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1. Fundamentals of Sustainable EngineeringModule 11Life Cycle Cost/Benefit AssessmentRichard N. Wright, Dist.M.ASCE 11.1

2. Learning Outcomes • Learn techniques for life cycle cost and benefit assessments • Learn about advanced techniques for probabilistic and sensitivity analyses, benefit-to-cost ratios, and comparing incommensurate benefits and costs • Learn how to access information sources on the methods and data for such assessments

3. Acknowledgement • This presentation is based in part on work of: • Barbara Lippiatt, Economist • Building and Fire Research Laboratory • National Institute of Standards and Technology

4. Outline • Rationale for Life Cycle Cost/Benefit Assessments • The Life Cycle Cost/Benefit Methodology • Advanced Topics in Assessment

5. Life-Cycle Cost Analysis • A method of economic analysis that sums all relevant project costs over a given study period in present-value terms • Most relevant when selecting among mutually exclusive project alternatives that meet minimum functional performance requirements but have different initial costs, OM&R costs, and/or expected lives

6. Types of Decisions • Accept/Reject Projects/Alternatives • Optimal System Size • Optimal Combination of Interdependent Systems • Ranking Independent Projects

7. Outline • Rationale for Life Cycle Cost/Benefit Assessments • The Life Cycle Cost/Benefit Methodology • Advanced Topics in Assessment

8. LCC Analysis Method • Evaluates costs of acquisition, ownership & disposal • Compares initial investment with future savings • Includes financing costs • Consistent with ASTM Standard E917, “Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems” Search for E917 at www.astm.org

9. Relevant Project Costs • Investment-related • First costs • Replacement costs • Residual value • Operation-related • Operation, maintenance, and repair costs • Energy and water costs • Contract-related costs (for financed projects)

10. Project Costs • LCC Analysis requires • Dollar amounts as of today • No sunk costs • Non-tangibles in narrative form • Generally, only amounts that are different need to be considered when comparing mutually exclusive alternatives

11. Study Period • Length of time over which an investment is analyzed • Study period must be equal for all alternatives, depending on • The expected life of the project and/or • The investor’s time horizon • Base Year: analysis date to which all cash flows are discounted • Base Case: alternative with lowest first cost

12. Study Period • Key dates • Base Date: beginning of study period • Service Date: beginning of operational period • End Date: end of study period • Planning/Construction/Implementation Period • Contract Period

13. Present Value & Discounting • Present-Value amount is the equivalent value to an investor, as of the Base Year, of a cash amount paid (received) at a future date • Present-Value of a Future amount is found by discounting • Discounting adjusts for the investor’s time-value of money

14. Discount Rate • The interest rate that makes an investor indifferent between cash amounts paid (received) at different points in time • Set by the federal government for its projects • Set by or agreed to by owners for other projects

15. Annual Operating Costs Study Period Discounting Investment Costs Replacement Replacement Replacement Replacement PV Investment Costs First Cost Residual Value Residual Value

16. Annual Operating Costs Study Period Discounting Operating Costs PV Operating Costs PV Investment Costs

17. 1 (1 + d)t PV = Ct x n  t=0 Ct (1 + d)t LCC = Discount Formula where Ct =cost at time t, d = decimal discount rate, n = length of study period, and t = time of cost occurrence

18. Present Value Factors • Single future amount (year t) PV = Ft x SPV (t,d) • Recurring annual amount (over n years) PV = Ao x UPV(n,d) • Constantly escalating annual amount (over n years) PV = Ao x UPV*(n,d,e)

19. Inflation Adjustments • Inflation • Rate of increase of the general level of prices • Escalation • Rate of differential increase in the price of a particular commodity

20. Inflation Adjustments Two Approaches to dealing with inflation: • Constant dollars (excluding inflation) • a real discount rate • a real escalation rate • Current dollars (including inflation) • a nominal discount rate • a nominal escalation rate

21. Constant vs. Current Dollars Given: Real Discount rate: 3.0% Base Date amount: $500 Inflation rate: 1.75% Time period: 1 year • Constant dollars, with real discount rate: $500 PV = (1+0.030) = $485.44 • Current dollars, with nominal discount rate: $500 (1+0.0175) PV = (1+0.030) (1+0.0175) = $485.44

22. Differential Escalation Rate • Difference between the rate of a good’s annual price change and general inflation • Due to causes other than loss of purchasing power of the dollar • Relevant to energy pricing

