LCC - Life Cycle Costing A Critical Tool for Building Green...

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) ¥ $ € ial s oc ct Se sp 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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