Unformatted text preview: Life Cycle Costing:
A Critical Tool for Building Green Charles J. Kibert, Director & Professor
Powell Center for Construction & Environment
University of Florida
Gainesville, Florida 32611-5703 USA
[email protected] +1 352 273 1189 Overview
Overview Definition of Life Cycle Costing
Views of Life Cycle Costing: Broad and Narrow
Conducting a LCC analysis
Role of the discount rate
General and Energy Inflation Factors
Bringing it all together
Several examples
A quiz!
Conclusions Life Cycle Costing Defined
Life The total discounted dollar cost of owning, operating,
maintaining, and disposing of a building or a building
system (NIST Handbook 135)
Life Cycle Costing is a process to determine the sum of
Life
all the costs associated with an asset or part thereof,
including acquisition, installation, operation,
maintenance, refurbishment and disposal costs. It is
therefore pivotal to the asset management process.
(NSW Government)
(NSW
Life Cycle Costing (LCC) is a methodology to evaluate
Life
the economic performance of investments in building
and building systems. www.lifecycle.org
www.lifecycle.org
Latter refers to ASTM E 917-93, Practice for
Latter
Measuring Life-Cycle Costs of Buildings and Building
Systems, ASTM Standards on Building Economics Applications of LCC
Applications Asset Management
Facility Management
Complex Systems, e.g. Transportation
Value Engineering
Sustainable Design/Integrated Design Process Some Applications of Sustainable Design
to LCC
to Analyzing active versus passive system
Analyzing
tradeoffs: passive cooling/ventilation
tradeoffs:
Daylighting systems versus thermal loads
Employment of renewable energy systems
Ultra low flow water systems
Constructed wetlands for wastewater
Constructed
processing
processing
IEQ measures versus energy consumption Definition of LCC – The Broad View A tool for comparative cost estimations Life Cycle Costing (LCC) is as an assessment of all costs
associated with the life cycle of a product that are directly
covered by any one or more of the actors in the product
life cycle (supplier, producer, user/consumer, EOL-actor),
with complimentary inclusion of externalities that are
anticipated to be internalized in the decision-relevant
future. Source: Rebitzer, G.; Hunkeler, D.: Life Cycle Costing in LCM. International Journal of LCA 8 (5), 2003, p. 253 Where do we want to go?
Where do we want to go? Economic dimension of sustainability along life cycle is captured by life cycle costing (LCC) ¥
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a Life Cycle Costing :
Cost estimation for
product & process development,
purchasing, sales & marketing,
etc. Environmental Impacts (GWP,
energy, Ecoindicator, etc.) The Concept of Life Cycle Costing Assessing present and future money flows within the economic system
e.g., fuel tax (externality that is (partially) internalized)
Externalities Externalities Costs Resources
(externalities) Materials/
component
supplier(s) Revenues Externalities Externalities Costs Costs
Rev. Externalities Costs Product
manufacturer Costs
Rev. Revenues Consumer(s)/
user(s) Revenues Externalities Externalities Costs Costs
Rev. End-of-life actor(s) Final disposal
(externalities) Revenues Externalities Social and natural system:
Economic system = boundaries of LCCcertificates (will be (partially) internalized)
e.g., CO2
boundaries of social and environmental assessment Source: Rebitzer, G.; Hunkeler, D.: Life Cycle Costing in LCM. International Journal of LCA 8 (5), 2003, p. 253 Life Cycle Costing
Life
A Narrower View Benefits and/or costs of competing
investment options are compared in the
common unit of the dollar
common Life Cycle Costing
Addresses Key Project Questions Why? Performance
What? Greatest net benefit
When? Optimal timing
Where? Best alignment
How? Best implementation strategy LCC Issues and Concepts
LCC
Costs and benefits can be valued in dollars
Project life cycle or system life is basis for
Project
comparison
comparison
To be compared, dollars in different years must
To
be “discounted” to their present value amounts
be
Various inflation factors can be taken into
Various
account
account
For each year, the difference between benefit
For
and cost is discounted to the present
and
The discounted net (benefit-cost) for all years is
The
summed and compared to the initial investment
summed Typical Life Cycle Profile
Typical Benefits
Costs Initial Capital
Cost Dollars 0 1 2 3 4 5 6 7 8 9 10 Year 11 12 13 14 15 16 17 18 19 20 Benefits and Costs
Benefits Benefits Energy/water savings
Lower maintenance
Greater durability
Tax breaks and other incentives Costs Loan covering system procurement
Down payment
Operations and Maintenance
Insurance
Component Replacement O p e r a tin g C o s t
I n v e s tm e n t
C o st R e p la c e m e n t
C o sts C o n trac t C o st - F ir s t C o s t R e p la c e m e n t
C o sts O M & R C o s ts
R e s id u a l V a lu e S tu d y P e r io d Life Cycle Costing
Life
Adjusting for Present Value Fn
P=
n
(1 + d )
where
P = present value at time zero (base year)
d = discount rate
t = time (number of year) Fn = amount of net benefit or net cost in year t Life Cycle Costing
Example of Discounting What if we want to determine how much a
What
$1,000 benefit in 30 years is worth to us
today?
