A Model for Life Cycle Cost Analysis with a Learning Curve

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Engineering (HMC)

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Life cycle costs (Lee) are the total costs of a project over its lifetime. These total costs are the sum of the initial project costs (research, development, design, construction, startup, etc.) plus the operating costs (maintenance and operations, etc.) over the life of the project [4]. The present worth of these costs may be used to compare and select economic alternatives. Life cycle costing gains considerable importance if we recognize that the operating costs over the life of a project are often a large fraction of or may even be greater than the initial investment. LCC often has not been used because of the difficulty associated with estimating the various factors that influence the operating costs. For instance, the inflation rate has been fluctuating widely, and we have seen that the price of imported oil has gone from $4 per barrel to $30 per barrel, more than a seven-fold increase since 1973. A combination of such factors has caused researchers to develop LCC models with increasing operating costs over the life of a project [2, 3, 9, 10]. The interested reader is referred to a recent paper by Almond and Remer that develops a present worth analysis of capital projects using a polynomial cash flow model [2]. In this model, the operating costs are represented by an Mth degree polynomial. When M=O, the LCC curve is a level annuity, and when M=l, the LCC curve is a linear gradient. They found that the degree of the polynomial representing the operating costs had a much greater impact on the LCC than either the cost of capital or the project lifetime. However, their model does not account for the effect of learning on LCC. In this paper we have developed an economic model that incorporates the learning or experience factor into the life cycle cost analysis. Such a model contributes to a more meaningful and viable investment evaluation for projects where learning is important. We will focus on the operating cost portion of the LCC calculation.

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© 1981 Taylor and Francis

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