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Life cycle cost analysis considers all costs of ownership, from acquisition to disposal, for informed decision making. It can be used for large purchases, repairs, and pricing decisions. It also includes environmental costs and can be performed for real estate using computer programs.
Life cycle cost analysis is an approach to asset valuation that involves considering all costs of ownership. It is also known as the cost of living. The idea behind Life Cycle Cost Analysis is that it reveals hidden costs of ownership that may not be apparent when looking at the superficial purchase price, allowing people to make a more informed decision about a purchase. For asset types such as real estate, there are computer programs that can be used to perform a life cycle cost analysis.
This analysis considers everything from costs associated with acquisition to final disposal. Costs can include valuation of a single object, such as construction, planning and development, for major repairs and renovations, and the costs associated with the purchasing process itself. It also includes costs incurred in the course of ownership, including routine maintenance costs, possible repairs, etc. Lifecycle 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 deciding whether or not to make a large purchase. Analysis can also be used to compare and contrast two or more purchases under consideration. For example, a 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 generally perform some level of life cycle cost analysis for large items like cars. A more expensive car with a better reputation for reliability might be considered a better buy than a cheaper model that is more likely to require expensive repairs, for example.
Life cycle cost analysis can also be used when considering repairs and overhauls. For example, when surveying a building and developing renovation plans, people can consider whether large outlays of funds, such as money to retrofit the electrical system to run on solar energy, will be worth it in the long run. This type of life cycle cost analysis can also include a consideration of environmental costs; for example, solar panels may have a higher lifecycle cost than connecting to the conventional power grid in terms of how much money is spent on power/system maintenance, but the environmental benefits of solar energy may offset the higher cost .
Conducting a life cycle cost analysis can also help with costing. Companies that price their products appropriately often consider long-term ownership costs when evaluating pricing options. As in the car example above, a manufacturer that knows its cars are known to be reliable might feel justified in charging more for its products, understanding that people are willing to pay a premium for reliable cars.
Asset Smart.
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