How to run a lifecycle cost model on a drainage asset

The four inputs

Costs, timing, period and rate. Costs come from a cost database or a schedule of rates. Timing comes from the asset lives and the renewal cycles. The period and the rate come from the analyst, and they are the two that need a justification on the page rather than in a footnote.

1. List every cost with the year it falls in, including routine maintenance and every component renewal.
2. Set the analysis period, and state whether it is the shorter asset's life, the longer one's, or a common multiple.
3. Choose the discount rate, and state whether it is a real rate or a nominal one, because mixing them is a common error.
4. Discount each year separately and sum, then test the answer at two other rates to show how much it depends on the choice.

The two errors that matter

The first is mixing a nominal discount rate with costs stated in today's money, or the reverse. The result is a figure that is wrong by the inflation assumption over the whole period, which on a sixty-year model is not a rounding error. The second is choosing an analysis period that favours one option: comparing a thirty-year asset with a sixty-year one over thirty years charges the long-lived asset for a replacement it will not need, and over sixty years charges the short-lived one for a second construction.

A lifecycle cost is not the same as a whole-life cost, and neither is the same as a total cost. Whole-life cost is the undiscounted sum; lifecycle cost is the discounted sum; total cost is whatever the writer meant. Where a comparison rests on one of these, the document has to say which one and at what rate.

Where this posting stops

This page covers the model. The method's definition is owned by the lifecycle cost account, the benefit side by the benefit-cost account, and the programme the ranking feeds by the capital plan account.