The first task one must accomplish in performing an LCC analysis is to determine the period of time for which the analysis of accumulated costs is to occur. This will usually be designated the project design life. The life span of the facility to be analyzed (a bridge, pavement, or culvert pipe) must be determined, together with the associated maintenance and rehabilitation costs. Another consideration that must be addressed is the realization that individual life spans of components of a system may be quite different. For example, in considering a highway system, the life of a bridge will likely be much longer than the life of a pavement. In considering a building, the life of the structural framework may well be 100 years or more, whereas the life of the roof may be only 20 years.
In performing a value study, the project design life or life span that should be selected is the period of time over which the owner or user of a product or facility needs the item. The user’s need determines the life span when judging LCC and worth, and when comparing alternatives. The life span should be a realistic, reasonable time, and the same life span must be used for evaluating all choices. Assessment of obsolescence is part of a rational determination of design life. One must estimate how far in the future the functional capacity will be adequate. An unrealistically long design life may result in excessive expenditures on initial costs. On the other hand, an unrealistically short design life may lead to expensive replacement at a premature date.
The salvage or residual value at the end of the project design life must be determined and accounted for in the analysis. This may represent a net scrap value or the value associated with the reuse of a component, if that is feasible.
The discount rate is used to convert costs occurring at different times to equivalent costs in present dollars. The selection of the discount rate to be used in the calculations is very important. If a low discount rate is selected, greater significance is given to future expenditures. If a high discount rate is selected, less significance is given to future expenditures. The discount rate should represent the rate of interest that makes the owner indifferent regarding whether to pay a sum now or at a future time. In government projects, the discount rate may be mandated by policy or law. The Office of Management and Budget prescribes rules for federal projects in Circular A-94. It states that the discount rate represents an estimate of the average rate of return on private investment, before taxes and after inflation. Thus, it may differ from the cost of borrowing. Guidelines on discount rates may be further amplified by federal agencies.