today? $1000 is in “real” dollars (i.e., in dollars
$1000
with today’s purchasing power)
with Discount rate is 3% Economic Analysis
Example (continued) Plug values into discounting formula: 1
PV = (1 + .03) 30 $1,000 year 30 Do calculations: PV = $1,000 x 0.41199 = $412 Discount Rate
Discount The interest rate used in calculating the present
The
value of expected yearly benefits and costs.
The interest rate at which eligible depository
The
institutions may borrow funds directly from
the Federal Reserve Banks. This rate is
controlled by the Federal Reserve and is not
subject to trading.
The interest rate of your alternative investment Discount Rate Is Important
Discount Higher the discount rate, the lower the
Higher
present value of a future dollar
present At 3%, $1,000 30 years from now is
At
worth only $412 today
worth Worth $231 at 5% and $57 at 10%
Discount rate can influence project
Discount
selection or design
selection Year Savings 2% 4% 6% 8% 1 $ 10,000.00 $ 9,803.92 $ 9,611.69 $ 9,423.22 $ 9,238.45 2 $ 10,000.00 $ 9,611.69 $ 9,238.45 $ 8,879.71 $ 8,534.90 3 $ 10,000.00 $ 9,423.22 $ 8,879.71 $ 8,367.55 $ 7,884.93 4 $ 10,000.00 $ 9,238.45 $ 8,534.90 $ 7,884.93 $ 7,284.46 5 $ 10,000.00 $ 9,057.31 $ 8,203.48 $ 7,430.15 $ 6,729.71 6 $ 10,000.00 $ 8,879.71 $ 7,884.93 $ 7,001.59 $ 6,217.21 7 $ 10,000.00 $ 8,705.60 $ 7,578.75 $ 6,597.76 $ 5,743.75 8 $ 10,000.00 $ 8,534.90 $ 7,284.46 $ 6,217.21 $ 5,306.33 9 $ 10,000.00 $ 8,367.55 $ 7,001.59 $ 5,858.62 $ 4,902.23 10 $ 10,000.00 $ 8,203.48 $ 6,729.71 $ 5,520.71 $ 4,528.90 11 $ 10,000.00 $ 8,042.63 $ 6,468.39 $ 5,202.29 $ 4,184.01 12 $ 10,000.00 $ 7,884.93 $ 6,217.21 $ 4,902.23 $ 3,865.38 13 $ 10,000.00 $ 7,730.33 $ 5,975.79 $ 4,619.48 $ 3,571.01 14 $ 10,000.00 $ 7,578.75 $ 5,743.75 $ 4,353.04 $ 3,299.06 15 $ 10,000.00 $ 7,430.15 $ 5,520.71 $ 4,101.97 $ 3,047.82 16 $ 10,000.00 $ 7,284.46 $ 5,306.33 $ 3,865.38 $ 2,815.72 17 $ 10,000.00 $ 7,141.63 $ 5,100.28 $ 3,642.43 $ 2,601.29 18 $ 10,000.00 $ 7,001.59 $ 4,902.23 $ 3,432.34 $ 2,403.19 19 $ 10,000.00 $ 6,864.31 $ 4,711.87 $ 3,234.37 $ 2,220.17 20 $ 10,000.00 $ 6,729.71 $ 4,528.90 $ 3,047.82 $ 2,051.10 Inflation Factors
Inflation Model how the costs of a given activity or
Model
resource will vary over time.
resource
General inflation rate: from government
General
figures. Fixed : same for entire life cycle
Variable: changes each year, use a lookup table Energy inflation rate Assumes that it will be different than general
Assumes
inflation rate
inflation
Can be fixed or in a lookup table Inflation Factors
Inflation General Inflation S n = S o (1 + g ) n Energy Inflation En = E0 (1 + e) n General Inflation
General Based on government estimates for the future
Can be constant or from a lookup table S n = S o (1 + g ) n
Assume the initial cost of maintenance is
$1,000 per year. What is the maintenance
cost in year 8 if the general inflation rate is
3%?
