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cycle costing, LCC, is the accumulation of costs for activities that occur over the entire life cycle of a product, from inception to abandonment including its cost of installation, operation, maintenance, conversion, and/or decommission.
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using LCC, total cost of the product can be calculated over the total span of product life cycle.
is a economic tool which combines both engineering art and science to make logical business decision. This analysis provides important inputs in the decision making process in the product design, development and use.
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using LCC, product suppliers can optimize their design by evaluation of alternatives and by performing tradeoff studies. By using LCC, product suppliers can evaluate various operating and maintenance cost strategies (to assist product users).
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using LCC, customers can evaluate and compare alternative products. By using LCC, customers can assess economic viability of projects or products.
Project Engineering wants to minimize capital costs as the only criteria, Maintenance Engineering wants to minimize repair hours as the only criteria, Production wants to maximize operation hours as the only criteria, Accounting wants to maximize project net present value as the only criteria, Shareholders want to increase stockholder wealth as the only criteria.
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can be used as a management decision tool for synchronizing the divisional conflicts by focusing on facts, money, and time.
Why should engineers be concerned about cost elements? It is important for engineers to think like managers and act like engineers for a profit maximizing organization.
Cost element
The identification of cost elements and their sub-division are based on the purpose and scope of the LCC study.
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Cost element
Initial Cost: Design & development cost, Investment on asset, or cost of equipment, Installation cost or erection & commission cost.
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Cost element
Operation
Labour cost, Energy cost, Spare & maintenance cost, Raw material cost.
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To be continued
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factor
The discount rate is an interest rate, a central bank charges banking institutions that borrow reserves from it.
For example, let's say Mr. Ram expects Rs. 1,000 in one year's time. To determine the present value of this Rs. 1,000 Ram would need to discount it by a particular rate of interest (often the risk-free rate but not always). Assuming a discount rate of 10%, the Rs. 1,000 in a year's time would be equivalent of Rs. 909.09 to Ram 20 today (i.e. 1000/[1+0.10]). To be continued
factor
The inflation rate is the percentage by which prices of goods and services rise beyond their average levels. It is the rate by which the purchasing power of the people in a particular geography has declined in a specified period.
To be continued
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C (1+i/100) (n-1) PV= ----------------------(1+d/100) n where, C = any cost element at nth year I = inflation rate d = discount rate/ interest rate
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Step 5: Analysis
The data collected from LCC are analyzed. If one product has to be selected among multiple equipments, then LCC is calculated for every product. Data for every product are analyzed, and the lowest LCC option become preferred. But lowest LCC option may not necessarily be implemented when other considerations such as risk, available budgets, political and environmental concerns are taken into account.
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An important reminder..
LCC provides critical information to the overall decision-making process, but not the final answer.
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Case Study
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A highly productive foundry shop has one sophisticated robot operated core making machine (made in Italy). Due to increase of demand for its casting, the foundry shop wants to install one new core making machine. For new machine, there are two options: Similar sophisticated robotic machine, or Semi-automated machine.
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Option 1
Initial cost
Cost Element
Value Time (in INR, phase million)/ year
Sl. No.
Remarks
1
2 3
59.4 0.6
1% of asset cost
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Option 1
Initial cost (IC) Computation of PV of IC
D(1+i/100) (n-1) A(1+i/100) (n-1) I(1+i/100) (n-1) PV= ------------------------ + ---------------------- + ----------------------(1+d/100) n (1+d/100) n (1+d/100) n
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Option 1
Sl. No. 1 2 3 4
Time phase 2-10 year 2-10 year 2-10 year 2-10 year
Remarks
Labour (L) Energy (E) Spare & maintenance (S) Raw material (M)
Option 1
Operation & Maintenance cost (OC) Computation of PV of OC Total OC= L+E+S+M=34.6 Million INR PV of OC at nth year,
Option 1
Time Period
Discounting factor 1/(1+8/100)n B 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50 0.46
Inflation factor (1+5/100)n-1 C 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 1.55
PV of any year Million INR E=DXBXC 31.15 30.28 29.44 28.62 27.83 27.05 26.30 25.57 24.86
Total PV incurred Million INR F=E+ last year's F 31.15 61.43 90.87 119.49 147.32 174.38 200.68 226.25 251.11
Total LCC Million INR H=G+F 55.50 86.65 116.93 146.37 174.99 202.82 229.88 256.18 281.75
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nth year
A 1 2 3 4 5 6 7 8 9 10
Million INR
D 34.60 34.60 34.60 34.60 34.60 34.60 34.60 34.60 34.60
Million INR
G 55.50 55.50 55.50 55.50 55.50 55.50 55.50 55.50 55.50 55.50
Option 1
Computation of LCC In the previous calculation, expected future values of OC at all the years were same, i.e. 34.6 Million INR. This expected value can be different for different years, too.
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Option 2
Different cost element for option 2 (i.e. Semi-automated machine) has been estimated and final calculation for LCC has been done.
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Option 2
Discounting factor 1/(1+8/100)n B 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50
Inflation factor (1+5/100)n-1 C 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48
PV of any year Million INR E=DXBXC 45.01 43.76 42.54 41.36 40.21 39.10 38.01 36.95
Initial Cost (IC) Million INR G 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00
Total LCC Million INR H=G+F 42.00 87.01 130.77 173.31 214.68 254.89 293.99 332.00 368.95
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0.46
1.55
50.00
35.93
362.88
42.00
404.88 35
Analysis
Life Cycle Cost Analysis 450 400
LCC (INR, in Million)
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Analysis
Considering LCCA, the robotic machine is preferred compared to the semiautomated machine, for this particular application.
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