Lifecycle Costing

HayleyM

Hi,

Can anyone help? Our tutor hasn't covered this and It seems to come up in a lot of past exam papers. What is it in a nutshell? And how do you do it? Sorry to sound a bit vague but I have absolutely no idea..... :S

Thanks in advance!!

anniem

Hayley, this is something you should have learnt for ECR.

In a nutshell, it is to do with the purchase of new equipment.

For instance:

You buy a new piece of machinery for £300,000.

It is going to cost you £30,000 per year to maintain.

You are going to keep it for 5 years and at the end of that time you will dispose of it for £50,000.

Factors are:

Year 0 - 1.00
Year 1 - 0.952
Year 2 - 0.907
Year 3 - 0.864
Year 4 - 0.823
Year 5 - 0.784

THE RESULT:

Year 0 - 1.00 = £300,000 (the whole of the purchase price)
Year 1 - 0.952 = £28,560 (30,000 x 0.952)
Year 2 - 0.907 = £27,210 (30,000 x 0.907)
Year 3 - 0.864 = £25,920 (30,000 x 0.864)
Year 4 - 0.823 = £24,690 (30,000 x 0.823)
Year 5 - 0.784 = £-15,680 (50,000 - 30,000 x 0.784)
Net present cost = £390,700

So, although the machine will cost you £300,000 to buy now, if you factor in future costs and resale value it is equivalent to spending £390,700 now.

Hope this makes sense.

HayleyM

Hi Annie

Yes I remember doing it now and it has all come flooding back to me after reading your post!! Thanks