23. Heating & Cooling System Existing Baseboard Heating System with Window AC • Base Case: • Alternative: Heat Pump • Location: Maryland • Base Date: January 2009 • Discount Rate: 3.0 % real; 4.9 % nominal • Study Period: 15 years

24. Base Case Data • Baseboard Heat / Window AC • Initial investment: $0 • Expected Life: 15 years • Electricity: 16,000 kWh $0.10/kWh, commercial • Annual O&M: $80 • AC repair: $400 in year 8

25. $0 Initial Inv. $1,600annually Electricity $80 annually O&M Base Date AC Repair $400 Year 09 10 11 12 13 14 15 16 17 18 23 $0 Residual Value Cash-Flow Diagram Base Case

26. Alternative System Data • Heat Pump Initial investment: $3,000 • Expected Life: 20 years • Residual Value: $750 (25 % of initial cost) • Electricity: 10,100 kWh $0.10/kWh, commercial • Annual O&M: $100 • Compressor repair: $600 in year 8

27. $3,000 Initial Inv. $1010 annually Electricity $100 annually O&M Base Date Compressor Repair $600 Year 09 10 11 12 13 14 15 16 17 18 23 $750 Residual Value Cash-Flow Diagram Heat Pump Alternative

28. LCC Calculation Total PV LCC costs = $19,895

29. LCC Calculation Total PV LCC costs = $15,942

30. Lowest LCC • Base Case: LCCBB = $19,895 • Alternative: LCCHP = $15,942

31. Steps in an LCC Analysis • Identify feasible project alternatives • Establish common assumptions • Base Year • Study period • Discount rate (real vs. nominal) • Inflation assumption (constant $ vs. current $) • Identify relevant project costs • Convert all $-amounts to present value • Compute and compare LCCs of alternatives • Interpret results

32. Discussion Questions • What assumptions must be the same for all alternatives? • Does a lower discount rate favor the base case? • How can one deal with uncertainties on future costs and values?

33. Outline • Rationale for Life Cycle Cost/Benefit Assessments • The Life Cycle Cost/Benefit Methodology • Advanced Topics in Assessment

34. Uncertainty and Risk Techniques are available to assess the sensitivity of LCC analysis results. See ASTM Standard E1369 Guide for Selecting Techniques for Treatment of Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems. • An example of such analysis for highway bridges is given in: www.bfrl.nist.gov/bridgelcc/overview/html

35. Benefit/Cost Analysis • The Present Value of Benefits spread over the study period (LCB) is computed just like the costs • The Return on Investment (ROI) is the discount rate at which LCC=LCB

36. ASTM Standards for ROI • E1185 Standard Guide for Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems • E1121 Standard Practice for Measuring Payback for Investments in Buildings and Building Systems • E964 Standard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems • E1057 Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for Investments in Buildings and Building Systems

37. Evaluating Incommensurate Qualities • Alternatives often have different economic, environmental and social impacts • Economic is all dollars, but how can different environmental qualities such as storm water discharge and GHG emissions be compared? • Monetization of environmental and social impacts allows use of LCC techniques, but the monetization is itself questionable or arbitrary

38. Analytic Hierarchy Process • Saaty, The Analytic Hierarchy Process, McGraw Hill, 1980, provides a systematic process for pairwise comparison of alternatives • ASTM E1765, Standard Practice for Applying Analytic Hierarchy Process (AHP) to Multiattribute Decision Analysis for Investments Related to Buildings and Building Systems, provides guidance and tools for analyses • Lippiatt, Building for Environmental and Economic Sustainability, provides methodology and tools for selecting environmentally and economically preferable alternatives for building products and building systems, see www.bfrl.nist.gov/oae/software/bees. These techniques have been applied to whole buildings and are applicable to infrastructure systems, too

39. Federal Principles and Guidelines • Updated Principles and Guidelines for Water and Land Related Resources Implementation Studies • Require bases in sound science with consideration of both monetary and non-monetary benefits http://www.whitehouse.gov/administration/eop/ceq/initiatives/PandG

40. References • Building Life Cycle Cost (BLCC), associated programs and user guides:www.eere.energy.gov/femp/program/lifecycle.html • Whole Building Design Guide of the National Institute of Building Sciences: www.wbdg.org/resources/lcca.php