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Use life cycle costing to build a smart business case

Image of project life cycle cost spreadsheet being reviewed

Look at the total cost of operating equipment, not just the initial purchase cost

When you're planning for a new equipment purchase, or comparing two upgrade projects, you need to be smart in building your business case. Otherwise, you can wind up paying more than you expected.

That means understanding the long-term – or "life cycle" – costs of your decision, not just the up-front expenditures.

Life cycle costing is especially important when there are significant variations in performance (especially in energy usage) between the equipment models you're considering. A gas-guzzling car might come with a great sticker price, but how much will you pay to operate it over time? The same consideration goes for industrial equipment.

Life cycle costing allows you to look at the total cost of owning, operating and maintaining a project over its useful life. Include fuel, energy, labour and replacement components, in addition to the initial purchase price.

Energy efficiency projects often require a higher initial investment but have lower operating and maintenance costs over the life of the project. Purchasing a lower-cost, less-efficient product may save money in the short-term, but may cost more through higher energy and other operating costs over the life of the project.

Life cycle costing example

Company X is considering whether to pursue Equipment A or Equipment B.

Equipment A has an initial cost of $3,500, while Equipment B has an initial cost of $2,000. Company X is more inclined to purchase Equipment B because of the perceived lower cost. However, by also looking at the annual costs of operation and applying the life cycle cost formula, Company X can determine if Equipment B is truly more cost-effective than Equipment A.

Calculating life cycle cost

The formula for calculating life cycle cost is:

LIFE CYCLE COST = INITIAL COST + (ANNUAL COSTS x ANNUITY PV FACTOR**)

  Equipment A Equipment B
Initial Cost $3,500 $2,000
Annual Costs
Electricity
Maintenance

$150
$50

$250
$150
Project/equipment Life
(Years)
15 15
Annuity Present Value Factor**
(Based on an interest rate of 3% over 15 years)
11.937 11.937
Calculations $3,500 + ($200 x 11.937) $2,000 + ($400 x 11.937)
LIFE CYCLE COST $5887.40 $6,774.80

**The annuity present value factor is used to calculate the total present value of the equipment's annual costs over the life of the project/equipment, or, the value of the money you invest today, over time. This factor may be found on an Annuity PV Factor table or calculated using the equation below where r = interest rate and n= project life.

Annuity present value factor = [1 - (1 / (1 + r)n) ] / r

The above comparison demonstrates how the lowest initial cost may not lead to the lowest cost overall. Equipment A has a much higher initial cost, but with greater energy efficiency and lower maintenance costs over the life of the project, it is the more cost effective option to pursue. (Also note, more efficient equipment often offers a longer life span than cheaper alternatives, adding to its life cycle value.)

Incentives for your energy efficient project

Efficient facilities are more profitable and have better productivity. Power Smart Programs offer funding to help you increase the efficiency of your facility, and further improve the cost effectiveness of your project.

Have a look at the following incentives available to industrial customers:

Contact the Power Smart Business Helpdesk 604 522 4713 (Lower Mainland) and 1 866 522 4713 (everywhere else in B.C.) today to find out how you can benefit.