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Compute NET Present Value (NPV) |
  
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Compute NET Present Value (NPV) |
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In its broadest sense, LCCA is a form of economic analysis used to evaluate the long-term economic efficiency between alternative investment options. Economic analysis focuses on the relationship between costs, timings of costs, and discount rates employed. Once all costs and their timing have been developed, future costs must be discounted to the base year and added to the initial cost to determine the NPV for the LCCA alternative. As noted earlier, NPV is the economic indicator of choice, and the basic NPV formula for discounting discrete future amounts at various points in time back to some base year is:
n = year of expenditure
niop: number of different initial operations
nmop: number of different maintenance operations
The discount rate used in roadway LCCA is a function of both the interest rate and the inflation rate.
The exact mathematical relationship between the discount rate, the interest rate, and the inflation rate is as follows:
r = [(1 + iint) / (1 + iinf)] – 1
Where:
r =Real discount rate, decimal
iinf = inflation rate, decimal
iint = interest rate, decimal
Discount Rate: rate of interest that balances an investor’s time value of money.
Inflation: an increase in the prices paid for goods and services bringing about a reduction in the purchasing power of the monetary unit, is a business reality that can affect the economic comparison of alternatives.
Life Cycle Cost: a sum of all costs of creation and operation of a facility over a period of time.
Life Cycle Cost Analysis: a technique used to evaluate the economic consequences over a period of time of mutually exclusive project alternatives.
Maintenance Cost: any cost of scheduled upkeep of building, building system, or building component.
Nominal Discount Rate: a discount rate that includes the rate of inflation.
Operating Cost: any cost of the daily function of a facility.
Present Value (PV): an economic analysis method that requires converting all present and future costs and benefits to a single point in time (usually at or around the time of the first expenditure), using a discount rate factor.
Real Discount Rate: a discount rate that excludes the rate of inflation.
Figure 12.3 – Initial and future maintenance operations in STADIUM ® LCCA
Figure 12.4 – a. Cash flow of Maintenance and Rehabilitation Activities; b. Cash flow of Maintenance and Rehabilitation Activities in STADIUM ® LCCA for 3 alternatives
Salvage value represents the value of an investment alternative at the end of the analysis period.
Analysis Period: Period of time used in making economic comparisons between design alternatives.
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