Vikas asks:

What is a life cycle cost analysis and how do I calculate it?

Answer:
A life cycle cost analysis ("LCC") is used to measure the total cost of a green building project through the lens of the project's entire useful life.

The LCC measures the opportunity cost of one investment vs. another alternative and provides data as to which might provide a better return on investment (ROI).

In contrast to a simple payback analysis, the LCC examines not only the initial cost of a project, but also the expected operations, maintenance, financing, useful life and any salvage value (residual) that the project may have at the end of its life. The LCC considers all of these future factors and then calculates a present value of the future investment using a discount rate % that is specific to the investor's requirements. The discount rate that is typically used is the investor's required rate of return on an investment.

A simple payback analysis only considers the initial cost of the investment and the annual savings or additional revenues that are expected to accompany it.

To determine whether a simple payback analysis or a more in depth LCC should be used, a green building owner typically employs a simple payback analysis first and if the answer to that analysis indicates that the project requires, say, more than five years to produce a return, an LCC may be employed. Ten year horizons may also be used, but most investors want their money back as soon as possible.

Energy Star offers its Cash Flow Opportunity Calculator which is a good tool to analyze green building investments and helps decision-makers answer three important questions about energy efficiency investments, specifically:

- How much new energy efficiency equipment can be purchased from the anticipated savings?
- Should this equipment purchase be financed now, or is it better to wait and use cash from a future budget?
- Is money being lost by waiting for a lower interest rate?

Good luck!
Green-Buildings.com

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