The only difference is that with the lifetime of a building being 30-50 years, these decisions are even more critical.
In fact, as shown in Fig. 1, construction costs represent only about 2% of the total cost of a building, with operations and maintenance costs (including utilities) representing 6%, and associated personnel costs representing 92%. (This last statistic also highlights the reason that energy projects usually are also designed to increase occupancy comfort; in any facilities other than heavy-industrial buildings, those occupants are the single greatest cost.)
Life cycle costing is a method not only for analyzing the reasonableness of one particular decision or group of decisions, but also for examining the advantages of one investment vis-a-vis another. To a greater or lesser extent, depending on the complications inherent in the decision, it models reality—which means that the calculation mechanism can be a scrap of paper, a simple spreadsheet, or a complicated and multifaceted computer model. The same principles apply in all cases, but each is appropriate in different circumstances.
For large projects, life cycle costing standards have been developed by ASTM International (www.astm.org) and the National Institute of Standards and Technology (NIST) (www.nist.gov), and the principles inherent in those standards are extremely useful even when the calculations are less complicated than whole-building analyses.
Stage 1: Describe the Current Situation
First, LCCA incorporates the characteristics of the current situation, to give one a picture of “what is” against which to compare. This can take many forms, as shown in Tables 1 and 2.
The level of complexity in these two analyses is very different, but the principle is the same: it is important first to know what the current situation is and then to benchmark that against similar buildings (either out of one’s own experience or by using a benchmarking tool such as EnergyStar; www.energystar.gov).
In these cases, for example, it becomes evident that the gas station has an immense opportunity for energy savings, as the normal energy usage in this particular climate would be approximately 2,00,000 Btu/sf/yr. (Expressed in this way, it is a measure of utility usage across various types of energy sources.) It is also clear that although the electricity and natural gas costs are almost identical, the gas usage in Btu/sf/yr is that upon which the greatest emphasis should be placed. Also, maintenance costs are quite high in relation to comparable facilities, and that information too will be useful in defining the energy projects to be recommended for the facility.
Table 2 HVAC system example, current situation
| System type | HVAC system |
| Date of installation | 1980 |
| Manufacturer and model number | Trane packaged rooftop air conditioner with natural gas heating package |
| Description | 25 ton, 350 MBH input heater |
| Nameplate efficiency | Estimated EER of 6 |
| Thermal zones | 2 |
| Utility rate schedule | Local REA, average blended electricity cost $0.87 |
| Operating schedule | 24 h |
| Heating & cooling season | 8 months heating, 4 months cooling |
| Maintenance costs | $860/yr |
For the HVAC system, any unit with an energy efficiency rating (EER) of six is about half as efficient as it should be—which provides a great deal of scope for reduced utility costs in both heating and cooling seasons. This is particularly true because the unit runs 24 h a day, all year long, so the increased efficiency should have a significant impact.
These “current” situation descriptions (and the possible energy efficiency measures associated with them) become the first step in the LCCA—the base against which other alternatives will be compared. When the analyst thoroughly understands the current picture, the next step is to examine the facility for upgrade and efficiency possibilities.
Table 3 shows a brief example comparing the life cycle cost (or total owning cost) of an incandescent light bulb vs. a compact fluorescent (CFL) bulb. The light in each case is assumed to operate 4 h per day or 1400 h per year. The CFL lasts about 7 year, whereas the incandescent bulb lasts less than 1 year; with 9 replacements, the LCCA analysis shows the CFL, at $14.94, to be a better choice than the incandescent bulb at
Table 3 Total owning cost of an incandescent vs a CFL light bulb
| Incandescent bulb (60 W) | 15 W compact fluorescent bulb | |
| Initial cost ($) | 0.25 | 7.00 |
| Annual operation ($) | 7.03 | 1.26 |
| 7-year life cost ($) | 44.29 | 7.94 |
| Life cycle cost ($) | 44.54 | 14.94 |
$44.54. (As a side note, actual electrical costs have increased, and a recent recalculation for the Denver, Colorado market produced an LCCA for the CFL of $18.76 and an LCCA for the incandescent bulb of $62.04.)
