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Life-cycle cost analysis (LCCA) is a method for evaluating all relevant costs over time of a project, product, or measure. The LCC method takes into account first costs, including capital investment costs, purchase, and installation costs; future costs, including energy
costs, operating costs, maintenance costs, capital replacement costs, financing costs; and any resale, salvage, or disposal cost, over the lifetime
of the project, product, or measure.
Life-Cycle Cost formula - To find the total LCC of a project, sum the present values of each kind of cost and subtract the present values of any positive cash flows such as a resale value. Thus, where all dollar amounts are converted to present value by discounting, the following formula applies:
Life-cycle cost = first cost + maintenance and repair + energy + water + replacement - salvage value
Applications of LCCA - Projects may be compared by computing the LCC for each project, using the formula above and seeing which is lower. The alternative with the lowest LCC is the one chosen for implementation, other things being equal.
The LCC method can be applied to many different kinds of decisions when the focus is on determining the least-cost alternative for achieving a given level of performance. For example, it can be used to compare the long-run costs of two building designs; to determine the expected savings of retrofitting a building for energy or water conservation, whether financed or agency-funded; to determine the least expensive way of reaching a targeted energy use for a building; or to determine the optimal size of a building system.
In addition to the LCC formula shown above, there are other methods for combining present values to measure a project’s economic performance over time, such as Net Savings, Savings-to-Investment Ratio, Adjusted Internal Rate of Return or Discounted Payback.
Further study on Guidance on Life-Cycle Cost Analysis: http://www1.eere.energy.gov/femp/pdfs/lcc_guide_rev2.pdf