A $18,000 higher upfront cost for premium-efficiency equipment, evaluated against its lower annual operating cost over 20 years at a 6% discount rate — with a clear payback point.
| Option A — Standard efficiency | Initial cost $50,000, annual operating cost $12,000 (3%/yr escalation) |
| Option B — Premium efficiency | Initial cost $68,000, annual operating cost $8,500 (3%/yr escalation) |
| Discount rate | 6% per year |
| Analysis period | 20 years |
| Salvage value (both options) | $0 |
| Check | Requirement | Actual | Status |
|---|---|---|---|
| Option A life-cycle cost | n/a (comparison basis) | $224,738.39 | ✓ PASS |
| Option B life-cycle cost | n/a (comparison basis) | $191,773.03 | ✓ PASS |
| Lower life-cycle cost option | n/a (this is the result) | Option B (premium efficiency) | ✓ PASS |
| Simple payback on the extra $18,000 upfront cost | n/a (informational) | 5.14 years | ✓ PASS |
Key insight: Simple payback period and life-cycle cost can agree (as they do here) or disagree depending on the analysis period and discount rate — payback only asks 'when does the extra cost break even', while LCC captures the entire remaining value of ongoing savings after that break-even point, discounted back to present value. A project could have an attractive payback but a poor LCC if the analysis period is short relative to the payback, so both figures are worth checking rather than relying on payback alone.
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Open Life-Cycle Cost (LCC) calculator →The discount rate converts future dollars to present value regardless of what's driving them, while the escalation rate reflects that the operating cost itself is expected to grow year over year (e.g. from rising energy prices) — the calculation nets these two effects against each other every year, which is why a 3% escalation against a 6% discount rate still produces a declining (not flat) contribution to present worth from later years, not a simple 20x multiplication of the annual cost.
EAC converts a lump-sum life-cycle cost into a level annual figure using the capital recovery factor, which is useful for comparing options with different initial costs and cash-flow timing on a common 'cost per year' basis, or for comparing against an annual budget or lease-equivalent figure — it carries exactly the same ranking information as total LCC (the cheaper LCC option always has the cheaper EAC too) but expressed in a more budget-familiar unit.