Stage 2: Definition of the Energy Project
The next step is to define the proposed project. As with the purchase of a car, this requires the definition of strategic, technical, and economic factors. In addition, for each alternative, both immediate and long-term costs and benefits should be described and understood.
This definition is necessary for both simple standalone projects and for energy efficiency measures that impact strongly on multiple elements and systems in a building. In almost every case, however, there will be long-term implications for each improvement. An EEM (energy efficiency measure) of “replacing incandescent exit signs with new fixtures illuminated by LEDs,” for example, does not impact the operation of the building significantly. On the other hand, there will be significant differences in maintenance and operation costs, because LED exit lights and batteries can last at least 10 years, whereas incandescent bulbs are supposed to be replaced annually.
It is precisely this type of decision that LCCA is designed to facilitate. LED exit lights are more expensive than their incandescent versions and have no effect on building operation but do significantly reduce long-term maintenance expenses. More importantly, their longer battery life makes them safer. LCCA can aggregate these costs and benefits, and provide consistent and complete information for a decision on the appropriate emergency lighting choice.
One brief note is that in most LCCA analyses, intangible costs and benefits (increased safety, lower risk, increased occupancy comfort, increased employee health, and so on) are not accounted for unless they can be quantified in some way (reduced employee sick days from better air quality and less mold, for example). It is possible and increasingly common, however, for the value of such intangible factors to be included in LCCA by weighting the variables in a statistically appropriate way, by rating the importance of several intangible factors and then grading each alternative for its performance against those factors.
When the proposed project or alternative projects have been defined (which is predominantly the responsibility of the consultants, engineers, and operations personnel), the impact of the energy efficiency improvements—both short term and long term—can be quantified. This step is the essence of LCCA, and although the details can be quite complicated, the premise is simple: Projected economic impacts for each period should be calculated, most easily by completing a table with costs and assumptions over the project life (as shown below).
In the single-technology exit light replacement example cited above, it would be important to quantify the following variables:
• Wattage difference between old lights and new LED lights
• Cost (including labor) for old lights and new LED lights
• Number of fixtures to be replaced
• Frequency of changeouts at present and cost to change lights (including labor)
• Projected frequency of changeouts and cost to change lights
• Residual value or disposal costs of both old lights and new LED lights
• Current utility rates and any projected changes over the life of the project
• Time value of money, or discount rate that should be used to convert future dollars to current ones
• Projected project cost
Even in a simple example such as the LED exit lights, other variables might usefully be included in a very large building and probably would be included in a computer model. Among them would be:
• Anticipated changes in material and/or labor costs
• Possible vandalism costs
• Inventory carrying cost for replacements
In most projects, however, these additional parameters would not provide materially different answers and, thus, are not likely to be worth the effort of research and calculation.
If exit light replacement can decrease electricity usage by approximately 70% per fixture and has long-term effects on maintenance and operations, it is easy to imagine that the picture becomes exceedingly complicated when one is looking at a whole building with integrated systems and interlocking issues.
For the architects and design engineers planning to build a new recreation center with an indoor swimming pool, for example, the technical considerations involved in defining the project are many, complicated, and interrelated, and all have financial implications. It is for cases such as this that the computer LCCA models integrating energy use and economic considerations are designed, because energy use is a key component of long-term cost; the more involved models run hourly simulations of buildingwide energy use to understand the entire economic picture.
Whether the analysis is simple or complex, however, the steps are the same. With the recreation center, the first step remains a description of the current situation (or, as here with new construction, a benchmark building). Second, the project must be defined strategically, technically, and financially.
With planned construction that is as complicated as a new recreation center, a computer model including LCCA should then be used to simulate results. For building developers who are planning to apply for U.S. Green Building Council LEED (Leadership in Energy and Environmental Design) certification, such modeling is critical, but it can be extremely useful for any facility for which construction and operating costs are constrained. With the help of computer models, the technical, energy use, and financial information provided by the model can often reduce both initial construction and long-term operating costs—although, of course, the main benefit comes from reducing the larger, long-term operating costs. For this purpose, the model should be run several times, with different assumptions or using alternative equipment, to achieve optimal whole-building results before comparing the project with other possibilities. (LCCA is a tool designed to be used as a decision-making tool for managers and operational personnel. Energy modeling, on the other hand, is best accomplished by professionals trained both in the use of the specific modeling program and in analyzing the output produced by the model.)