S8 = $1000 (1 + 0.03)8
= $1267 Energy Inflation Based on government estimates for the future
Normally greater than the general inflation rate
Can be constant or from a lookup table En = E0 (1 + e) n Assume the initial energy savings are $2,000
per year. What are the savings in year 10 if
the energy inflation rate is 5%?
E10 = $2000 (1 + 0.05)10
= $3257 Initial Maintenance $1,000 General Inflation 3% Initial Energy Savings $2,000 Energy Inflation Rate 5% Year Maintenance Cost Energy Savings 1 $1,030 $1,030 $2,100 $2,100 2 $1,061 $1,061 $2,205 $2,205 3 $1,093 $1,093 $2,315 $2,315 4 $1,126 $1,126 $2,431 $2,431 5 $1,159 $1,159 $2,553 $2,553 6 $1,194 $1,194 $2,680 $2,680 7 $1,230 $1,230 $2,814 $2,814 8 $1,267 $1,267 $2,955 $2,955 9 $1,305 $1,305 $3,103 $3,103 10 $1,344 $1,344 $3,258 $3,258 Basic LCC Formulae
Basic
Fn
P=
(1 + d ) n Present Value of Future Money Fn = P (1 + d ) n Future Value of Present Money S n = S o (1 + g ) n Future Value (General Inflation) En = E0 (1 + e) n Future Value (Energy Inflation) i (1 + i ) n
LP =
LA
n
(1 + i ) − 1 Annual Loan Payment (LP) for
a Loan Amount (LA) borrowed
for n years at interest rate, i Sum of Present Value of Discounted
Present Worth
Present
The basic multi-year discounting formula:
The 1
PV = ∑ (1 + r ) t
t =0 N ( Benefitt − Costt ) Initial Investment $10,000 General Inflation
Rate 2% Initial Maintenance
Cost $1,000 Energy Inflation
Rate 4% Initial Energy
Savings $2,000 Discount Rate 3% Year Coats Savings Net Benefit PW Net
Benefit 1 $1,020 $2,080 $1,060 $1,029 2 $1,040 $2,163 $1,123 $1,058 3 $1,061 $2,250 $1,189 $1,088 4 $1,082 $2,340 $1,257 $1,117 Total
PW $11,618 5 $1,104 $2,433 $1,329 $1,147 SIR 1.16 6 $1,126 $2,531 $1,404 $1,176 7 $1,149 $2,632 $1,483 $1,206 8 $1,172 $2,737 $1,565 $1,236 9 $1,195 $2,847 $1,652 $1,266 10 $1,219 $2,960 $1,741 $1,296 LCC Concepts
LCC
1. For each year: Net Benefit = Benefits – Costs
Example: Net Energy Savings=Energy Savings -Costs
2. Then, find the Present Worth of the Net Benefit
Note: The Present Worth is how much the savings are
worth today. Use the discount rate for this purpose.
3. Sum the Present Worth for each year over the life of
the option. This is the Total Present Worth
4. Compare the Total Present Worth to the Total
Investment. This is the Savings-to-Investment Ratio
(SIR). Basic LCC Example 1
Basic See spreadsheet Basic LCC Example 2
Basic See Spreadsheet Photovoltaic Example 1
Photovoltaic See Spreadsheet Daylighting Exercise & Solution
Daylighting See Spreadsheet $245,000
Cost of Low-e windows, controls:
Building Area:
Energy Saved:
Operating Weeks/Year: 50,000 SF
3 watts/SF
48 weeks Days/Week: 7 days Hours/Day 12 hours Electricity Cost:
Annual Savings: $0.08 per Kwh
$48,384.00 Interest Rate: 6% Discount Rate: 3% General Inflations Rate:
Energy Inflation Rate: 2.50%
5% Term of Loan 10 years Study Period 20 years TABLE 2-A
Summary of Initial Input
Data Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20 IR Payment GIR 6%
6%
6%
6%
6%
6%
6%
6%
6%
6% -$33,288
-$33,288
-$33,288
-$33,288
-$33,288
-$33,288
-$33,288
-$33,288
-$33,288
-$33,288 2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50% Maint.
