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Life Cycle Cost(LCC)

by Dave Ryan
(Melbourne)




If minimization of LCC is the criteria, which truck should be recommended?




                       Truck X       Truck Y

Procurement Cost       $130000       $158000
Annual Operating Cost  $25000        $21000 
Annual Failure Rate     0.05           0.06
Disposal Cost          $2000         $2000
Useful Life (expected)10 years       10 years
Annual Interest Rate     6%             6%
Expected Failure Cost  $2000/yr      $1500 /yr




Comments for
Life Cycle Cost(LCC)

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Nov 24, 2009
 NPV Analysis Of Life Cycle Costs
by: Dee Reavis

The numbers work out to be:



First Cost    $130,000    $158,000

Annual Cost    
  Operating     25,000      21,000
  Failure          100          90

Disposal Cost    2,000       2,000

NPV at 6%      297,976     296,548

NPV at 10%     259,091     262,145



The NPV at 6% shows that the 2nd option has a lower cost, so it should be chosen.

It is interesting to note that when a discount rate of 10% is used, then the first option has a lower cost.

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