Stage 3: Determine and Quantify Costs and Benefits
In any analysis as potentially complicated as LCCA, it is important to include all appropriate costs and benefits. On the other hand, it is easy to go overboard in collecting information, unnecessarily increasing the complexity of the variables to be considered and, thus, delaying the decision which should be made. This is an important point because with energy projects (in contrast to most potential projects evaluated by organizations for consideration), delays do not conserve cash by reducing expenditures, but instead reduce the cash available by maintaining operating expenses at an unnecessarily high level.
The costs to be considered for an energy-project LCCA analysis generally can be described as follows:
• First costs. Depending on the project, this could be construction cost, purchase or other acquisition cost, installation costs, etc.
• Operations costs. These include the following:
— Maintenance costs
— Repair costs
— Subunit replacement costs (as in the replacement of a bulb in a light fixture)
— Utility costs
• Replacement costs
• End-of-life value or cost, which might include disposal, demolition, or residual value, depending on the project or product
• Finance charges
• Benefits and/or costs that are nonmonetary but that (if quantifiable through weighting or by some other method) are important to the decision The LCCA approach, like most other financial calculators, takes each cost or benefit into account in the year in which it occurs and then discounts or adjusts the value of those flows to the present.
For the third step, again, the appropriate variables (in addition to the design and technical data that is collected for Stage 2) will need to be defined, and they address essentially the same issues as those in the LED exit-lights example. They might include the following (using the indoor-pool example):
1. How often will the pool be occupied, and by how many people?
2. How often will there be spectators, and how many?
3. What lighting levels will be required—during the day and at night?
4. What are the normal outside weather conditions?
5. How easy is it to change lights, and what will each change cost per light?
6. What are the utility rates, including demand charges?
7. What is the projected change in utility rates over the period when the building will be occupied?
8. What is the anticipated life of the facility and its major components?
9. What is the disposal cost or residual value of short-lived building systems or components?
10. What is the projected yearly maintenance cost?
It is a very complicated picture.
When looking at a retrofit option, however—for example, a recreation center with a swimming pool already in place—the complications increases dramatically. “What is” can be known, of course, along with what is working and what is not, what is proving to operate in the way it was designed to operate, and what is causing difficulties for one reason or another. Therefore, a description of the current situation is possible, but an analysis of the issues raised by the project—even when confined to those that have energy usage implications—is quite difficult.
Naturally, most complications come from the interactions of various systems. The humidity in the pool-room air must be controlled, for example, and in a dry climate, that damp heated air might be exhausted through the locker room; heat might also be recovered from the exhaust system and used in other parts of the building. The advisability of this approach would depend on and impact the design of the air handling system, the size of the pool, the numbers of spectators, the hours of use, the pool lighting, and a number of other factors. Each important system interaction can be accounted for with a variety of the building modeling tools available on the market, and the implications for the operation of the building accounted for and understood.
LCCA allows one to take the next step, which is to assess the cost implications of the actions that might be taken to improve the situation in the future. Thus, it looks at both future costs and benefits of any energy efficiency system improvements. With whole buildings or more involved systems, the complications can mushroom because of the complexity of the building and the interactions among systems, and computer models can take such implications into account. The principle for comparison remains the same, and for most projects, a simple spreadsheet LCCA assessment is more than sufficient.
LIFE CYCLE COSTING AND ITS USES
Life cycle costing is in fact an outgrowth of several standard methods for calculating the economic impacts of various decisions over time. It is similar in many ways to the standard business measure of net present value (NPV), which takes future cash flows from any proposed investment (both in and out) and calculates their value in current dollars; when the outcome is positive, the project makes economic sense. A similar measure is the internal rate of return (IRR), which provides a percentage return on the investment after calculating costs and benefits from today forward; usually, companies have a hurdle rate, and an IRR must exceed that number for the project to be considered.
