Life Cycle Cost Calculator
Whole of life cost as a present value and an equivalent annual cost
Inputs
Undiscounted whole of life cost
$5,300,000
Present value of operating and maintenance
$2,185,899
$240,000 a year × annuity factor 9.1079
Life cycle cost (NPV)
$3,813,279
Purchase and installation 39 per cent, operating and maintenance 57 per cent
Equivalent annual cost
$418,678
$3,813,279 ÷ 9.1079
How it's calculated
Year 0
Purchase + installation
Each year
(Operating + maintenance) × annuity factor
One-offs
Overhaul and residual, discounted to year 0
Life cycle cost
Sum of present values
Annual cost
÷ annuity factor
Present value of a one-off cost = cost ÷ (1 + r)year, where r is the discount rate.
Annuity factor = (1 − (1 + r)−n) ÷ r, the present value of $1 a year for n years.
Life cycle cost = purchase and installation + annual cost × annuity factor + present value of the overhaul − present value of the residual.
Equivalent annual cost = life cycle cost ÷ annuity factor.
Work in today's dollars with a real discount rate, or inflate every cash flow and use a nominal rate. The result is a comparison tool, not a substitute for the organisation's business case method.
How to calculate life cycle cost: a worked example
Take a single item of plant, using the figures the calculator opens with. It costs $1,200,000 to buy and $300,000 to install, runs for 15 years, and costs $150,000 a year to operate and $90,000 a year to maintain. A major overhaul of $250,000 falls in year 8, and it is sold for $50,000 at the end. The organisation discounts future money at 7 per cent a year.
Adding the cash flows up gives the undiscounted whole of life cost: $1,500,000 up front, $240,000 a year for 15 years, the overhaul, less the residual value, which comes to $5,300,000. That figure is useful for a budget but not for a comparison, because a dollar spent in year 15 is not worth a dollar spent today. Discounting fixes that.
| Cash flow | Calculation | Present value |
|---|---|---|
| Purchase and installation | Paid in year 0, no discount | $1,500,000 |
| Operating and maintenance | $240,000 a year × annuity factor 9.1079 (7%, 15 years) | $2,185,899 |
| Overhaul | $250,000 ÷ 1.07⁸ | $145,502 |
| Residual value | −$50,000 ÷ 1.07¹⁵ | −$18,122 |
| Life cycle cost (NPV) | Sum of the present values | $3,813,279 |
| Equivalent annual cost | $3,813,279 ÷ 9.1079 | $418,678 |
The purchase price is 39 per cent of this asset's life cycle cost. Operating and maintaining it is 57 per cent. The cheapest asset to buy is rarely the cheapest to own.
The formulas
Each future cash flow is divided by (1 + r) raised to the year it occurs, where r is the discount rate. A cost that repeats every year for n years is handled in one step with the annuity factor, which is (1 − (1 + r)⁻ⁿ) ÷ r. The life cycle cost is the sum of the present values, and the equivalent annual cost is that sum divided by the annuity factor, which spreads it evenly across the life.
Equivalent annual cost is the figure to compare options on when they have different lives. A machine that costs more to own in total but lasts ten years longer may have the lower annual cost, and that is the comparison a replacement decision needs.
| Term | Formula | What it tells you |
|---|---|---|
| Present value of a one-off cost | Cost ÷ (1 + r)ʸᵉᵃʳ | What a future cost is worth today |
| Annuity factor | (1 − (1 + r)⁻ⁿ) ÷ r | Present value of $1 a year for n years |
| Life cycle cost | Sum of all present values, residual value subtracted | The whole of life cost in today's dollars |
| Equivalent annual cost | Life cycle cost ÷ annuity factor | The cost per year, for comparing options with different lives |
Choosing the inputs
- Use the discount rate the organisation uses for capital decisions, usually its weighted average cost of capital, so the result lines up with the business case. Public bodies often prescribe one.
- Work in today's dollars throughout, with a real discount rate, or inflate every cash flow and use a nominal rate. Mixing the two is the most common error.
- Include the costs that follow from the choice: energy, consumables, spares, operator time, licences and insurance, not only the maintenance budget line.
- Add the cost of downtime where options differ in reliability. The Cost of Downtime Calculator gives a defensible figure for the production side of that.
- Put the residual value in honestly. Relocatable plant may hold value; a fixed structure on a closing site is often a disposal cost rather than a receipt.
- Run the sensitivity. Change the life, the discount rate and the maintenance cost by a plausible amount and see whether the preferred option changes. If it does, the decision rests on that input and it deserves better evidence.
Where life cycle costing is used
Comparing options at purchase is the obvious use: two pumps, two conveyor drives, a new machine against a rebuilt one. The same arithmetic decides when to replace an asset, by comparing the equivalent annual cost of keeping the old one against a new one, and it is the frame an asset management plan uses to show what a renewal deferral really costs.
ISO 15663 sets out life cycle costing for the petroleum and gas industries, and ISO 15686-5 does the same for buildings and constructed assets. Both describe the same method as this calculator with more structure around the cost breakdown and the reporting, and either is a sound reference to name in a business case.
Why it matters
The purchase price is the number everyone sees, and on most industrial plant it is the smaller part of the money. Energy, maintenance, spares and the overhaul in year eight usually add up to more than the asset cost, and a decision made on price alone is made on the minority of the cost.
Discounting is what makes the comparison honest. It puts money spent now and money spent in fifteen years on the same footing, so a dearer machine with lower running costs can be weighed against a cheaper one that costs more to keep. The equivalent annual cost goes one step further and lets options with different lives be compared, which is the question every replacement decision comes down to.
Common questions
What is life cycle cost?
Life cycle cost is the total cost of owning an asset across its life, from purchase and installation through operation, maintenance and overhaul to disposal, worked out as cash flows over time and usually discounted to a present value so that costs falling in different years can be added and compared.
What is the formula for life cycle cost?
Life cycle cost = purchase and installation + the present value of every year's operating and maintenance cost + the present value of each overhaul − the present value of the residual value. Each future amount is divided by (1 + discount rate) raised to the year it occurs, and repeating annual costs are multiplied by the annuity factor (1 − (1 + r)⁻ⁿ) ÷ r.
What is equivalent annual cost?
The life cycle cost spread evenly across the asset's life, calculated by dividing the present value by the annuity factor. It is the figure to use when comparing options with different lives, since a total cost over ten years cannot be compared directly with one over fifteen.
What discount rate should I use?
The rate the organisation uses for capital decisions, which is usually its weighted average cost of capital or a rate set by policy. Use a real rate with today's dollars, or a nominal rate with inflated cash flows, and never mix the two. If in doubt, run the calculation at two rates and see whether the answer changes.
What is the difference between life cycle cost and total cost of ownership?
In practice they are the same idea. Total cost of ownership is the term more common in IT and procurement, life cycle cost in engineering and asset management. Both add up every cost of owning something over its life. Life cycle costing as described in ISO 15663 and ISO 15686-5 is usually discounted; total cost of ownership figures sometimes are not.
Is a negative residual value allowed?
Yes. Enter a disposal cost as a negative residual value. Decommissioning, demolition and site remediation are real costs at the end of life, and for fixed plant they often outweigh any scrap value.
Related reading
- The asset management plan, and the strategic asset management plan it comes from
- Asset management planning and the system behind it
- Cost of Downtime Calculator
- ISO 55001 explained: what the asset management standard requires, and what changed in 2024
- The asset register: the engineering register, the fixed asset register, and how to reconcile them
Want to improve the numbers?
These calculators reflect the work we do every day. If you want help lifting availability, cutting downtime or tightening your schedule, let's talk.
Contact us