-$61
-$63
-$64
-$66
-$68
-$69
-$71
-$73
-$75
-$76
-$78
-$80
-$82
-$84
-$87
-$89
-$91
-$93
-$96
-$98 -$2,511
-$2,574
-$2,638
-$2,704
-$2,772
-$2,841
-$2,912
-$2,985
-$3,060
-$3,136
-$3,215
-$3,295
-$3,377
-$3,462
-$3,548
-$3,637
-$3,728
-$3,821
-$3,917
-$4,015 SIR: 3.51419 Energy
Savings EIR
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5% $2,419
$2,540
$2,667
$2,801
$2,941
$3,088
$3,242
$3,404
$3,574
$3,753
$3,941
$4,138
$4,345
$4,562
$4,790
$5,029
$5,281
$5,545
$5,822
$6,113 $50,803
$53,343
$56,011
$58,811
$61,752
$64,839
$68,081
$71,485
$75,059
$78,812
$82,753
$86,891
$91,235
$95,797
$100,587
$105,616
$110,897
$116,442
$122,264
$128,377 Net Cost
$15,004
$17,482
$20,084
$22,819
$25,692
$28,710
$31,881
$35,212
$38,712
$42,389
$79,538
$83,596
$87,858
$92,335
$97,039
$101,979
$107,169
$112,621
$118,347
$124,363 Net Cost Total $1,282,831 DR
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3% NPV
$14,567.28
$16,478.16
$18,380.16
$20,274.44
$22,162.15
$24,044.41
$25,922.35
$27,797.05
$29,669.60
$31,541.08
$57,460.27
$58,632.37
$59,826.95
$61,044.46
$62,285.34
$63,550.04
$64,839.04
$66,152.79
$67,491.79
$68,856.53 $14,567
$31,045
$49,426
$69,700
$91,862
$115,907
$141,829
$169,626
$199,296
$230,837
$288,297
$346,929
$406,756
$467,801
$530,086
$593,636
$658,475
$724,628
$792,120
$860,976 NPV Total $860,976 TABLE 2-C
Expected SIR at Various Interest and Inflation Rates Interest Rate & Discount Rates
IR/DR
4/1
Energy
Inflation
Rate &
General
Inflation
Rate
EIR/GIR 5/2 6/3 7/4 8/5 3/0.5 3.53 3.05 2.63 2.28 1.97 4/1.5 4.07 3.52 3.05 2.64 2.28 5/2.5 4.69 4.06 3.51 3.05 2.64 6/3.5 5.39 4.66 4.04 3.51 3.05 7/4.5 6.19 5.36 4.64 4.03 3.50 TABLE 2-D
Sensitivity of SIR to changes in Interest and Inflation Rates. -50% +50% low Baseline high Interest Rate 3.67 3.51 3.34 Discount Rate 4.27 3.51 2.91 General Inflation Rate 3.54 3.51 3.49 Energy Inflation Rate 2.41 3.51 4.69 6.2 $1,450,000 5.39
5.24 $1,250,000 Interest rate (IR)
Discount rate (DR)
General inflation rate (GIR)
Energy inflation rate (EIR) 4.69
4.57 *** SIR values plotted on line ***
$1,050,000
4.06 4
3.82 3.77 3.72 3.67 3.62 3.51 $850,000 3.56 3.54 3.52 3.5 3.57 3.51
3.48 3.46 3.51 3.43 3.46
3.4 3.4
3.36 3.34
3.32 3.28 3.22 3.28
3.22 3.1
3.03 3.16
3.16 3.1 3.04
2.97 3.1
3.02 2.91
2.84 2.93
2.74 $650,000 2.78 2.83 2.71
2.72 2.6 2.64 2.44 2.22 2.43
2.36 2.44 2.28
2.28 2.17 2.21
2.14
2.06 NPV
Years
Payback IR
DR
GIR
EIR Baseline 2.5 2.09 0% 9
10
10 1.99 1.94 1.89 $450,000 % RATE 2.57 2.59 1.87
1% 9
10
11
14 2% 9
10
11
13 3% 10
11
11
12 4% 10
11
11
11 5% 11
11
11
11 6% 11
12
11
10 7% 11
12
11
9 8% 11
13
11
9 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 11 12 12 12 12 13 13 13 14 14 14 14 15 15 15 15 16 16 16 17 17 11 11 11 11 11 11 11 11 11 11 12 12 12 12 Summary
Summary LCC is an essential tool for decision making
LCC
about green building strategies
about
It can have a broad definition and application
It
and be applied in parallel with LCA
and
LCC must not be used in a static fashion, but
LCC
as an exploratory tool with sensitivity analysis
as
Selection of discount rate and inflation factors
Selection
is the key to a good LCC analysis.
is ...
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- Fall '08
- Kibert
- Inflation, Time Value Of Money, purchasing power
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