LCCA is in the same mould. It reduces energy project complexity down to one number that can then be easily compared with the same calculations performed on other projects. Because life cycle costing includes both current and future benefits and costs, and discounts for the time value of money, it gives a far more realistic picture than the payback period discussed earlier.
Table 4 Lighting retrofit example, Stage 1 (Current situation) and Stage 2 (Proposed situation)
| Stage 1 (current situation) | Stage 2 (proposed situation) | |
| Description | 100 fixtures; 2 bulb 4 ft long 34-Watt T12 FL fixtures with magnetic ballasts, V2 lenses broken, fixtures need cleaning but otherwise OK, fixture wattage 84, personnel unhappy with light provided; fixtures 2 years old | T8 lamps and electronic ballasts, to be installed in the same fixture; all fixtures to be cleaned. Total wattage 59, increased light levels 10%. Group replacement anticipated every 3 years |
| First costs | ||
| Design cost | $1000 | |
| Lenses for fixtures | 50 lenses at $8 each | 50 lenses at $8 each |
| Ballasts | $10.50 each, group replacement | |
| Bulbs | $3.00 each | |
| Installation and cleaning cost (incl. labor) | $20.00 per fixture on “ad hoc” basis | $10.00 |
| Fixture cost | $44.52 | $44.52 |
| Numbers of fixtures | 100 (100 ballasts, 200 bulbs) | 100 (100 ballasts, 200 bulbs) |
| Operating and maintenance costs | ||
| Bulb replacement (incl. | $28 each, replaced as needed, average | |
| cleaning and labor) | !/4/year | |
| Ballast replacement (incl. | $21.50 each, replaced as needed, average | |
| cleaning and labor) | !/4/year | |
| Repairs | $200/year | |
| Electricity | $0.08 blended rate/kWh | |
| Replacement/retirement cost | ||
| Expected life | 4 years | 4 years |
| End of life disposal costs—lamp | $1 | $1 |
| End of life disposal costs—ballast | $1.75 | |
| Salvage value at end of life | 0 | 0 |
| General assumptions and costs | ||
| Finance charges | 0 | 0 |
| Expected fixture life | 10 years | 10 years |
| Discount rate (nominal rate for 10 years) | 6.1% | 6.1% |
| Utility rate changes expected | Increase 2% yearly | Increase 2% yearly |
| Usage changes expected | None | None |
| Non-monetary costs | Complaints regarding lighting levels and color, “look” of the facility | |
| Non-monetary benefits | Increased light levels and better attractiveness of facility | |
| Cost escalation projection Hours of operation | None 24 h | None 24 h |
Life cycle costing can be used in different ways, depending on the situation and the circumstances:
• With new buildings (and principally through computer models incorporating life cycle costing), design, systems, site placement, materials, equipment choice, and other options can be modeled and evaluated so that the best possible choices are made, both in construction and in operating cost.
• With existing buildings, LCCA can be used to:
— Compare the current situation with that proposed under several design scenarios.
— Choose the optimum balance between retrofit cost and operating expenses.
— Choose one or several possible energy efficiency options among a number of possibilities.
• For states and other governmental agencies, as well as large corporations, LCCA models can be required for both projects and systems as prerequisites to approval, and often, the particular variables to be used and the specific computer model that is acceptable will be specified.
Many of the computerized technical and economic modeling programs are excellent, accounting for the interactions among various systems and possibilities, and giving a true picture of a complicated set of interrelationships. They are not fundamentally different, however, from a spreadsheet-based LCCA, which any manager can use with relative ease. Where a full economic analysis and computerized modeling for various design alternatives are required, they should be done by engineers or designers experienced in the particular modeling program to be used; their analyses of the competing alternatives and recommendations regarding options to install will very likely be worth far more than the cost of their services.
EXAMPLE
Let’s take an example: a small lighting retrofit. First, Table 4 describes both the current situation and the proposed retrofit throughout the anticipated life of the project.
For the third stage of quantifying costs and benefits, additional variables are defined, and the LCCA spreadsheet is constructed for the life of the project—in this case, 8 years, which is the remaining projected life of the fixtures. The retrofit option also includes group relamping of bulbs and ballasts every 3 years, with a guarantee from the manufacturer to cover any materials and maintenance costs between those times (Tables 5 and 6).
