Lifecycle Cost Analysis for Dummies

By Aryani, Giant | Law & Order, July 2005 | Go to article overview

Lifecycle Cost Analysis for Dummies


Aryani, Giant, Law & Order


Lifecycle cost analysis (LCA) is a commonly employed decision tool. It is employed to select between alternative vehicle choices as well as to determine the best vehicle replacement policy. Its use is widespread in private sector fleets. Yet, the majority of law enforcement fleets do not employ such a decision tool even though the data necessary for a LCA is readily available and collected by most agencies.

A basic LCA can serve as an effective tool and is simple to implement. The three simple ingredients of a basic LCA are: 1) an understanding of basic math, 2) the collection of cost data such as vehicle purchase price and various operating costs, and 3) a healthy dose of common sense.

Do you represent a smaller agency that may not be able to afford to contract with a fleet management consulting firm or does not have access to suitable fleet management software? Maybe, you have access to a spreadsheet as part of your computer system's word processing office tools to facilitate your analysis? Then the following example of a basic LCA can help you to carry out such a simple analysis for your own agency using your own circumstances and data.

Basic Assumptions

Assume that a hypothetical small law enforcement agency procures Ford Crown Victoria Police Interceptors (CVPI) for patrol and traffic duties. Like many agencies this small hypothetical agency buys its squads outright. Therefore, there are no financing or leasing costs to consider in this example. This agency employs shift rotation squads and not take-home vehicles.

It retains its patrol squads in service for five years or about 100,000 miles before rotating them out of service and auctioning them off at public auction. Based on these rotation criteria, the average annual miles driven are 20,000 miles per unit. The LCA then spans the five-year time frame from calendar year 2005 to the end of calendar year 2009. The CVPIs procured are model year 2005 vehicles delivered in January of 2005.

In a LCA costs are analyzed in periodic time intervals such as on an annual basis in order to derive meaningful and readily to compare numbers. A basic LCA covers only actual vehicle cost data. It does not entertain overhead cost in order to keep the analysis simple.

The cost data required for a basic LCA are: initial vehicle acquisition price, emergency equipment cost, insurance cost if applicable, fuel cost, maintenance cost, and repair cost. Other data required are figures for the cost escalation rate and the discount rate. A LCA is not valid without due consideration of escalation and discount rates.

Escalation Rate

The cost escalation rate is an approximate measure for future cost of living/cost of doing business increases. Assume that the escalation rate is 3%. Figures for the escalation rate can be derived from past consumer price index (CPI) numbers or future forecasts. Changes in the CPI represent a commonly employed measure for the inflation rate. The US Department of Labor's Bureau of Labor Statistics publishes these figures and they are available on the Internet.

Preliminary figures put the average annual inflation rate based on CPI changes at 2.7% for 2004. The same statistical rate for 2003 and 2002 was 2.3% and 1.6%. A 3% assumption for the years ahead represents a reasonable estimate for the future given the slight increases in the inflation rate during the past three years and current economic trends.

Discount Rate

The discount rate is an approximate measure to determine today's value of an expense or income to be paid or received in the future. The process of determining this value is called discounting. Discounting is simply looking backward from the future to the present. Future expenses and income are discounted because their nominal cash value in the present is less than in the future due to society's overwhelming consensus.

This is the same logic that lottery officials across the country apply. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Lifecycle Cost Analysis for Dummies
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.