Life Cycle Cost Analysis

Tapan K. Datta, PhD, PE

CE 7640: Fall 2002
What is Life Cycle Cost (LCC)
Analysis?
A method of calculating the cost of
a system over its entire life span.
Objectives of LCC Analysis
Evaluate the economic
effectiveness of different mutually
exclusive investment alternatives
over a certain period
Identify the most cost-effective
alternative
Analysis Period
A time frame that is sufficiently long to
reflect differences in performance
among different strategy alternatives.
Selection of Analysis Period
It is necessary to select an
analysis period over which the
alternatives are compared.
Pavement Rehabilitation
Project
Analysis period is considered
starting at the end of the
performance period of the
original pavement.
Rehabilitation strategy analysis period
beginning at the end of original pavement
performance period
Example 1
Common Performance Period
All the investment alternatives
have the same performance
period.
Common Performance Period
Performance curves for rehabilitation
alternatives expected to exhibit
notably different performance over the
common performance period.

Selection of analysis period for alternatives with
common performance period, but different performance
Options for Defining the
Analysis Period
The least common multiple of the
performance periods of all the alternatives
The shortest of the performance periods
among the alternatives
The longest of the performance periods
of the alternatives
Some other time period
Comparisons of Various Options
For relatively longer performance
periods, use of least common multiple of
the performance periods can result in an
extremely long and unrealistic analysis
period.
The use of shortest performance period
may adversely affect those alternatives
with better long-term performance and
favor those with short performance
periods.
The longest performance periods is
recommended as the analysis period.
Example 2
Unequal Performance Periods
Alternatives having different
performance periods, which are
expected to be able to keep the
pavement condition above the
minimum acceptable level for
different lengths of time.
Unequal Performance Periods
The analysis period is recommended to
be no less than the performance period of
the longest surviving alternative.
Using a shorter analysis period (equal to
the performance period of one of the
shorter-lived alternatives) would not fully
capture the anticipated differences in
performance.
Selection of analysis period for alternatives with
unequal performance periods
Unequal Performance Periods
While using a longer analysis
period, the follow-up rehabilitation
treatments would have to be
assigned to all three alternatives.
Selection of analysis period to encompass follow-up
rehabilitation for all alternatives
Comments
One or more of the alternatives may
have a follow-up rehabilitation
performance period which extends
beyond the end of the analysis period.
FHWA recommends an analysis
period of at least 35 years for all projects
(new construction as well as
rehabilitation)
Bottom Line of Analysis Period
Analysis period should be selected
sufficiently long to reflect significant
differences in performance among
the different strategy alternatives.
Discount Rate
Refers to the rate of change of
true value of money over time,
considering fluctuations in both
investment interest rates and the
rate of inflation.
Discount rate is approximately
equal to the interest rate minus the
inflation rate.
Selection of Interest Rate
Philosophy 1: A zero interest rate
is appropriate when tax monies are
used for financing.

Philosophy 2: The interest rate
need only reflect the societal rate
of time preference.
Selection of Interest Rate
Philosophy 3: The appropriate
interest rate is dictated by the
opportunity cost of those investments
forgone by private investors who pay
taxes or purchase bonds.

Selection of Interest Rate
Philosophy 4: The appropriate
interest rate is dictated by the
opportunity cost of those investments
forgone by budget agencies due to
budget constraints.
Selection of Interest Rate
Philosophy 5: The interest rate
should match that paid by
government for borrowed money.

The rate at which governments can
borrow money is felt to be
appropriate for evaluating highway
improvement projects.

Typical Discount Rate
Discount rates used by State DOTs
in life cycle cost analysis vary from 0
to 10 percent, with typical values
between 3 and 5 percent, and overall
average rate of 4 percent.

Monetary Agency Cost
Costs associated with the alternative
that are incurred by the agency
during the analysis period, which can
be expressed in monetary terms.
Monetary Agency Cost
Includes the following:
Initial rehabilitation design and
construction costs
Follow-up rehabilitation design and
construction costs
Annual maintenance costs
Traffic control costs during construction
Demolition and removal costs, or
residual value of the pavement structure
User Costs
Costs associated with the alternative
that are incurred by the users of a
roadway over the analysis period,
which can be expressed in monetary
terms.
Categories of User Costs
Vehicle operating costs
- fuel and oil, wear on tires and other parts,
registration, insurance, and others
Delay costs
- due to reduced speed and/or use of
alternate routes
Crash costs
- damage to the users/other vehicles,
public/private property, as well as injuries
Vehicle Operating Costs
In-service vehicle operating costs are a
function of pavement serviceability level,
which is often difficult to estimate.
Tools are available to model these costs,
such as World Banks Highway Design and
Maintenance Standards Model (HDM-III),
FHWAs Highway Investment Analysis
Package (HIAP-Revised), AASHTO Red
Book, and others.
Delay Costs
Costs associated with the value of time.
Vary by vehicle class, trip type and trip
purpose.
A function of demand for use of the
roadway with respect to roadway capacity.
Work zone user delay costs may be
significantly different for different
rehabilitation alternatives.
Crash Costs
In-service crash rates for different
roadway functional classes and crash
severities are well known.
Work zone crash rates may differ
significantly for different rehabilitation
alternatives.
Other Monetary Costs
Those incurred by parties other than the
agency or the users of the roadway.
Owners of properties and businesses
adjacent to or near the route under study.
Municipalities whose sales tax receipts
might be reduced during the period that the
nearby businesses were adversely
affected.
Salvage Value
The residual value that can be
attributed to the alternative at the end of
the analysis period.
The value that the item would have in
the market place.
Must be defined the same way for all
alternatives.
Compare Strategies
Present Worth
Equivalent Uniform Annual Cost
Future Worth
Internal Rate of Return
External Rate of Return
Benefit/Cost Ratio
Payback Period
Capitalized Worth
Sensitivity of Life Cycle Cost Analysis
to Key Parameters
Factors that are more sensitive:
The analysis period and performance
period
The predicted traffic over the design and
analysis periods
The initial investment
The discount rate
The timing of follow-up maintenance and
rehabilitation activities
The quantities associated with initial and
follow-up maintenance and rehabilitation