Compares the full life-cycle cost of two equipment/design options — typically a lower-first-cost/higher-operating-cost option against a higher-first-cost/higher-efficiency option — using standard discounted-cash-flow engineering economics: initial cost plus the present worth of annual operating costs (optionally escalating) minus the present worth of salvage value.
Standards followed
Standard discounted-cash-flow / engineering-economics method (consistent with the approach in references such as IEEE 1013 and general engineering economics texts) — not a single numbered standard
What it can do
- Life-cycle cost (LCC) for each option: initial cost + present worth of annual operating cost (with optional annual escalation) − present worth of salvage value.
- Equivalent Annual Cost (EAC) via the capital recovery factor — useful for comparing options with different analysis periods.
- Simple payback: years for Option B's extra initial cost to be recovered by its lower annual operating cost.
- Head-to-head comparison flagging which option has the lower life-cycle cost.
Example problem
Standard-efficiency option: $50,000 initial, $12,000/yr operating, 3% escalation. Premium-efficiency option: $68,000 initial, $8,500/yr operating, 3% escalation. 6% discount rate, 20-year analysis period.
- Present worth of Option A's operating cost = Σ 12,000×(1.03)^(t-1)/(1.06)^t for t=1..20 ≈ $174,738.
- Option A LCC = 50,000 + 174,738 = $224,738.
- Present worth of Option B's operating cost ≈ $123,773 → Option B LCC = 68,000 + 123,773 = $191,773.
- Simple payback = (68,000 − 50,000) / (12,000 − 8,500) = 18,000 / 3,500 ≈ 5.14 years.
Option B (premium) has the lower life-cycle cost by about $32,965 over 20 years, paying back its extra first cost in about 5.14 years.
Want the full step-by-step version?
Discount rate should be consistent with how the operating costs are expressed (nominal discount rate with nominal/escalating costs, or real discount rate with today's-dollar/non-escalating costs) — don't mix the two conventions. Salvage value and periodic (non-annual) maintenance overhauls aren't modeled as separate line items here; roll major overhauls into the annual operating cost as an equivalent annualized figure if needed.