Saving Money and Saving GHGs

Life cycle costing can be applied by comparing the initial capital costs along with operation and maintenance costs of two or more projects over their useful lives.

While more complex projects involve more complex calculations, LCC is based on a basic formula:

LCC = Capital Cost + (O&M Costs x Project Life x Discount Rate)

O&M refers to operation and maintenance. The Discount Rate is applied to calculate the time value of money. One dollar received today is worth more than the promise of $1 next year, because the $1 today can be invested and earn interest. Future costs are therefore discounted.

You are considering whether to pursue Equipment A or Equipment B (e.g., two different heating systems). Equipment B has an initial cost of $12,000, while Equipment A has an initial cost of $20,000. You may be inclined to purchase B because of the perceived lower cost, however a life cycle cost analysis shows Equipment A is less expensive in current dollars.  CO2 emissions are also significantly lower in Equipment A. Carbon costs are modestly estimated.

  Equipment A Equipment B 
Capital Cost  $20,000 $12,000 
O&M Costs    
Energy $700 $2500
Maintenance $50 $150
Project Life 20 20
(Years)    
Discount Rate 0.64 0.64
(Based on 3% interest)    
Calculations $20,000 + ($750 x 20 x 0.64) $12,000 + ($2650 x 20 x 0.64)
Life Cycle Cost $29,600 $45,920
     
Annual tonnes of CO2 0.32 2.70
Life Cycle tonnes of CO2 6.40 54.00
Carbon Cost / Tonne $15 $15 
Calculations 6.4t x $15/t x 0.64 54t x $15/t x 0.64
Carbon Liability $61 $518