Life Cycle Cost Analysis (LLC)

Suppose that you are a builder or developer and discuss when you need to use LCC for residential buildings?

I would use the LCC whenever starting to convert everything to present values. In personal finance everyone talks about a certain “number” that is needed to retire happily. But this figure is relative due to 2 variables: inflation and when you plan on retiring. Being able to equate apples to apples or in this case “dollars today” in the form of present value is a very logical strategy for planning. Buildings and structures last a lot longer than people therefore more emphasis is put on the time period factor.

Currently I have a rental home and I am debating on the viability of the business venture as compared with simple investing in stock. There are many factors when having a rental and frankly it is very overwhelming to keep track of so many expenses especially when they are at times intervals from year 1 through year 30. Some of these costs or incomes include: rent charged, interest paid, management fees, taxes, insurance, tax rebates, contingency allowances incase the rental goes vacant, typical maintenance on home such as landscaping, non-regular expenses such as a new roof or washing machine, depreciation value deductions, etc. The question at the end of the day is after all this work am I making more money than investing in stocks (5-8% annually)? In this case a life cycle cost estimate is the only way to compare these future dollars into a comparable value.

Here is how you do it:
Establish the objectives, scope, alternatives, and constraints to be considered.
Select the applicable measure to be used—Present Worth, Equivalent Uniform Annual Cost, or SIR.
Break down system components.
Compile data.
Describe all alternatives quantitatively.
Determine initial cost data.
Determine future cost data, time of expected costs, and replacement costs.
Determine salvage cost and/or values.
Discount all cash flows item-by-item, converting amounts to Present Worth or Equivalent Uniform Annual Costs.
Calculate the LCC for all alternatives.
Calculate the Savings-Investment Ratio (SIR) for all alternatives, as applicable.
Compare LCC and SIR for all alternatives.
Examine the results of risk and uncertainty aspects.
Review all data and decide on a solution.