What is a Life Cycle Cost Analysis?
Life cycle cost analysis is an approach to asset valuation which involves considering all of the costs of ownership. It is also known as whole-life cost. The idea behind life cycle cost analysis is that it reveals the hidden costs of ownership which may not be apparent when looking at the superficial purchase price, allowing people to make a more informed decision about a purchase. For types of assets such as real estate, there are computer programs which can be used to run a life cycle cost analysis.
This analysis considers everything from the costs associated with acquisition to final disposal. The costs can include assessment of a unique object such as a building, planning and development for things like major repairs and renovations, and the costs associated with the purchasing process itself. It also includes costs which are incurred over the course of ownership, including costs for routine maintenance, potential repairs, and so forth. Life cycle cost analysis can also include estimates of unexpected expenses, and a final estimate of how much it will cost to dispose of the object.
People can use life cycle cost analysis when they are deciding whether or not to make a big purchase. The analysis can also be used to compare and contrast two or more purchases under consideration. For example, one purchase might be cheaper in the immediate sense, but more expensive in the long run, while a more expensive item might be cheaper to own. People often perform some level of life cycle cost analysis for big ticket items like cars. A more expensive car with a better reputation for reliability might be considered a better purchase than a cheaper model which is more likely to require expensive repairs, for example.
Life cycle cost analysis can also be used while considering repairs and overhauls. For example, when examining a building and developing renovation plans, people can consider whether or not big outlays of funds, such as money to retrofit the electrical system to run on solar power, will be worth it in the long term. This type of life cycle cost analysis can also include a consideration of environmental costs; for example, solar panels might have a higher life cycle cost than plugging into the conventional electrical grid in terms of how much money is spent on energy/system maintenance, but the environmental benefits of solar power might outweigh the higher cost.
Conducting a life cycle cost analysis can also assist with costing. Companies determining an appropriate price for their goods often consider the long term costs of ownership when weighing pricing options. As in the car example above, a manufacturer which knows that its cars are known for being reliable may feel justified in charging more for its products, understanding that people are willing to pay a premium for reliable cars.
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