Table 5 Lighting retrofit example, Stage 3 (Determine and quantify costs and benefits) – Current situation
 |
|
| First cost | |
| Design cost | |
| Lenses |  |
| Ballasts | |
| Bulbs | |
| Installation & cleaning | |
| incl. labor | |
| Fixture cost | |
| No. of fixtures | |
| O&M costs | |
| Total bulb replacement |  |
| Total ballast |  |
| replacement | |
| Repairs |  |
| Electricity | Fixture wattsXnumber of fixturesXhours used in a year/1000, increasing 2%/year compounded |
| Replacement/retirement | |
| cost | |
| Expected life | 10 years total for fixtures; 8 years remaining |
| Lamp disposal | $1 per lamp, 25% of 200 per year |
| Ballast disposal | $1.75 per ballast, 25% of 100 ballasts per year |
| Salvage value | $0 |
Table 6 Lighting retrofit example, Stage 3 (Determine and quantify costs and benefits) – Proposed situation
 |
|
| First cost | |
| Design cost |  |
| Lenses |  |
| Ballasts |  |
| Bulbs |  |
| Installation & |  |
| cleaning incl. | |
| labor | |
| Fixture cost | |
| No. of fixtures |  |
| O&M costs | |
| Total bulb | |
| replacement | |
| Total ballast | |
| replacement | |
| Repairs | |
| Electricity | Fixture wattsXnumber of fixturesXhours used in a year/1000, increasing 2%/year compounded |
| Replacement/ | |
| retirement cost | |
| Expected life | |
| Lamp disposal |  |
| Ballast disposal | |
| Salvage value | |
When the data has been input into the spreadsheet, Microsoft Excel or a similar program is used to calculate the life cycle cost of the proposed project based on that information.
Based on the assumptions shown above and with the cost and benefit calculations assigned to their particular years, cash flows for each year are first summed for each year and then discounted back to the present. In Excel, this can be done by using the NPV formula, which allows both discount rates and differential cash flow by period. If an organization does not have a generally accepted internal discount rate, appropriate rates for the United States, drawn from the President’s annual budget submission, can be found in the ASTM International standard.[3]
Then the life cycle cost for the proposed project is compared with the life cycle cost for the current situation, and a decision can be made to proceed or not, based on a good economic assessment.
LIFE CYCLE COSTING CALCULATORS AND MODELS
The same approach and components could be used for widely different types of projects, and in fact, many LCCA calculators for an incredible variety of products are available on the Web sites of many organizations that are interested in fostering energy efficiency. Following are two examples:
• For an electric griddle, www.fishnick.com/tools/calcu-lators/egridcalc.php is a calculator from the Food Service Technology Center, which also offers other food service-related calculators.[4]
• For transformers, the Copper Development Institute has an excellent set of formulas that can be used to evaluate alternative transformer possibilities.
As noted, a multitude of computer models include energy project LCCA in addition to their core focus areas (which may be energy costs, integrated building design, or other specialties). These are well summarized by the National Institute of Building Sciences[6] and are listed here for reference:
• Screening tools: FRESA, FEDS
• Architectural design tools: ENERGY-10, Building Design Advisor, Energy Scheming
• Load calculation and HVAC sizing tools: Hap, TRACE, DOE-2, BLAST, VisualDOE, EnergyPlus
• Economic assessment tools: BLCC, Quick BLCC.
CONCLUSION
Life cycle costing analysis is a tool that combines financial, technical, and other information considered over time to facilitate decision-making. The variables in use, the cost of whole projects or systems, and regulatory requirements can make the use of complex computer modeling vital. The principles of LCCA, however, are relatively simple and straightforward. The techniques can be used for small as well as large decisions, and provide managers and decision-makers a way to compare possibilities that are not on the surface comparable.
Mastering the techniques of simple LCCA calculation is possible for any well-informed professional. Such mastery in turn facilitates communication among those professionals and technically trained experts needed for more complex modeling. Thus, LCCA can be a useful tool both for making decisions and for talking about those decisions.
