Engineering economy lorie m. Cabanayan francisco d. Cuaresma

Life cycle cost 
– refers to the summation of cost estimates from inception to disposal for both 
equipment and projects as determined by an analytical study and estimate of total costs experienced 
during their life. The objective of LCC analysis is to choose the most cost effective approach from a 
series of alternatives so the least long term cost of ownership is achieved. 
LCC analysis helps engineers justify equipment and process selection based on total costs 
rather than the initial purchase price. Usually the cost of operation, maintenance, and disposal costs 
exceed all other costs many times over. Life cycle costs are the total costs estimated to be incurred 
in the design, development, production, operation, maintenance, support, and final disposition of a 
major system over its anticipated useful life span (DOE, 1995). The best balance among cost 
elements is achieved when the total LCC is minimized (Landers, 1996).
Figure 1. The Life Cycle Cost 
COST 
(P) 
Cumulative committed life-cycle cost 
Potential for life-cycle cost savings 
OPERATION PHASE 
Cumulative life-cycle cost 
ACQUISITION PHASE 

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1 = Needs assessment; definition of requirements 
2 = Conceptual (preliminary) design; advanced development; prototype testing 
3 = Detailed design; production or construction planning; facility and resource acquisition 
4 = Production or construction 
5 = Operation or customer use; maintenance and support 
6 = Retirement and disposal 
Life cycle begins with the identification of the economic need or want and ends with 
retirement and disposal activities. Life cycle is divided into two general time periods, the 
acquisition phase and the operation phase. And each phase is further subdivided into interrelated but 
different activity periods.
The figure shows the relative cost profiles for the life cycle. The greatest potential for 
achieving life-cycle cost savings is early in the acquisition phase. Savings on the life-cycle costs of 
a product is dependent on many factors. And here, effective engineering design and economic 
analysis during this phase are critical in maximizing potential savings. One aspect of cost-effective 
engineering design is the minimizing of the impact of design changes during the steps in the life 
cycle.
The cumulative committed life cycle cost curve increases rapidly during the acquisition 
phas
e. In general, approximately 80% of life cycle costs are “locked in” at the end of this phase by 
the decisions made during the requirements analysis and preliminary and detailed design. In 
contrast, as reflected by the cumulative life-cycle cost curve, only about 20% of actual costs occur 
during the acquisition phase, with about 80% being incurred during the operation phase. 
One purpose of the life-cycle concept is to make explicit the interrelated effects of costs over 
the total life span for a product. The objective of the design process is to minimize the life cycle 
cost 
– while meeting other performance requirements.